Capital Regulation Deconstructed

Last week, we provided clients with several more in-depth analyses of the interagency capital proposal.  Of particular note is our wrap-up report (see Client Report CAPITAL234) which looks hard at the agencies’ own quantitative and qualitative impact assessments to see what the raw numbers say, how the numbers comport with current data and market realities, and – most importantly – how to interpret the agencies’ qualitative conclusions in light of these analytics, as well as our understanding of many of the studies on which key assumptions are premised.  As the report details, we agree that the agencies’ rationale for every possible capital woe – that anything is better than a financial crisis – is right.  But it’s only right if the result of the rules is to make financial crises less likely and that, as our reports make clear, is far from assured.  Many provisions of each key section combined with overall quantitative results could well prove profoundly destabilizing.