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Treatment of Derivatives on US bank balance sheets is swept under the table

SEC. 629. From the unobligated balances available in the Securities and Exchange Commission Reserve Fund established by section 991 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111– 203), $25,000,000 are rescinded

With that (on P615 of the US Omnibus Spending Bill H.R. 83) the single largest concern from the 2007 banking crisis, which was front and centre in the Dodd Frank legislation is quietly removed. Derivatives.

Banks won a measure easing restrictions on their derivative-trading activities.

The change would affect requirements under the Dodd-Frank law that banks spin off certain derivatives-trading activities into units that don’t enjoy access to the government safety net.

The practical impact is simple. $670 trillion in contingent liabilities of US and foreign operating in US banks, can remain on their balance sheet, which means:

  • any debts that arise as a result of those derivatives are part of the banks’ liabilities and in case of default would benefit from any taxpayer bailout
  • the commercial transaction that derivatives support, such as currency hedging, benefit form the lower cost of funds that on balance sheet funds attract.

The whole thing is swept under the carpet in support of last minute support to keep the US government from running out of funds again.

Written by Colin Henderson

December 13, 2014 at 20:14

Posted in Uncategorized

Government of Canada introduces payments code of conduct addendum that anticipates smart phone apps, but potentially at the cost of less product innovation

The Government of Canada is being quite proactive in consideration of payment regulation.  The code of conduct released in 2010 has been overtaken by introduction of apps that incorporate payments into smart phones, and the government have issued this addendum in that light.  However the approach risks being to product centric versus focussing on their mandate which is consumer protection.


The Code of Conduct for the Credit and Debit Card Industry in Canada (the Code) came into effect in August 2010 and covers several methods for making payments, including point-of-sale, internet and telephone. The Code does not explicitly address mobile payments transactions.

One situation in particular is dealt with in Element 8 but also seems to apply broadly throughout, requires that debit and credit cannot reside on the same card.  The addendum recognises this makes no sense for smart phones with a debit app and a credit app on the same device, albeit separate apps.  Protection is provided in the addendum to ensure consumers are still able to make choices about what they accept and what they pay for, notwithstanding the apps are on the same device.

However the original intent to keep debit and credit separate is unclear.  The original code of conduct, Element 8 states (emphasis mine);

8.  Payment card network rules will ensure that debit and credit card functions shall not co-reside on the same payment card.

Debit and credit cards have very distinct characteristics, such as providing access to a deposit account or a credit card account.  These accounts have specific provisions and fees attached to them.  Given the specific features associated with debit and credit cards, and their corresponding accounts, such cards shall be issued as separate payment cards.  Consumer confusion would be minimized by not allowing debit and credit card functions to co-reside on the same payment card.

The government in their well intentioned regulation seem to have decided that consumer confusion could never be eliminated by innovation, and therefore have eliminated the opportunity for that innovation by insisting on separate cards.

Fast forward to Sept 2012 and the addendum says its ok for debit and credit to co-exist on a smart phone provided they are separate apps.

I say what is the difference between a smart phone and a smart card?  In theory there is no difference when we remove the constraints of current design.  The chip on a smart card is pretty dumb but that is todays design and given the current rules no-one has been allowed to consider alternatives either on the card or on the acquirer device that would mitigate confusion.  This is a slippery regulatory slope.

Relevance to Bankwatch:

While this addendum is released with the best of intentions, it strikes me as being mightily detailed in describing apps that broadly do not yet exist.  In fact by trying to address a problem in the original code it further confounds the confusion by layering on more regulation, ie, “in the case of smart phones …”.  As it turns out this might be an improvement but for all the wrong reasons.

One of the problems with regulation, especially since 2008 and monstrous tomes such as Dodd-Frank is that they are so detailed and specific to address known problems that by their very nature they are bound to miss the next problem that has not been yet experienced.

