[DRAFT] NEW PROPOSAL REGULATION FINANCIAL SYSTEM

[Republic Denmark]

NEW PROPOSAL
Regulation of the Financial Sector

Category: Social Justice
Strength: Significant

Observing: the importance of regulation of the financial sector (banks and insurance companies) in member states,

Cognizant: of the risks associated an unregulated financial system in the member states,

Honouring: The possibility to regulate the financial system by the member states itself and remains sovereign on this matter.

A. Recognizes: member nations' right to develop their own method how to regulate the financial system,

B. Forbids member nations to deregulate the financial system that could cause major risks for the world economy and could destroy the financial system. If the member nations (especially for socialistic and state industry states) want to opt-out this resolution it is possible by putting own laws in effect to regulate the financial system.

C. Directs a World Assembly Stability Mechanism (WASM) to grant the safety of the financial system by the following measures:
1. The WASM will audit the financial sector of the member states;
2. The WASM will test the banks and insurance companies if they are solvent enough;
3. The WASM will do stress tests to ensure if the economy is failing the banking system is liquid and solvent enough to overcome the trouble.

D. Tasks: the WASM with securing and safeguard the financial system and to eliminate the possibilities of a bank run that could cause major problems in the trust between banks and the people.

E. Further tasks: The WASM will do research reports and will contribute to the safety of the financial sector.

F. Directives:
1. The amount of debt is restricted. Consumers can’t lend more money then 4 times there total salary a year;
2. The banks need to have 12% of their equity in cash to remain liquid if it comes to a run on the bank. If a bank fails to achieve this it could lend from the central bank;
3. Insurance companies and banks needed to have a license that they may sell their financial products;
4. Employees in the financial sector need special certificates about the financial products;
5. Insurance companies need a solvency rate of 150% or more to overcome major risks on insurance products. (This means the insurance company can pay 1,5 times their liabilities on a normal level without an enormous raise of claims caused by weather, fire or other circumstances);
6. Customers need to be well informed by the banks and insurance companies. This will solve problems that the banks and insurance companies sell products that are not in the interest of the customer.


OLD PROPOSAL

Regulation of the Financial Sector

Category: Social Justice
Strength: Significant

Observing: the importance of regulation of the financial sector (banks and insurance companies) in member states,

Cognizant: of the risks associated an unregulated financial system in the member states,

Honouring: The possibility to regulate the financial system by the member states itself and remains sovereign on this matter.
A. Defines, for the purpose of this resolution:
• Financial sector: the banks and insurance companies
• Debt crisis: To overcome future crisis that cause major risks for the financial system and the future of the economy that could cause a depression and a worldwide economic crisis.
• Trust: The financial sector is there to provide services to the people and needs to be trustworthy. The money of the people needs to be save.

B. Recognizes: member nations' right to develop their own method how to regulate the financial system,

C. Forbids member nations to deregulate the financial system that could cause major risks for the world economy and could destroy the financial system.

D. Directs a World Assembly Stability Mechanism (WASM) to grant the safety of the financial system by the following measures:
1. The WASM will audit the financial sector of the member states;
2. The WASM will test the banks and insurance companies if they are solvent enough;
3. The WASM will do stress tests to ensure if the economy is failing the banking system is liquid and solvent enough to overcome the trouble.

E. Tasks: the WASM with securing and safeguard the financial system and to eliminate the possibilities of a bank run that could cause major problems in the trust between banks and the people.

F. Further tasks: The WASM will do research reports and will contribute to the safety of the financial sector.

G. Directives:
1. The inter-banking lending rate is controlled by the central banks;
2. The amount of debt is restricted. Consumers can’t lend more money then 4 times there total salary a year;
3. The banks need to have 12% of their equity in the currency of the country where the bank is located. This could overcome problems if some of the investments are decreasing in value rapidly.
4. Insurance companies and banks needed to have a license that they may sell their financial products.
5. Employees in the financial sector need special certificates about the financial products.
6. Insurance companies need a solvency rate of 150% or more to overcome major risks on insurance products.
7. The people needs to be well informed by the banks and insurance companies. This will solve the problem that insurance companies and banks will only sell products to make profit without informing the customer about the risks.

