Posts Tagged ‘banking crisis’
For the record. Links to both the reports below. Enjoy.
Last week, the banking world was gripped by the findings of a probe into the financial crisis by a powerful US Senate committee and the interim report of Britain’s government-appointed Independent Commission on Banking, led by Sir John Vickers.
Here are the reports:
Vickers Independent Commission on Banking (UK)
Levin US Senate Report (US)
A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes. This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.
I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift. It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear. The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.
All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.
The paper outlines three core results of financial crises. This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.
No real surprises here; Low asset values, high unemployment, and high government debt. Click through for details (13 pages).
The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)
First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.
Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.
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;
In something that is a bit ironic, the Democratic US government is looking the most conservative in management of banks amongst the G-7 scheduled next week in Italy. Geithner is also looking the most thoughtful of the finance ministers, alongside Lagarde in France.
This is seriously not a time for grandstanding as Brown and Darling continue to do too often. Time to get it right with a sustainable approach that will not relegate banks to becoming permanent financial utilities which I fear is happening when you read this dire summary of the current state.
Could we have a system in the future that has the private (and presumably innovative) banks existing only in North America?
Ireland injected €7 billion, or $9 billion, into its two largest banks Wednesday. In return, it gained the right to appoint four directors, limit executive pay, set lending parameters, require the suspension of home foreclosures, as well as an option to buy a 25 percent equity stake at fire sale prices some time in the future. The government already owns 75 percent of Anglo Irish bank.
In Britain, four of the most troubled financial institutions — two of them were officially nationalized — are already under the de facto control of a newly formed government holding company.
Officials are pushing Lloyds Bank and the Royal Bank of Scotland, among others, to pare bonuses and increase lending to British homeowners and businesses.
Both countries’ actions conform to a growing sense in Europe that the best way to revive banks is to put them on the tightest possible leash. But in an interview in advance of the Friday and Saturday G-7 meetings, a senior Treasury official reiterated that the Obama administration is committed to the proposition that banks must remain in private hands.