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Archive for the ‘regulation’ Category

U.S. Planning to Reveal Data on Health of Top Banks

I saw somewhere earlier that the President was planning a major economic speech tomorrow, and now this below is finally coming after being delayed while some banks announced.  This probably explains the context.

U.S. Planning to Reveal Data on Health of Top Banks | NYT

WASHINGTON — The Obama administration is drawing up plans to disclose the conditions of the 19 biggest banks in the country, according to senior administration officials, as it tries to restore confidence in the financial system without unnerving investors.

Written by Colin Henderson

April 14, 2009 at 20:46

Posted in Banking Strategy, regulation

Tagged with ,

G20 draft communiqué & FT interview with Obama indicate more regulation coming to Banks

Lionel Barber at the FT interviews US President Obama in advance of the G20 meeting Thursday.  Despite the broad sweeping answers it seems unlikely that we will see much tangible outcome from the session, but the G20 draft communiqué (below) is clear about stronger regulation.

Obama interview: Full text | Financial Times

FT: Let’s talk about the G-20. What will be your benchmarks for success?

Obama: The most important task for all of us is to deliver a strong message of unity in the face of crisis. There’s some constituent parts to that. Number one, all the participating countries recognise that in the face a severe global contraction we have to each take steps to promote economic growth and trade; that means a robust approach to stimulus, fighting off protectionism.

Next, we have to make sure that we are all taking serious steps to deal with the problems in the banking sector and the financial markets and that means having a series of steps to deal with toxic assets and to ensure adequate capital in the banking sector.

Third, a regulatory reform agenda that prevents these kinds of systemic risks from occurring again and that requires each country to take initiative but it also requires coordination across borders because we have a global, we have global capital markets, and that will include a wide range of steps, additional monitoring authority coordination of supervisors and various countries dealing with offshore tax havens.

The G20 draft communiqué has been leaked to the FT and some directional clues are there.  While the debate on stimulus and protectionism are less clear there seems little doubt we will see more regulation and regulation that is sweeping in nature across countries, Banks and economies … some snippets here, but worth reading if interested to get full context in the 2 or 3 pages.

Reforming financial systems for the future

14. We recognise that weaknesses in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. …

• to work closely and systematically, in accordance with the Financial Stability Forum framework, to supervise cross-border institutions and to complete the establishment of colleges of supervisors for all significant cross-border financial firms;

• to improve over time the quality, quantity, and international consistency of capital in the banking system. Capital requirements should not be strengthened until a significant and sustained economic recovery is assured and the transition managed to ensure that the extension of credit is not constrained. Regulation should limit leverage and require buffers of resources to be built up in good times which banks can draw down when conditions deteriorate;

• each of us commits to candid, even-handed, and independent IMF surveillance of our economies and financial sectors, of the impact of our policies on others, and of risks facing the global economy;

Written by Colin Henderson

March 29, 2009 at 20:29

Posted in regulation

Tagged with , ,

The Turner Review: a regulatory response to the global banking crisis

Here is the Turner Review commissioned by the Chancellor of the Exchequer.  Martin Wolf reviews here at the Financial Times.  Wolf argues it is a watershed for finance making this excellent point –

“The most important analytical points are that individual rationality does not ensure collective rationality, that individual behaviour is frequently less than rational and that, in consequence, markets can overshoot, in both directions. Above all, such failings create systemic risks: if everybody believes in the same (faulty) risk models, the system will become far more dangerous than any individual player appreciates; and if everybody relies on their ability to get out of the door before anybody else, many will die in the inferno.

Here is the introduction in the report. 

Over the last 18 months, and with increasing intensity over the last six, the world’s financial system has gone through its greatest crisis for a least a century, indeed arguably the greatest crisis in the history of finance capitalism. Specific national banking crises in the past have been more severe – for instance, the collapse of the US banking system between 1929 and 1933. But what is unique about this crisis is that severe financial problems have emerged simultaneously in many different countries, and that its economic impact is being felt throughout the world as a result of the increased interconnectedness of the global economy.

More analysis later.  Here is the full report site, and link to pdf.

The Turner Review: a regulatory response to the global banking crisis

Following the banking crisis, the Chancellor of the Exchequer asked Lord Turner, in his capacity as our Chairman, to review and make recommendations for reforming UK and international approaches to the way banks are regulated.

