The Bankwatch

This is a fascinating and insightful paper by Willem Buiter and Anne Sibert on the failure of the Icelandic banking system, but with scary parallels to the UK system and others.  In particular though, and of interest to everyone possibly is section 2.1 copied below in full.  It defines the generic vulnerability that all banks’ have to “run a on the bank” even in good times.

Thus the argument goes, accept reality, nationalise the banks, and treat basic banking as a utility, just like water and electricity, until a better model can be developed that would have a better chance of surviving the coming sovereign debt crisis and transitioning into the new economic world that we are facing.

I fear the feeble attempts by heads of state of the western world to address banking and banks’ problems is failing, because banking is not understood.

The Icelandic banking crisis and what to do about it |  CEPR Policy Insight No. 26

2.1 All banks are vulnerable to runs

There is no such thing as a safe deposit-taking bank on its own, even if its assets are of good quality and it has enough liquid assets to cope with normal variations in the net flow of deposits and other short-term liabilities. The events since August 2007, and in particular the demise of Northern Rock in the United Kingdom and Bear Stearns in the United States, have made it clear that any highly leveraged institution with assets that are mostly long term and illiquid and liabilities that are mostly short term can be subject to a catastrophic liquidity shortage.

In the case of deposit-taking institutions, the canonical liquidity crisis is a bank run. Deposits can be withdrawn on demand and those who wish to withdraw are paid on a first-come, first-served basis. A bank run can occur if it is believed  rightly or wrongly that a bank is balance-sheet-insolvent (with assets worth less than liabilities).  But, as assets are illiquid, a bank run that cripples the bank is always possible, even if the bank is not believed to be balance-sheet insolvent: if each depositor believes that all other depositors are going to withdraw their assets then each depositor’s rational response is to withdraw his own. The outcome a bank  run validates the depositors’ beliefs: it is individually rational, but socially disastrous. The risk of cash-flow insolvency inability to meet one’s obligations including the obligation to redeem deposits on demand for cash is always present when assets are illiquid.

For highly leveraged institutions that fund themselves mainly in the wholesale capital markets, including the asset-backed securities and asset-backed commercial paper markets, an analogous event is  possible: in the belief that other creditors will be unwilling to roll over their loans to a borrower whose obligations are maturing or to purchase the new debt instruments the borrower is issuing, each  creditor finds it optimal to refuse to roll over his own loans or to purchase the new debt instruments the borrower is trying to issue, let alone to extend new credit. As with a classic bank run, this scenario can occur even when the assets of the bank are believed to be sound, if only they could be held to maturity.

Fareed conducted a wide ranging interview and the pragmatic & intelligent conversation from Ferguson spoke of:

• the importance of avoiding protectionism that was the real culprit of the 30′s depression
• the potential for innovation in industry, technology and financial services. Innovation accelerates in bad times he pointed out – eg IBM arose from the depression.

UPDATE:

The video will appear here in due course.

Late last year, the American Banker of the Year awards were held, and the winner was Ken Lewis .  Fast forward and his decisions on Merrill Lynch, China Construction Bank and  Countrywide are being put together a call for his resignation.  In particular the article notes somewhat to my surprise that BofA were not pressed into taking over Merrill – this was done voluntarily.

In any event the armchair quarterbacks are out in force.  The strategic opportunities of China, Mortgages, and brokerages were 100% accepted as valid at the time by commentators, newspapers, government and industry.  The problems that arose in 2007 were universal, and systemic of a broken banking and brokerage model – a systemic problem in the interdependencies of members of the world financial system that was not understood.

More important to my mind will be how Lewis deals with the current crisis.

Paul Volker and the Group of 30 have released their report on regulation for the financial industry post crisis.  Volker is advisor to Obama.  They are careful to avoid commentary on the “fixes” but have focussed on the reforms.  Its a wide ranging and sensible report, dealing with the non bank sector, ie hedge funds, and with off balance sheet transactions and derivatives.

G30

UPDATE:

The Economist has a great peace here summarising the G30 report – How to Fix Finance.

The most notable aspect of the report is the call for separation of invesments from banking.  They point out the irresponsibility of using traditional bank deposits and the associated safety requirements for sepculative investments is fundamentally bad.

Under the proposals, banks that are deemed systemically important would face restrictions—in the form of “strict” capital requirements—on high-risk proprietary activities, that is bets made using their own money. While this would not quite mean a return in America to the separation of commercial banking and investment banking that ended with the repeal of the Glass-Steagall act in 1999, it would strongly encourage the investment-banking arms of universal banks to focus on client businesses, such as merger advice, rather than trading. One reason for separating these functions is that they seem to be “unmanageable in financial conglomerates”, says Mr Volcker.

As noted on the BofA Future Banking blog, they are now also seeking out customers, or others needing assistance on twitter.  This is consequential stuff for a Bank.  Here are a few sample twits.  User names masked here.  Clearly something has taken hold at BofA that is setting them apart from most others, and moving them into Wells Fargo territory.  Interesting stuff, and other Banks take note.

Bank of America on twitter

@_______ Can you send me a DM with your contact information? I’ll give you a call to see what we can do. Thanks!”

yesterday at 1:25 pm – Comment – Like – Hide – More

“@______ I work for Bank of America, anything I can do to help?”

yesterday at 1:22 pm – Comment – Like – Hide – More

“@________ I work for B of A, were you able to get it resolved? Anything I can do to help?”

I attended enough marketing conferences and events this year to realise this headline is no surprise.  Classic response which I can hear now – “we are in a new paradigm, with new challenges that no-one has seen before – time to get back to basics, and forget all this talk about social this/ that”.