I have written much about regulation and what I believe to be appropriate here.  Regulation should be designed to control the design and actions of bank organisations who provide basic banking services.  Regulation should not be so low level as essentially providing product design, and I fear these well intentioned payments regulations are dangerously close to being just that, and this addendum designed to address mobile proves that regulation needs to get back to its roots and out of product design.

Written by Colin Henderson

September 23, 2012 at 23:04

Posted in Uncategorized

Real banking innovation requires separation of basic banking from the rest of financial services

Reading Competition creates a Race to the TOP: The EU should seek Liberalisation not Harmonisation over at the thoughtful “The Extended Society” blog, and some of the other links there such as this at the Economist, got me to thinking more about regulation of financial services.

The Dodd-Frank act | Economist  [emphasis mine]

The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. Voracious Chinese officials, who pay close attention to regulatory developments elsewhere, have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one outside Beijing (your correspondent is a tired-eyed exception to this rule). And the size is only the beginning. The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: “Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.” Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.

At Extended, Henry makes the point that we need less regulation, not more.  This will he argues, prepare financial markets for life in the wild and we will be the better for it because

“Competition creates a Race to the TOP”.  This is an admirable argument, and in a green field situation when designing markets from scratch, as in the Amsterdam 1602  example provided, makes eminent sense.  That is not the case today.

That said, I would not advocate strong deterministic regulation that is politically nor socially motivated.  That is for smarter and folks, and not for this blog.  What is for this blog is a closer look at what financial services has learned and actually needs based on experience of the last 4 years in particular and how we got here.

What is regulation, and what is expected of regulation?

The purpose of regulation is presumably at its core is to provide control and protection of citizens.  At least that would be the basic belief of free market advocates.  Where regulation becomes shakey and on much thinner ground is when it is used to reshape society, business or groups of people.  This is the realm of social democrats whose desire is to make life better for certain segments.

This is where Dodd-Frank and EU Financial Directives are straying into dangerous territory that is fed by news headlines.  They are designing regulation in the name protection, yet there is an almost emotional aspect;  the one that focusses on bonuses as the largest example, but including prima donna chief executives, and general corporate greed.

Yet despite the relatively light 118 pages that made up the US banking system and which reduced by 37 when Glass-Steagall was repealed, we still had the 2008 crash.  Where the thinking falls off the rails, is that by adding 10 times more pages that the problem will be solved.

One of the largest fears exhibited by smart thinkers at the 2009 Davos meeting was that new regulation cannot be designed to solve problems that are in the past.  They should be, the argument went, be designed to solve future problems and provide stability.

This led to the entire Too Big to Fail discussion, and enormous bailouts and quantitative easing combined to kick the proverbial can down the road such that we are now dealing with a new problem.  We have the pre 2008 system with its global system of financial entangled products that far exceed commercial trade, now layered on with financial organisations that are so large that any one going down, would be so catastrophic in and of its self, even without the aforementioned global entanglement.

What regulation do we need, and what regulation are we getting?

At a high level, and having watched the events play out for the last 4 years, it seems quite clear, at a high level, that we need regulation that will accomplish 3 things:

  1. A soft landing break up of large financial institutions
  2. A soft landing unwinding of the consumer debt cycle, and (the 64 thousand $ question)
  3. A firewall between Government borrowing and the risks associated with points 1 & 2.

Instead the EU is looking at a myriad of rules that seem to be mirrored on Dodd-Frank.  The French are also pressing for a new tax on financial investment activity.  These are rules guaranteed to provoke unintended consequences that will have no bearing on the problems that need to be solved.

