3  Laeven, L and F Valencia (2013) “Systemic Banking Crises Database”, IMF Economic Review 61(2), 225–270, IMF. Output losses are computed as the cumulative sum of the differences between actual and trend real GDP over the crisis period in relation to pre-crisis GDP. 4  Basel Committee on Banking Supervision (BCBS) (2010) An assessment of the long-term economic impact of the new regulatory framework, August. The loss of output represents referred to represents the median cumulative discounted output loss reported by a number of academic studies assessed in the study, measured over the period from the peak to the end of the crisis. The output loss does not include permanent losses in GDP, i.e. where the GDP trend does not recover to the pre-crisis level. 5  The bank stating this was Merrill Lynch. Source: FCIC. BIS central bankers’ speeches  3  capital markets.” – This bank incurred USD 13 billion losses in Q1 2008 and USD19 billion in writedowns on real estate and related structured credit positions.6 I can assure you that there are many more similar examples to quote – the message being that the proposed reforms were overly restrictive, would damage the market and reduce activity. This illustrates that we need perspective when assessing the feasibility of reforms.
It is also standard procedure that new regulations are subject to industry consultation and in many cases additional discussions also take place with the industry itself, as well as with investors, to avoid unintended consequences. In this context, however, let me remind us all that the reactions we get from the banking industry are sometimes slightly biased, if I dare say so. A telling example is the lobbying effort during the design of the Basel II framework. As part of that work, in 2003 the Committee consulted on a new securitisation framework, which, with the benefit of hindsight, turned out to be very weak. Yet the comments from the industry on the proposed securitisation framework were in general quite alarming. Allow me to quote just a couple of the replies to the consultation proposal that the Committee received (all of which are publicly available): •  One bank wrote: “The prescribed risk weightings for securitisation exposure(s)…result in excessive risk weights compared to the economic risks of securitisation tranches, particularly for retail and mortgage portfolios.” – This particular bank happened to incur $ billion in losses from CDOs during the crisis.5  •  Another bank wrote: “If adopted, the current proposal for securitisation will materially impair the ability of banks to distribute risk from their own balance sheets into the  2  Calculations of costs are based on Laeven, L and F Valencia (2013) using data from the banking crisis database and calculations of the BIS and the Riksbank.