This resolution will make the financial sector more stable and.

[Calladan]

While I am not an expert in areas of financial management, I do not believe asking for a solvency rate of 150% is actually possible. Could you explain how this can be managed?

[Republic Denmark]

While I am not an expert in areas of financial management, I do not believe asking for a solvency rate of 150% is actually possible. Could you explain how this can be managed?

The solvency rate of an insurance company needs to be 100% to pay their day to day businesses. But if a risk that is insured costs more money they need more money in cash. To overcome problems that insurance companies will fail they need always a solvency rate above 100%. Its possible by lower the risky investments and have e high client profiles to ensure the risks that are insured are possible for the company to insure. Look more information about it in the solvency II program that is in a resolution in the Netherlands for insurance companies. There are insurance companies with a solvency rate above 180%.

[Republic Denmark]

While I am not an expert in areas of financial management, I do not believe asking for a solvency rate of 150% is actually possible. Could you explain how this can be managed?

Do you suggest that I elaborate more on the solvency rate in the proposal?

[Aclion]

A. Defines, for the purpose of this resolution:
• Financial sector: the banks and insurance companies
• Debt crisis: To overcome future crisis that cause major risks for the financial system and the future of the economy that could cause a depression and a worldwide economic crisis.
• Trust: The financial sector is there to provide services to the people and needs to be trustworthy. The money of the people needs to be save.

This entire section can be removed.

[Republic Denmark]

A. Defines, for the purpose of this resolution:
• Financial sector: the banks and insurance companies
• Debt crisis: To overcome future crisis that cause major risks for the financial system and the future of the economy that could cause a depression and a worldwide economic crisis.
• Trust: The financial sector is there to provide services to the people and needs to be trustworthy. The money of the people needs to be save.

This entire section can be removed.

Thank you for the feedback. I will look at it.

[Calladan]

While I am not an expert in areas of financial management, I do not believe asking for a solvency rate of 150% is actually possible. Could you explain how this can be managed?

Do you suggest that I elaborate more on the solvency rate in the proposal?

No - I get your explanation. I just always thought that you can't get something to be more than 100% of what it can be. What one percent being one one hundredth so one hundred percent being one hundred one one hundredths. (And even after your explanation I still think it is just a matter of perspective and how it is described).

[Republic Denmark]

Do you suggest that I elaborate more on the solvency rate in the proposal?

No - I get your explanation. I just always thought that you can't get something to be more than 100% of what it can be. What one percent being one one hundredth so one hundred percent being one hundred one one hundredths. (And even after your explanation I still think it is just a matter of perspective and how it is described).

Thats true. The Solvency is just a matter used in the insurance industry to indicate if the insurance company is solvent enough. It used to be more then 100% because of the possibility if the premium of the insurance is not enough they can't pay the claims. So they need more then 100% of the premiums yearly income in cash to pay out the claims that possibly are comping. An insurance company build up these reserves over the years.

[Imperium Anglorum]

This is a terrible idea. Foremost, it doesn't actually do anything to solve issues with financial instability. This is because practically all firms will always be able to meet the servicing costs to their liabilities at all times. Otherwise, they would be insolvent. Having everyone being able to meet their liabilities in full doesn't actually do anything to prevent firms from going insolvent because the proximate cause of insolvency in financial institutions is a massive fall in asset values.

The question then, is whether those firms are also then able to pay back every single creditor immediately. The idea of this is patently ridiculous. Consider that you are a person, borrowing money from some financial intermediaries so you can buy a house. In your world, if that person were a firm, they would have to have the ability to pay for the entire house upfront to meet the long-term liabilities portion of some solvency ratio at 100%.

The solvency ratio is the ratio between a firm's cash flow divided by their short and long term liabilities.

Two major issues: (1) there would be no reason for any firms to ever borrow money. If they are forced to meet all liabilities in full, why would they ever borrow any money at all? This sets up the more pernicious issue, (2) where firms are incapable of finding the money to invest in anything because they have to provide the entirety of their up-front costs from internal financing.