Why not do this:

  • Isolate a section of banking for consumers that seek it from financial risk. There was a time, and it was only 5 or 6 years ago depending on which country where deposits up to $60K – $100K had a government guarantee through the Federal Deposit Insurance Corp (or Canadian Deposit Insurance Corp, or UK £85,00 – wikipedia – deposit insurance).  While these legal limits remain, no-one believes it.  Everyone assumes entire banks and their deposits are protected.   The result is that trust is now focussed upward to Government and now the question is which government do we trust with our money?
  • Time to change that, and make it clear anything outside the deposit schemes are NOT protected.  This takes one line of regulation but has the largest potential impact.  If I was in government, I would insist on the Volker Rule/ Glass-Steagall to backstop this provision.
  • Keep regular consumer debt inside the utility banks.  The technocrats will figure it out with debt reductions, consumer proposals, debt re-arrangements.  Fancy words that will align real consumer debt with the allowances on the banks’ balance sheets.  Think 10 – 15 years; it can be done.
  • Fix Basle 3x to treat sovereign debt like any other debt.  Let analysts look at the debt servicing capacity of the nation, and determine the interest rate, or even whether to participate.  You will see the Eurozone rapidly decide who is in or who is out.
  • Peripheral point.  The Euro zone must be broken up.  This Euro currency is the dream of central European bureaucrats.  There is no basis in reality, nor popular expectation that aligns the bureaucrats dream with the average person.  There is too much mixing of disparate objectives (freedom of work, freedom of movement, social equality, none of which squares with the local pressures felt and political objectives required of the individual countries.

This would bring us to a period of utility banking.  Boring.  Just like buying water, and electricity.  But it is there for those that prefer the security of those basic services, which I would suggest are likely the majority of people.  When people go to the grocery store, or pay their phone bill they need to know the money that was there yesterday is still there.  This is the definition of utility banking, and even the richest person needs to know his debit card will work tomorrow.

Beyond utility banking, there are many with investments that seek additional return and they can look outside the utility banking framework.  Then there are another group with super investment needs.

Beyond utility banks let the remainder organisations create diverse and no doubt novel products that offer the services, returns and whatever else the customers desire.  They will succeed or fail; this is no matter for government.  Let these organisations design their products to attract utility bankers other needs beyond day to day payments, through novel design and products that provide a balance of risk and reward which fits with their customers risk profiles’.

A final point to note.  These risk-taker banks will be initially very attractive to governments (think London vs Paris) and governments will be motivated to design tax positive zones to attract them.  Let them.  Provided the three principles above are embedded it is their risk (and their citizens) to take on, but it is NOT the risk of other countries to support them.  (Euro-desingers take note.)

Relevance to Bankwatch:

Thank you Henry for focussing my thinking on the underlying problem with regulation.  Bureaucrats are making it at best too complicated and at worst wrongly directed.

There is no hope for banking innovation in my mind, until we first separate basic banking from the rest.  Only then can we have clarity of strategy and design on services that are either risky or risk free.  The amalgam we have today is more like a social safety net, that no-one believes nor trusts.

Written by Colin Henderson

February 20, 2012 at 16:23

Posted in Uncategorized

Tagged with , , ,

“Why US Banks need a new business model” | McKinsey

A nice summary from McKinsey of the fundamental problem facing banks in any country, that reflects the zero appreciation in bank stock value over the last 20 years.  McKinsey state that banks need a new model.

Why US banks need a new business model

Many commentators blame Europe’s sovereign-debt crisis and fears of a double-dip recession. But three additional factors also weigh heavily on investors: the new bank capital requirements introduced under the Basel III international-banking regulations, the impact of new US banking regulations responding to the financial crisis, the Dodd–Frank Act, and the unwinding of consumer debt. All three undermine banking’s traditional business model.

This is an obvious point despite investors lack of appreciation of it. 

This next point is my favourite.

By business model, we mean how banks actually operate—how work is done, the degree of automation, the pricing and design of products, and underlying compensation systems. In the market’s view, the threats are so strong that it won’t be enough to trim the sails, refocus investment, or cut costs a bit here and there.

There has been an unfortunate mixing of what I would call banking, that is accepting deposits and making loans; mixing with investment banking that is far removed from traditional banking.  But that is a self made problem so no excuse.

