An engineer, a lawyer, a social worker and an accountant sit in an arithmetic classroom.
What's 2 + 2?
asks the teacher.
The engineer -- he loves math and is a bit of a teacher's pet -- pulls out his slide rule, mumbles, and responds
Somewhere between 3.99999 and 4.000001, under stable conditions.
Looking pensive, the social worker raises his hand.
Everyone's experience can inform these kinds of answers. Perhaps this is something we can best work out through honest discussion. But commonly, human experience would indicate that the answer for most people is 4.
The lawyer, irritated that he's wasting so much billable time, glances at his watch and growls out
It's likely, under the precedent established by the Second Circuit in Einstein v. Sagan, that any litigation involving the question of 2 + 2 would result in liability resting with 4. This is an excellent opportunity to settle under favorable terms. I'd suggest starting at 3.8 and negotiating downward.
The accountant, patient with these wishy washy types, finally responds
What do you want it to be?
So the Basel system establishes, among other things, how much in capital reserves a bank's got to keep around to insure against the risk of bank runs.
But isn't a company's capital, under accounting rules, simply assets minus liabilities? So the amount of "capital" a bank has at any one time depends upon how accurately it reports its assets and liabilities?
And isn't the thing firms like to play around with most is accounting for assets they don't really have, and downplaying their liabilities? By manipulating accrual rules, underestimating or discounting future liabilities, spinning off debts to "special purpose vehicles," etc? Think Enron and the Banksters. And most other securities fraud litigation.
In other words, a bank's "capital" reserves can be anything it wants it to be.
So what's the point of mandatory minimum capital reserves unless we get the auditing rules in line????