[Imperium Anglorum]

1. The inter-banking lending rate is controlled by the central banks;

There is no reason to do this, the inter-bank lending rate ought be determined by markets, then propped up by central banks if necessary, i.e. in their capacity as lender of last resort. A determined inter-bank lending rate falls into the Poole problem where it induces volatility in non-borrowed reserves.

2. The amount of debt is restricted. Consumers can’t lend more money then 4 times there total salary a year;

This isn't a problem. The issue is rather, interest rates. The ability for some consumer to maintain some level of borrowing isn't dependent on the amount of borrowing itself. It is rather dependent on the cost of that borrowing, the interest rate. The level of borrowing is irrelevant because consumers are price takers which lack market leverage to change interest rates by changing their individual credit demand.

3. The banks need to have 12% of their equity in the currency of the country where the bank is located. This could overcome problems if some of the investments are decreasing in value rapidly.

This doesn't matter given that there is an effective payments system. What you're doing is basically imposing a trade barrier on equity and preventing it from leaving the country.

4. Insurance companies and banks needed to have a license that they may sell their financial products.

This is already the case in most nations in status quo. I cannot think of a reason why any nation wouldn't have such licences.

5. Employees in the financial sector need special certificates about the financial products.

This doesn't solve any problems with excessive risk-taking. In the economics of crime, most white-collar crimes are conducted after significant cost-benefit analysis. The presence or lack thereof, of these undefined 'special certificates' will not change risk-taking. Also, one might consider a central bank's time inconsistency vis-à-vis bank bailouts, which makes risk-taking any institution's optimal strategy.

6. Insurance companies need a solvency rate of 150% or more to overcome major risks on insurance products.

Insurance companies don't need this. The impact of this would generally be massive entry-exit barrier that prevents new companies from entering the market due to the fact that such a plan imposes increasing returns to scale. That leads to monopolistic competition in the industry and harms social welfare writ large.

7. The people needs to be well informed by the banks and insurance companies. This will solve the problem that insurance companies and banks will only sell products to make profit without informing the customer about the risks.

All products which any financial institution will willingly sell are going to make a profit. What is probably necessary is some modicum of education on how personal finance works to prevent people from borrowing huge amounts of money. Why ought banks do this when such a thing would basically be a public good that the government ought provide?

[Imperium Anglorum]

Forbids member nations to deregulate the financial system that could cause major risks for the world economy and could destroy the financial system.

So socialist states can no longer deregulate their industries. Perfect. Now WA law prevents socialist nations from reforming their economic system to a market model.

Directs a World Assembly Stability Mechanism (WASM) to grant the safety of the financial system by the following measures:
1. The WASM will audit the financial sector of the member states;
2. The WASM will test the banks and insurance companies if they are solvent enough;
3. The WASM will do stress tests to ensure if the economy is failing the banking system is liquid and solvent enough to overcome the trouble.

Considering this as a fixed cost that imposes falling costs as scale increases, why would such heavy-handed regulation not stop market entry that actually creates the stabilisation mechanisms which you seem to want?

E. Tasks: the WASM with securing and safeguard the financial system and to eliminate the possibilities of a bank run that could cause major problems in the trust between banks and the people.

Preventing bank runs is easy. Bail them out. The problem is trying to prevent the start of any bank run. That will never happen because the Nash equilibrium between any two depositors is always going to be 'run' and 'don't run'. There is never going to be a position where a rational depositor would allow other people to run and not run himself.

[Great Minarchistan]

This proposal is intended to wreck with the financial system or what? A 100% solvency rate is already impossible. 150% and nobody will give loans. Why? Because if you want to lend $100000 to someone, you'll need to have a $150000 capital. This is an absurd. While I dislike any solvency rate below the 50% mark, establish a value 3x bigger than that will either crash economic system or cause incredibly high interest rates. Regulation isn't the solution - in fact, governments are the ones who provoke banking bubbles most of the time - but yes deregulation. No subsidized federal loans, no bailouts with taxpayer's money, less bureaucracy and you are helping a lot already.

[Imperium Anglorum]

Because if you want to lend $100000 to someone, you'll need to have a $150000 capital.

Also, nobody would ever take loans, because if every dollar you borrow (the payments of which are a liability on your balance sheet, which over the period of that loan, is going to be more than the loan itself) has to be met with 100 pc backing, you already have the money to do self-financing and there is no reason to borrow.