Lets break this down using the McKinsey model approach:

  1. how work is done,
  2. the degree of automation,
  3. the pricing and design of products, and
  4. underlying compensation systems

1. How work is done:

Banks approach the market with a sales force that generally speaking has no idea about products or technology.  I don’t mean this to sound as harsh as it does but it is not the fault of the front line. 

The technology and product people (I am generalising here) are generally not allowed to speak directly to customers.  The model is designed to provide features and benefits descriptions to front line staff.  This is a good design for selling but a bad design for quality service and answering questions.

2. The degree of automation:

If you ask a bank technologist they will describe an amazing amount of automation, with incredible sophistication of system integration.  However the very statement is evidence of the degree of internal focus required to make the systems work together at all.  This in contrast to what customers need. 

3.  The pricing and design of products:

Pricing and product design for banks generally follows the telco and airline models by creating complexity with a host of extra fees embedded in that complexity.  There are some standouts such as ING who try to break through that but not a lot of innovation here. 

5. Underlying compensation systems

Not much to be said here.  Many bank employees have made a lot of money, yet the value to shareholders over the last 20 or 30 years for the average bank is zero.


Written by Colin Henderson

January 7, 2012 at 15:44

Posted in Uncategorized

An important new analysis of global corporate ownership demonstrates US and European banks have largest concentration

What is this, may you ask and why on this blog?  A piece from the New Scientist.  (ht – jpg)

This graphic shows the 1,318 inter-connected companies that represent a disproportionate concentrated control over the global economy.  There are 43,000 transnational companies.

It was produced by three complex network scientists working in Switzerland.  Their report is here (pdf).

The 1,318 represent 3.2% by number of all transnational companies.  The thing that is most illuminating is the dramatic degree of control exercised by banks (40% of ownership).  This actually surprised me until I read deeper.

Here is the report abstract “The network of global corporate control” – emphasis mine.

The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

The analysis defines control using ownership as the proxy but that is not the point.  I see this is further insight into why the banking crisis occurred in Sept 2008.

Institutional ownership, including mutual funds have become the largest corporate owners and that is why Banks as issuers of Mutual Funds are so highly ranked in this ranking.  Although it is worth noting for the conspiracy theorists, the US mutual funds represent only a small fraction of all global financial institutions.  Much of the institutional ownership is centred in Banks.

The chart demonstrates clearly the concentration of control within a small number of companies and that those companies are banks.  If we repurpose this chart from the report to align by country we get the pie chart shown.

imageA staggering 97% of ownership within this group is centred in US, UK, France, Switzerland, Germany and Japan.  In fact 83% are represented by UK, UK and France.

Despite all the talk of GDP shifts to the East, India and China barely show on this chart.

Fast forward to todays headlines and the worried brows in France and Germany.  It is this concentration of interconnectedness of ownership that makes for shakey ground when one or more of their joint assets (Greek, Italian and Spanish sovereign debt) is going to be written down by a substantial margin.  The demonstrated interconnectedness of banks guarantees ripples that are not well understood, but this report is an important new view into this murky world.

Relevance to Bankwatch:

Banks’ motivation is driven by reaction to risk and for the large banks, global risk.  This kind of new analysis suggests some insight into why we saw the panic in 2008 and the reaction when Lehman Bros went bankrupt.  This uses 2007 data and therefore includes Lehman Brothers which is useful.  At 0.43% of the top 50 (representing 40% of all world transnational corporate ownership) , Lehmans owned 0.17% (o.43% * 40%)  of all world transnational companies as defined here.

Yet when Lehmans went down in Sept 2008, the worlds banks were already distrusting each other.  This was not a regional phenomenon, nor a large vs small one.  Literally all banks stopped trusting any other bank, and looked only to their respective Central Banks.