Here, we publish Lord Turner’s Review and the supporting FSA Discussion Paper. These take an in-depth look at the causes of the financial crisis and recommend steps that the international community needs to take to enhance regulatory standards, supervisory approaches and international cooperation and coordination.

Main document

The Turner Review : [ PDF ]

A regulatory response to the global banking crisis

Written by Colin Henderson

March 20, 2009 at 00:18

Posted in regulation

Bank nationalisation by a thousand cuts is distracting us from the root problem

In the series “The Great Unwinding” last week two types of banks, Financial Utilities and Risk Takers were highlighted to appear.  This direction received strong support this weekend with Alistair Darlings order to perform a complete review of bank practices.

The review is the not so thin edge of a large wedge when the ramifications are considered.

The chancellor said on Sunday that the review would look at risk management by boards including how pay affects risk taking; it would also look at the way boards operate and the role of institutional investors.

Mr Osborne (Shadow Chancellor)  added: “The party is over for the banks. You can’t go on paying yourselves 20 times what a heart surgeon earns.”

Last October I wrote that RBS and Lloyds/ HBOS were effectively nationalised by the actions taken by the Government and since copied in other jurisdictions, mainly US.  You will recall that the original intent promoted by TARP in US was to carve off the toxic loans into a “bad loan bank” which would have had the role of managing those loans.  That approach would have allowed banks to continue to operate as smaller banks, with adequate capital.  Additional controls on operations of banks to ensure stabiity of the system  could have been implemented through appropriate regulation.  Credibiilty and confidence in the banking system would have been restored quicker because the doubts about asset quality would be removed and presumably the remaining assets (bank loans) would have been operating normally and since there would have been less assets (investment) the capital base would have been relatively stronger.

However the British Government went straight to their socialist roots and went down the ownership route taking significant stakes.  This is akin to taking a tiger by the tail – once you start you cannot stop as they are now finding.  The rapidity which the US followed suit surprised me as they took stakes in the banks too.  And just last week Obama found himself regulating bank executive pay limiting it to $500K.  Neither government should be surprised by this.  Of course their is popular outrage at bank executive pay and bonuses, and of course that outrage is directed at … the owners!  The owners are the government who are politicians first, so now we have the politicians running around managing messages such as bankers bonuses. Once government starts with a review of internal governance and practices it is impossible to retreat from that slippery slope.  Each item in the review will drive out sets of others that once viewed in the public eye will bring out additional political issues that will require additional political influence, and the snowball will grow and grow.

I am not agreeing or disagreeing with bankers bonuses.  I am suggesting that that debate is irrelevant and distracting when it comes to solving the crisis of confidence in the banking system that is created by assets that are not accurately valued – in fact the doubts are such that a value of zero is the only rational value and this is displayed in the stock prices of those banks.

In fact nationalisation may be an appropriate approach even though I would not pick it.  However the half in/ half out situation that the banks are in now is doing irreparable harm to those banks and to the economy both through failure to address the central issue of asset valuation, and through ensuring politically oriented non-management by those half in banks.  Those same banks are destined to the category of Financial Utilities.

One a separate note,  it probably is too late to create the bad bank now – and as Niall Ferguson recently wrote, that bank already exists.  [emphasis mine]

Now the talk is of a new “bad bank” to buy the toxic assets that the Troubled Asset Relief Program couldn’t cure. No one seems to have noticed that there already is a “bad bank.” It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.

Written by Colin Henderson

February 8, 2009 at 13:20

banking 101 | All banks are vulnerable to runs

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.

Written by Colin Henderson

January 20, 2009 at 22:02

The G20 ought to consider only regulation that assesses the outcome of good and bad decisions

President Bush makes an important point and distinction here [emphasis mine].  The couch economists and newly found supporters of a new President are tempted by talk of new regulation and government control. 

Bush defends free-market system | BBC

Returning to the cause of the credit crunch, Mr Bush admitted that failures had been made "by lenders and borrowers, by financial firms, by governments and independent regulators".

But that the answer was "not to try to reinvent the system".

Instead, he said the solution was to "fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people around the world".