[Republic Denmark]

This proposal is intended to wreck with the financial system or what? A 100% solvency rate is already impossible. 150% and nobody will give loans. Why? Because if you want to lend $100000 to someone, you'll need to have a $150000 capital. This is an absurd. While I dislike any solvency rate below the 50% mark, establish a value 3x bigger than that will either crash economic system or cause incredibly high interest rates. Regulation isn't the solution - in fact, governments are the ones who provoke banking bubbles most of the time - but yes deregulation. No subsidized federal loans, no bailouts with taxpayer's money, less bureaucracy and you are helping a lot already.

If you know more about Insurance companies then you know that a Insurance company has always a solvency rate above 100% otherwise they can't pay their liabilities. Look at solvency 2 rules of the European Union.

[Republic Denmark]

Because if you want to lend $100000 to someone, you'll need to have a $150000 capital.

Also, nobody would ever take loans, because if every dollar you borrow (the payments of which are a liability on your balance sheet, which over the period of that loan, is going to be more than the loan itself) has to be met with 100 pc backing, you already have the money to do self-financing and there is no reason to borrow.

This solvency rate was only for Insurance companies look more clearly at the proposal.

[Imperium Anglorum]

If you know more about Insurance companies then you know that a Insurance company has always a solvency rate above 100% otherwise they can't pay their liabilities. Look at solvency 2 rules of the European Union.

Okay. So the EU does that. Why should the WA do that? I hear that a number of countries also have things like Electoral Colleges. I guess the WA must do it now! Some nations don't even have civil rights! I guess the WA must eliminate civil rights now!

This solvency rate was only for Insurance companies look more clearly at the proposal.

Okay. So why should insurance companies have these absurd 100 pc solvency ratios and why are insurance companies so different that they ought not be lumped with normal financial institutions? Also, given that multiple different jurisdictions are going to have different evaluations about the value of liabilities, assets, equity, etc. Which one ought have priority?

[Republic Denmark]

Forbids member nations to deregulate the financial system that could cause major risks for the world economy and could destroy the financial system.

So socialist states can no longer deregulate their industries. Perfect. Now WA law prevents socialist nations from reforming their economic system to a market model.

Directs a World Assembly Stability Mechanism (WASM) to grant the safety of the financial system by the following measures:
1. The WASM will audit the financial sector of the member states;
2. The WASM will test the banks and insurance companies if they are solvent enough;
3. The WASM will do stress tests to ensure if the economy is failing the banking system is liquid and solvent enough to overcome the trouble.

Considering this as a fixed cost that imposes falling costs as scale increases, why would such heavy-handed regulation not stop market entry that actually creates the stabilisation mechanisms which you seem to want?

E. Tasks: the WASM with securing and safeguard the financial system and to eliminate the possibilities of a bank run that could cause major problems in the trust between banks and the people.

Preventing bank runs is easy. Bail them out. The problem is trying to prevent the start of any bank run. That will never happen because the Nash equilibrium between any two depositors is always going to be 'run' and 'don't run'. There is never going to be a position where a rational depositor would allow other people to run and not run himself.

To answer response to all you things its easy its the basics of the laws in the European Union to regulate the financial system. So its not really that bad if you are saying if this is the basics in the real world

[Republic Denmark]

If you know more about Insurance companies then you know that a Insurance company has always a solvency rate above 100% otherwise they can't pay their liabilities. Look at solvency 2 rules of the European Union.

Okay. So the EU does that. Why should the WA do that? I hear that a number of countries also have things like Electoral Colleges. I guess the WA must do it now! Some nations don't even have civil rights! I guess the WA must eliminate civil rights now!

This solvency rate was only for Insurance companies look more clearly at the proposal.

Okay. So why should insurance companies have these absurd 100 pc solvency ratios and why are insurance companies so different that they ought not be lumped with normal financial institutions?

It aren't absurd percentages. I'm working in the Insurance indymustry they have all above 100% solvency otherwise they can't face there liabilities. Look it up if you want to know more about solvency rates. Look at the basic rules of solvency 1 and 2.