It strikes me that the other dimension on the top 50 here is whether they have any additional risk that effects them which is non-systemic and specific to their bank.  Bank of America with its enormous iceberg of bad debts and derivative liability springs to mind.  The difference with Lehmans was they were not trusted and that was why they were allowed to go under in 2008.  The lesson was that despite best intentions, the international banking system cannot easily survive such a test.

This is a bank phenomenon, and none of the increased capital requirement from Basel 3, nor increased oversight from Dodd Frank deals with the core matter of power centralisation that is demonstrated in this analysis.  It represents an important contribution to the debate on the Volker Rule and Ring Fencing.

Written by Colin Henderson

October 22, 2011 at 11:58

Posted in Uncategorized

Who would lose money in a bank liquidation? Take a guess …

Simon Johnson , who served as chief economist at the International Monetary Fund in 2007 and 2008 writes on how we have learning nothing nor is the financial system improved in any way since 2008.  The changes including the US Dodd-Frank law do nothing to solve Too Big to Fail (TBTF).

Johnson asks one question, yet leaves the answer hanging …  Who would lose money in a bank liquidation?

Lets look at Bank of America who open that door nicely with their promise of a ‘fortress balance’ sheet.  But rest assured, this same analysis works for any bank as you will see when we get to the punch line.

2010 Annual Report ($ billions)


Balance sheet categories:

Total Loans incl debt secs (assets)              1,236

Securities (fed and others owe to BoA            404

Other Assets (real estate etc)                         624

Total Assets                                   2,264


Total Deposits (liabilities)                            1,010

Securities  (liabilities to fed and others)       1,327

Total Liabilities                                2,037                               

Capital                                               228

Off Balance sheet Notes                                    25

First the good news.  BofA has assets that exceed liabilities by 228 billion.  Big cushion, right?  Of course not and here is why.

In a liquidation scenario, you can bet 100% of the holders of liabilities will want all their money, all $2,037 billion.  Especially the Fed who need it to bail everyone out!  But what about the assets?  When BofA go calling on those debt holders, what % will they get … 90% ?  50% ?  25% ? 

Suddenly the $228 billion is not so large.  Lets assume 75% pay up.  BofA gets $927 billion.  For fun lets assume the Fed pays 100% or $404 Bn.  Real estate will plummet in a fire sale, but lets say Warren Buffet steps in and pays 75 cents on the dollar or $468 bn.

BofA collects $1,799 but pays out $2,037 – short 238 Bn.  Suddenly the capital is down by $466 bn ( that’s 1/2 a trillion)

That was a pleasant scenario because we assumed the loans would attract a 75% return.  There were $1.1 trillion in Countrywide mortgages sold off as derivatives between 2004 and 2009.  Its hard to value the liability from the balance sheet but it is still out there based on the numerous justifications and positive mentions.  In a liquidation, a safe additional $500 bn shortfall could be safely projected.

The impact of depositor insurance, both real and implied:

But you may ask, all of this is meaningless because the Federal Government will step in on liquidation and guarantee all the deposits therefore loan shortfalls do not matter, right?  Wrong again. 

This is precisely where the TBTF rubber hits the road.  When that happens, the government has no choice but take over the bank, with these implications on liquidation, yes liquidation means this happens on a Sunday afternoon and is complete before markets open Monday:

  1. common stock value goes to zero.  Stock disappears from NYSE
  2. government adds $ trillions to its balance sheet both assets (now worthless loans) and full value deposits (new government liabilities to citizens)
  3. GBoA (Government Bank of America) begins Monday morning calling up debtors (loans) and asks nicely if they wouldn’t mind continuing to pay down, repay their loans.
  4. Asset values crash as the largest creditor in the country now considers foreclosures and bankruptcy proceedings on a mammoth scale never seen before
  5. or … 4 becomes the largest debt write off seen in the countrys history with repercussions on currency and real estate values wiping off decades (centuries) of value.
  6. Tuesday … Wells Fargo, Citibank and others follow suit as the market freeze refuses to budge and no other country will deal with any American bank.