Top Marketing Trends for 2009: Execs ‘Sick’ of Web 2 | MC Marketing Charts

#4. Marketers “Sick” of Web 2.0: Twice as many marketers are “sick” of hearing about Web 2.0 and related buzzwords such as “blogs” and “social networking” compared with last year’s survey.

I know enough people in marketing who actually do get it, that I feel safe in generalising here – the comment is aimed at the rest

What is interesting here is that web 2.0 however one cares to define it is being written off by marketing before they try it.  This is not SEO or fake emails to bloggers – its about being genuine.  Here we have some concepts that have the potential to transform business, marketing and business models, and already it is being written off, before even trying them.

I keep going back to Cluetrain.  Written in 1999 it is even further ahead of its time than we realised.  it does not help that it is an awful, and disorganised read.  Nontheless it is prescient and visionary in its beliefs.  Cluetrain is the real web 2.0 and the tools we hear of such as blogs and wiki’s are transitory, and replaceable.  The concept lies in wisdom of employees, enjoined with the wisdom of customers that develops a new level of understanding of products and services.  This understanding will make marketing messages irrelevant.

It will take us some time to get with with traditional thinkers apparently, but the web will take customers there before corporations.  The corporations who ‘get’ that will be amongst the winners.

Celent reports at Finextra on the likely agenda for Bank IT investment in 2009.  No real surprises as Banks expected to think about rich internet [think Ajax] and social features.  However no surprise on the qualification that few such web 2.0 things will appear in 2009, so it might more of an experimential year.

North American bank IT spending to grow in 2009 – Celent | Finextra

Unsurprisingly risk management is expected to be the top trend this year, as banks look to get more use out of their systems in the wake of the crisis. Banks will stop viewing risk technology as just a regulatory necessity and embrace it as a way of saving money.

…

Web banking will also get investment as firms begin to realise they must improve customer interaction and experience through rich Internet applications and social networking features.

Celent says “bits and pieces” of Web 2.0 elements will appear this year but thinks it will be at least a year before cutting edge interactive online banking emerges.

Mobile banking will continue to gain momentum, although it will mainly focus on information services such as SMS text alerts

Wesabe just keep the good stuff coming – ok I admit I am a fan but they are worth it.  in addition to the recent labs the latest is a tool to evaluate your monthly recurring expenses, and decide which you really require to maintain.  Its hard to imagine anyone would not benefit by locating at least one thing that is not offerring value yet they are paying it monthly.

Cutback Tool |Wesabe blog

several beta testers reported charges of $14.95 for freecreditreport.com, a credit monitoring service they understandably thought was actually free (let’s see…wouldn’t $15amonthcreditreport.com be a more honest name?).

&

Sure enough, WaMu has been dinging my savings account for the last six months. I had transferred money out of the account during the summer and haven’t touched the account since, so I wasn’t checking my statement. Ends up my account balance of $295 was below the “account minimum” of $300 (which I didn’t know about), so every month, I’ve been paying a fee. I know I should be more of a fine-print reader, but since I’m not, I’m sure glad the Cutback Tool caught this for me.

PS … every bank ought out to have a bank/labs feature – what possible harm and imagine the potential?

This photo from the FT Monday exemplifies the state of the US Auto industry today.  The smiles, the protruding jaw, the “in your face” defiance in face of adversity – says it all – supported by the sub-headline “carmakers in drive for more government support”.

Where is the quiet thoughtful strategy to re-invent themselves and accept that the opportunity that crystalised 34 years ago with the oil crisis has been woefully lost.  Instead of magically rolling out electric cars all of a suddden as if they were always on the plan, lets hear the overall plan to change, and describe what the company will look like even 10 years from now.

Related example:  Abu Dhabi have made a significant investment in the non-oil future, and noted a clear vision of their future that is surprising a lot of people, including UK and US political leaders.

Gulf Oil States Seeking a Lead in Clean Energy | NY Times

“Abu Dhabi is an oil-exporting country, and we want to become an energy-exporting country, and to do that we need to excel at the newer forms of energy,” said Khaled Awad, a director of Masdar, a futuristic zero-carbon city and a research park that has an affiliation with the Massachusetts Institute of Technology, that is rising from the desert on the outskirts of Abu Dhabi.

Relevance to Bankwatch:

It seems to me this is precisely not the moment for bravado, and while bankers are less flashy, many tend to suffer closed thinking, and that is being perpetuated with all the other problems that abound in banking today.

I would suggest this is the time for Banks to learn the lessons of other industries such as the Auto industry, and bring out those quiet people in the back that have been thinking about this for years, by pooling knowledge and views from across the organisation.  Consider implementation of a Brainpark type tool to co-ordinate and democratise knowledge and thinking.  As Google notes their best ideas appear from the least likely sources.  The best ideas do not have to be formed within traditional hierarchies, and in fact are highly unlikely to appear there.

PS …  any snappy captions for the above photo   ?  Feel free to leave in comments – link at top of post.

American Banker have released a blog.  It covers current news in the areas of new regulatory restructuring initiatives, housing policy and financial rescue efforts coming out of Washington.  I like the design, nice and clean, although I am not a fan of partial/ read more posts display.  Some of the posts are reviews and summaries of other newspapers – all good stuff.   If I read that in my Google Reader that means I have to come to the site to read it.  Pro blog readers will tend to read less with that view.

Otherwise a nice start to opening AB up a little bit – there is great content there, and it has been very closed till now.  I always thought that a good model is the Economist, that has free content and premium content – the freemium model is a good way to engage people.

Anyhow good luck with the blog.  You will find it at http://blog.americanbanker.com/bankthink/ and the feed is here.