[Great Minarchistan]

This proposal is intended to wreck with the financial system or what? A 100% solvency rate is already impossible. 150% and nobody will give loans. Why? Because if you want to lend $100000 to someone, you'll need to have a $150000 capital. This is an absurd. While I dislike any solvency rate below the 50% mark, establish a value 3x bigger than that will either crash economic system or cause incredibly high interest rates. Regulation isn't the solution - in fact, governments are the ones who provoke banking bubbles most of the time - but yes deregulation. No subsidized federal loans, no bailouts with taxpayer's money, less bureaucracy and you are helping a lot already.

If you know more about Insurance companies then you know that a Insurance company has always a solvency rate above 100% otherwise they can't pay their liabilities. Look at solvency 2 rules of the European Union.

An insurance company is a bank? I don't think so. Come to your senses, this proposal wants to kill both lenders and borrowers using government as a coercive power. Also, Solvency II rule of EU talks all about insurance and nothing about loans. That's actually so true that most central banks in Europe - mainly Deutsche Bank - have a solvency rate below 10%.

[Imperium Anglorum]

To answer response to all you things its easy its the basics of the laws in the European Union to regulate the financial system. So its not really that bad if you are saying if this is the basics in the real world

That isn't what I said. I said that the costs to regulation create fixed costs which lead to increasing returns to scale as those fixed costs are, in proportion, reduced relative to total revenue.

[Imperium Anglorum]

It They aren't absurd percentages. I'm working in the Insurance indymustry industry they have all above 100% solvency otherwise they can't face there their liabilities. Look it up if you want to know more about solvency rates. Look at the basic rules of solvency 1 and 2.

If you want to say that incoming cash flows ought meet outflows, say that. The Financial Times Lexicon says it is a "bank's capital as a percentage of what it lends".

[Great Minarchistan]

So socialist states can no longer deregulate their industries. Perfect. Now WA law prevents socialist nations from reforming their economic system to a market model.


Considering this as a fixed cost that imposes falling costs as scale increases, why would such heavy-handed regulation not stop market entry that actually creates the stabilisation mechanisms which you seem to want?


Preventing bank runs is easy. Bail them out. The problem is trying to prevent the start of any bank run. That will never happen because the Nash equilibrium between any two depositors is always going to be 'run' and 'don't run'. There is never going to be a position where a rational depositor would allow other people to run and not run himself.

To answer response to all you things its easy its the basics of the laws in the European Union to regulate the financial system. So its not really that bad if you are saying if this is the basics in the real world

Isn't European Union in the brink of insolvency with lots of banks bankrupt? You are literally comparing a collapsing system with your proposal.

[Republic Denmark]

To answer response to all you things its easy its the basics of the laws in the European Union to regulate the financial system. So its not really that bad if you are saying if this is the basics in the real world

Isn't European Union in the brink of insolvency with lots of banks bankrupt? You are literally comparing a collapsing system with your proposal.

These regulations are put up just to overcome the same situation in the future. This was intended with such kind of resolutions.

[Republic Denmark]

It They aren't absurd percentages. I'm working in the Insurance indymustry industry they have all above 100% solvency otherwise they can't face there their liabilities. Look it up if you want to know more about solvency rates. Look at the basic rules of solvency 1 and 2.

If you want to say that incoming cash flows ought meet outflows, say that. The Financial Times Lexicon says it is a "bank's capital as a percentage of what it lends".

Sorry I made some mistakes with typing my last reaction was in a hurry. But thats what you are saying is about what i meant with 12% of the capital needs to be in the bank to meet the incoming and outgoing cashflows. But the solvency rate of an insurance company is something different. This is meaning that there is build up a reserve in the insurance company so that they could pay there liabilities if the claims are rising. But indeed i should rewrite that part a bit.

[Great Minarchistan]

Isn't European Union in the brink of insolvency with lots of banks bankrupt? You are literally comparing a collapsing system with your proposal.

These regulations are put up just to overcome the same situation in the future. This was intended with such kind of resolutions.

> European Union goes bankrupt due to excessive government regulation and intervention on banking system.

> Solution? Ehm, lets intervene more and blame deregulated banking market.