Who loses in a bank liquidation?

So who loses in a bank liquidation;  unfortunately everyone.  This is reflected in stock values, asset values and price increases for normal everyday items from currency gyrations and mammoth speculation.  There would be societal implications on the streets, chaos everywhere.  The concept of a bank disappearing is unforseen, and frightening.

The socialisation of bank liabilities by governments both in US and elsewhere, means they are de facto nationalised.  There is no difference between a well run bank and a poorly run bank for that reason alone.  In a liquidation scenario it is truly all for one and one for all.

The best solution that I can think is the UK ring fence, or full imposition of the Volker rule.  This will at least force the separation of your money from speculative money in the above calculations, and while not perfect that has to be a start.  While potentially chaotic, the liquidation of an investment bank does not directly impact day to day commerce, nor commercial business deposits.

And that needs to happen in weeks, not years as is proposed on both sides of the Atlantic.  Otherwise we are literally in the situation whereby the above can be likened to the Big Red Button of the Cold War, and we are constantly reminded of how it could be pushed in error.  It happened with Lehmans and AIG and could happen again as we watch events unfold in September 2011.

Thoughts on other solutions welcomed.

Written by Colin Henderson

October 10, 2011 at 18:07

Posted in Uncategorized

US GAO report – “Person-to-Person Lending – New Regulatory Challenges Could Emerge as the Industry Grows”

The General Accounting Office (GAO) in the US as requested by the The Dodd-Frank Wall Street Reform and
Consumer Protection Act directed GAO to conduct a study of person-to person lending.

Their report is now released at

It provides a comprehensive look at how Lending Club and Prosper work, the challenges P2P Lending presents to the regulators who are based on pre-internet business models.

This report addresses
(1) how the major person-to-person lending platforms operate and how lenders and borrowers use them;

(2) the key benefits and risks to borrowers and lenders and the current system for overseeing these risks; and (3) the advantages and disadvantages of the current and alternative regulatory approaches.

Written by Colin Henderson

July 7, 2011 at 14:12

Posted in Uncategorized

PA Securities Commission issues a strange notice and assessment of P2P Lending

Regulators have a tough job, and while they are subject to criticism few would disagree with the need for regulators.  However when I see hints of politics based on subjectivity creeping in, then they have to be called on it.  (hat tip Social Lending Network)

The Pennsylvania Securities Commission has released an alert that I believe is misleading.  The overall intent of the release is to set out the risks associated with P2P Lending.  What is most intriguing is that the release does this by pointing out the strength of banks as something that can be relied on as a counterpoint to the ‘risky’ P2P lenders.  The notice identifies points of contention that apply solely to P2P Lending.

Lets look at some examples from the release at PA Securities Commission Helps Assess Risks of Peer-to-Peer Lending or here and compare to experience with Banks in similar contexts to assess fairness of this notice.

“Peer-to-peer lending allows individuals and small businesses to receive loans that might be difficult or costly to obtain from traditional banks in our current economic climate,” noted PSC Chairman Robert Lam “

Their opening claim in the notice essentially states that P2P Lending is for sub prime.  Where on earth would they get that idea?  In 2005 there were examples of that which no-one can deny.  In 2010 there are no examples of such lending in P2P amongst any regulated P2P Lender.  Minimum credit scores are the base level entry requirement.  This is clearly documented in the regulation documents filed with the SEC (Securities and Exchange Commission).  If someone is not willing to accept the minimum score then request those lenders increase the standard.  To my knowledge the minimum score eliminates borrowers that would be classified as sub prime.

“Banks historically build impressive edifices out of bricks and mortar to underscore how stable and reliable they are.  On the Internet, it’s much more difficult to a reputable institution from ‘castles in the sky.'”

Words fail me in this one – “castles in the sky” ?  What kind of regulatory oversight did the SEC agree to with Lending Club and Prosper – do they have a new category for ‘castles in the sky’.