He added that while capitalism was "not perfect", it was "by far the most efficient and just way of structuring an economy".

"It would a terrible mistake to allow a few months of crisis to undermine 60 years of success," said President Bush.

Clearly there are issues that caused the current problem, and the first paragraph is one I have discussed frequently here.  The lack of transparency, in the orchestration of securitised mortgages as they are converted into ABCP is certainly at the core of the issue here.  Whether regulation, control, bank audits, new financial alternatives – this must be fixed.  But if we think about it, new regulation on that would only serve to protect banks from purchasing securities that they did not understand.


Did I just understand what I just said.  We need protect banks from themselves and their own uninformed decisions?

This is why the notion of regulation is hard. 

Relevance to Bankwatch:

The nature of the regulation that what the G20 ought to consider this weekend is regulation that assesses the outcome of good and bad decisions, rather than attempt to regulate markets, and their processes.  That result is determined by measurement (accounting rules) and capacity to absorb losses (capital requirements).

All President Bush is saying with that headline is that lets not throw the bay out with the bath water.  Worse, lets not become so technocratic that business decision making is over-ridden by government controls that could well produce dysfunction the likes of which might make the current crisis seem like a walk in the park.

Written by Colin Henderson

November 13, 2008 at 21:41

Some fresh thinking – The New American Bank Initiative (NABI)

I worry about the bailout plans led by newly famous Gordon Brown (Prime Minister UK), and which every other world leader is falling over themselves to adopt.  Such an approach is natural for Brown and his political leanings, but to see it occurring around the world to the extent it is happening is worrisome. 

That worry is exacerbated now that we see proposals to help out the auto manufacturers.  This is protectionism by another name, and will result in worse companies with worse products.  The same can be said of Banks.  How can a bank with a financial tap opened from the government be motivated by anything but keeping that tap open.  This is dysfunctional to making the service better and more attractive for customers.

So it was refreshing to encounter this thinking and the paper that makes the proposal, however its still worth digging deeper to understand if this will be better or just another way of creating dysfunctional government backed enterprises.

Forget the bailout, start over: the New American Bank Initiative | O’Reilly Radar

The bailout of the US financial system isn’t working. The government’s rescue plan has fundamental flaws, including incentives that favor the failed firms, not the country as a whole. New ideas are needed. In "New American Bank Initiative:

In this paper, we argue for a New American Bank Initiative: use the $700  billion in government funds to capitalize new banks and distribute the shares of the new entities to the American People.

These new banks would then acquire the operational and human capital  assets of failed banks in FDIC receivership

The paper goes on to outline the backdrop to their proposal.

The core issue with the current crisis is that the financial system is no longer properly functioning as a conduit of capital from savers to investment projects that generate real economic growth. The focus of every major proposal to date has been to inject liquidity and capital into current institutions in the hope that it will build confidence and start lending again to real projects (i.e., unclog the conduit).

First the scale of the US initiative is noted.

$700 billion is a huge amount of money–more than the equity book values of Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup, Washington Mutual, Bank of America and Wachovia combined.

The basis of the NABI solution is to construct 20 new banks across the country, and eliminate government interference in those organisations, but transferring ownership to the US people.

To avoid a concentration of risk, the capital should be distributed amongst at least 20 new institutions. To avoid the hazards of government ownership or sponsorship, the shares of these institutions should be  distributed to the American people (each bank can have 300m shares; one for every American man, woman, or child).

Relevance to Bankwatch:

While I applaud the notion from the perspective of creativity and innovation, its not clear to me how the business strategy would be defined for the 20 new banks, other than by the US Treasury, and that might be worse than the Paulson plan.  At least the Paulson plan retains the business and strategy drive from the existing bank leadership to counter the government bias.

Having said that there is something there in the idea of finding a way to bring the leverage of the $700 bn that will retain innovation, yet retain a credible banking system. 

A fresh proposal:

Split the $700 in two.

  1. $350 towards a US Government owned credit union.  Provide the mandate to offer basic banking, account, loans and mortgages.
  2. Use the tax system, or other methods available to government that support startups that keeps the innovation in the financial services startups.  Aggressively review the regulation of financial services, and fast track changes to accommodate internet. 


