UK. Rehypothecation should be banned - or at least capped.

In this article I argue Rehypothecation should be banned or capped in the UK.

http://morganisteconomics.blogspot.com/2012/02/rehypothecation-should-be-banned-or-at.html

What do you think?

EDITED.

I FOUND THIS PAPER ON THE SUBJECT. I THINK IT IS IMPORTANT SO PLEASE LOOK AT IT.

http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf

 

Banning it would cause an immediate and severe worldwide liquidity crisis. I do think phasing in some limits -- say 180% beginning in June and 160% next June etc. makes a good deal of sense.

My guess is an outright ban in say 30 days sends the S&P below 500 as a result of banking collapses on a huge scale.

 

I think you are right about the existing loans. I was thinking about new loans. Anyway I think that they need to put a cap below 100% because I can't see assets holding their value if the economic situation worsens and they default. It will worsen the question is how much the asset values will fall. Perhaps 60 - 80% of asset value.

Anyway in America it is 140% and in Canada it is outright banned. You do raise a good point that this would cause a problem if implemented immediately. But they have to do something.

 

Rehypothecation is good, banning is going too far.

 

What about a cap though that reflects the real value of the assets?

 

The margin call comes before that if the lenders are on top of their game.

 

This is a bank we are talking about. When have they ever been on top of their game?

 

Rehypothecation adds liquidity. No matter what the rationale, there is nothing positive whenever it involves removing this liquidity.

There's no benefit, especially for investors invested with firms who rephypothecate, but if you don't allow it or limit it excessively, this will always turn out with a worse result than the reason for the limitation.

 

I don't know. If there are defaults then the higher the rehypothecation the higher the loss. This is what I am afraid of it is inevitable there will be high loses and that will be magnified by rehypothecation. A cap now could reduce that.

 

The caps effect will, in practice, limit liquidity in the capital markets.

There is nothing positive about that because rehypothecation will remove liquidity that any regular firm will provide and follow their own risk management policies. An artificial cap won't help because it will prolong the existence of inefficient firms that should cease to exist and cease to exist faster than if inefficient firms are prevented from meeting their own demise faster than they otherwise would have.

The firms that know how to use rehypothecation properly will be less profitable, even if it might prevent small systemic risks of firms without useful risk management controls. More liquidity will always be preferred to less, in every case. Less liquidity and inefficient overregulation reduces the efficiency of the capital markets when failure is the best regulator.

The cap will not prevent failure, but prolong the existence of firms that are <i>inefficient.</i> Letting inefficient firms fail faster is better than letting inefficient firms fail more slowly. The societal impact of failure is better than prolonging customer relationships with firms that will fail anyway.