What did the Penn Securities Commission think in Feb 2009 about reputation and ‘impressive edifices’ as represented in this photo when the chief edifices were grilled by Barney Frank for irresponsibility and more.  Lets not forget the CEO’s were hauled in together and held to account on serious charges of at best misleading customers and investors.


The Securities Commission alert also warned investors to be aware that the identity of the borrower is often not available to them, making it impossible to verify independently the status of the borrower’s finances and business prospects. The lending platform may not do a thorough background check of the borrower, and borrowers may incur additional debts to other lenders.

Lets compare this allegation to foreclosuregate ‘If the chain of title of the note is broken, then the borrower no longer owes any money on the loan’.  In this case Banks took depositors money and made loans that had many potential defects including identity of the borrower and of imperfect collateral.

“It takes time to fully assess the risks and rewards of financial innovations such as peer-to-peer lending,” Lam said. “Investors should proceed with caution when considering new investment vehicles like P2P.”

This is one claim I can agree with.  I would prefer to not single out P2P because the statement works for any ‘new investment’.  Nonetheless P2P is relatively new and certainly quite new in terms of seasoning credit risk while under the auspices of the SEC.

Relevance to Bankwatch:

Just as there is a need in the investment world for a fair, balanced and considered assessment of all the risks, this is equally true when issuing notices such as the Penn SC notice.  Factors such as prime vs sub prime, identity verification, stability and reliability, are all valid considerations for risk.  However the first part of risk assessment is to gather a set of facts relative to each risk and then perform the assessment.  The nature of this notice reads that the factors are based on opinion related from side conversations, gossip and out of context one-off examples and if that is the case this is no way to perform a risk assessment.

In fact I would propose that the Pennsylvania Securities Commission release the entire report that supports this notice to highlight the methodology utilised in determining the extent of the risk associated with P2P Lending.  There is a supporting report and analysis, right??

Written by Colin Henderson

December 23, 2010 at 11:20

Posted in Uncategorized

Liveblogging C-Span | Timothy Geithner, Secretary of the Treasury on bank bailout package 10th Feb

Two minutes to go – running a little late.  This set of announcements to talk about the plans for the remaining $250 Bn TARP money.

Expect to see these dramatic developments.

  • A public / private investment fund
  • a new pre-requisite requirement for banks before receiving for government aid
  • major expansion to consumer / business lending programme

I will update this post every few minutes.

Here we go.  Sen Chris Dodd, D Banking, Housing and Urban Affairs Committee Chairman  introduces Geithner.

Treasury Department Financial Markets Assistance Plan.

Notes listening to him:

“Introduction has talked about unfreezing credit 5 times – interesting that is the focus.  Anyhow here is Geithner.

Economic strength is derived from the makers and do-oers of things.  The financial system is central to that process, finance for first home and new car.  Immediately speaking on new credit.

Credit markets are not working – borrowing costs risen sharply.

Many banks are reducing lending and tightening terms.  Referring to job losses, demand dropping.  Trade between nations drying up.  Credit worthy borrowers having trouble.  Financial ssystme working against recovery and against banks.

Unless we restore the flow of credit problem will be deeper.  Today as Congress passes the stimulus we are implementing the market assistance plan.


banks and investors took risks they did not understand.  Systematic failures by Board of Directors, and Rating Agencies.  Insufficient constraints to limit risk.  These failures laid the groundwork for the worst crisis in generations.  The emergency actions taken so far have added to anxiety and failed.

Las fall Congress acted quickly and pulled the system back from the edge of catastrophic failure and were essential but inadequate.  Distrust has turned to anger as senior execs – lavish perks.  American people have lost faith in leaders of fincancial institutions.    This has to change.

Policy has to be comprehensive and forceful.  Not gradualism.  Must be sustained until recovery is established.  In Japan etc governments applied the brakes too early.  We cannot make that mistake.