The problem with banks is confidence.  The reality of banks going under is irrelevant to most other than stockholders, but they understood the risk of investment. 

Point 1. above offers customers a safe structure to restore confidence.  Customers who are afraid of banks disappearing and taking their money with it could shift to the US Government bank.  The rates would be terrible, the service basic, but its safe. 

This frees the existing banks to sort out their problems write off their bad debts, including telling the truth about their bad debts, instead of the current exaggerations.  Incidentally most estimates place mortgage defaults at no more than 10% overall.  That means 90% are current.  So why does a bank need a bailout if their mortgages are still relatively current?  The headlines scream that sub-prime mortgage loans have lost all their value but that’s simply not true, or at least not the whole story.  The banks need to evaluate their portfolios, loan by loan, and define the write offs – deal with that, and move on.  Its simply ridiculous to see companies like AMEX proposing to become a bank – just so they can get money.

Point 2. will offer support and space to accommodate creativity and alternatives that will further pressure the banks to stop whining and move on. 

Thoughts welcome – how should the US Government use the $700 Bn if at all.

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Written by Colin Henderson

November 13, 2008 at 12:57

Yamato Life goes bankrupt due to bad management

In a dramatic similarity to HBOS, Bradford & Bingley, to name just two, the Japanese Life Insurer Yamato was caught out investing in securities and losing out in the crash.  The similarity lies in the classic example of a financial services company getting caught out of its bread and butter business, trying to build profits in other ways, and taking shortcuts.

Japanese insurer Yamato Life collapses

Government officials tried to portray the bankruptcy as a special case. Yamato Life’s failure “is the result mainly of the company’s unique business model, whereby it covered its high operational costs with returns from investing in securities”, Shoichi Nakagawa, minister of financial services, said.

The Japanese life insurer said it was unable to close its books for half-year reporting after a sharp and rapid fall in the value of its equity holdings led debts to exceed assets by Y11.5bn.

Relevance to Bankwatch:

This is pure bad management, and banks that get caught out making speculative investments that are out of proportion to their financial capacity ought to be penalised.  In terms of regulation, to my mind the regulation should focus on reporting of off balance sheet items, and investments that are out of proportion to capital and profits.  This would warn consumers to avoid such firms, and the market would drive normalcy.

Written by Colin Henderson

October 11, 2008 at 06:23

Two years on | Which banks understand the web lifestyle?

When I started this particular blog, my impetus was the lack of creativity amongst Banks in getting beyond automation of traditional transactions, and sticking them online [online banking].

Introduction « The Bankwatch

Introduction Saturday, 28 January 2006

Welcome to Bankwatch. The purpose of this blog is to monitor banks around the world for their online capabilities, and the strategies they are adopting with online. Consumers are web savvy now, and most banks aren’t, so I will point those out, and I will also recognise best practices too.

It might be useful to just take a look and see what progress has been made in just over two years. My general sense is not much progress amongst Banks, but enormous progress amongst non banks challenging the status quo.

Whatever progress, is now laid against the backdrop of threatened new regulation in UK, North America and others to place a cost on the political consequnces of bailing out Banks, and in particular investment banks who until now have been largely left to live and die on their own sword.

Disruption within financial services will not happen simply. The topic of regulation is always controversial, being one that Governments immediately leap to because it offers the pretense that they are making things better, even though the current credit crisis that the Banks are sufferring is one that occurred despite existing regulation and accounting guidance on the topic of off-balance sheet lending.

Banks are running scared at the moment, lacking trust to lend to each other, and simultaneously being concerned about revenue and expense growth at precisely the time they need increases in the former, and decrease the latter.

Yet customers are evolving and will continue to expect more and better online self service from Banks. No amount of denial can alter that. More and better in quantity, and quality. Services and offers that are more engaging, and work the way customers want to work.

Nothing about this time offers promise for customers from Banks. There is much promise in new startups, and we have the regulation cloud right in the centre of this epic battle.

So which Banks [or Credit Unions] show signs of life, and look to break out of the pack? That’s my question de jour. As I develop this meme, what suggestions and examples of Banks that ‘get the web lifestyle’ can you offer? [In particular Europe & Asia where language makes it harder for me to source.]

Written by Colin Henderson

March 30, 2008 at 17:16


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