Need transparency to see the impact of those investments.  Must support not replace private capital.  US must send a clear message to replace the current programme with a new one to support recovery.

The Dept of Treasury and Finance Reserve must work together but we are one government serving the American people.

Here is what we will do.  –  Site setup underway.  There is a link 02/10/2009 – Financial Stability Plan Fact Sheet PDF Icon that goes nowhere.  Link now live.  This is work in progress as we post.

Talking a lot about transparency to American people.

Three steps:

1.  Stress test for Banks.  Consistent review of Banks balance sheets.  New funding mechanism.  Every dollar will generate a level of lending,  New Trust to manage.  [Need to understand better]

2.  Financing for bad assets. Private capital and market managers to manage these assets.  A programme.  $1 trillion in capacity – beginning at $500 bn.

3.  Jointly with the Federal Reserve kick start lending and get credit flowing again.

Housing:  some borrowed beyond their means.  Government should have moved more forcefully.  Houseing prices fall, and we should find a new balance, but foreclosures and deepening crisis mean we must do something.  Focus will be to bring down mortgage payments and mortgage interst rates. Next couple of weeks.

Working in preparation for London G20 in April.  International co-operation on regulation.

Wrapping up now.  His speaking style is very direct clear, and no hesitation.  However he is not taking questions.  Thats weird.

Relevance to Bankwatch:

The messages above clearly add to notion of highly regulated banks.  The stress test remarks mean that banks will be under direct scrutiny and intervention.  Financial utilities are coming closer to fruition.

It appears that in the the internal debates  between Obama’s aids and Geithner (thanks @modernmod) that Geithner was able to introduce some compromises that are critical.  The stress test 9refer below) appears to be a pro-active measure that allows the government to step in and insist on banks taking capital in the form of preferred share injections.  This with a view to retaining confidence in the banking system.  The compromise is that they are first of all preferred and not common shares.  Secondly they will be managed through a trust that is handled by private instment managers, and will be supported by private capital.

The 64 thousand dollar question remains to what extent those private managers will be directed by politics and political intervention.  This becomes important as we see banks that would otherwise be bankrupt, continue to operate with this quasi government support.  Again the important point will be the resulting motivation of the Banks’ managers and the impacts on the customers.  As we progress towards the notion of banks managing government arranged and guaranteed loan programmes the notion of financial utilities comes ever closer.


Here is an extract from the online version outlining the Bank stress test and trust mechanisms.

Financial Stability Trust: A key aspect of the Financial Stability Plan is an effort to strengthen our financial institutions so that they have the ability to support recovery. This Financial Stability Trust includes:
A Comprehensive Stress Test: A Forward Looking Assessment of What Banks Need to Keep Lending Even Through a Severe Economic Downturn: Today, uncertainty about the real value of distressed assets and the ability of borrowers to repay loans as well as uncertainty as to whether some financial institutions have the capital required to weather a continued decline in the economy have caused both a dramatic slowdown in lending and a decline in the confidence required for the private sector to make much needed equity investments in our major financial institutions. The Financial Stability Plan will seek to respond to these challenges with:

Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators — the Federal Reserve, FDIC, OCC, and OTS — will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions..

Forward Looking Assessment – Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.

Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test.
Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase
lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Financial Stability Trust: Any capital investments made by Treasury under the CAP will be placed in a separate entity – the Financial Stability Trust – set up to manage the government’s investments in US financial institutions.
Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.

Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

Written by Colin Henderson

February 10, 2009 at 11:08

Posted in Uncategorized

Tagged with , ,

FinServ Blog : Barclays — Serious about Retail Banking

From FinServ ….  Barclays are bringing in fresh non Bank, and people with less traditional bank background, to rejuvenate their branch network. 

…..  hired Helen Dodd from Tesco

Source: FinServ Blog : Barclays — Serious about Retail Banking


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Written by Colin Henderson

November 6, 2006 at 14:00

Posted in Branch

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