January 27, 2023

It’s the Economy: Did We Waste a Recession?

Remarkably, five years after the crisis, the health of the financial industry is just as hard to determine. A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I’ve spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates.

Economists have also been locked in their own long-running arguments about how to make the banking industry safer. These disagreements, which are generally split between the left and the right, can have the certainty and anger of religious wars: the right accuses the left of hobbling banks and undermining prosperity; the left counters that the relatively lax regulation advocated by the right will lead to a corrupt oligarchy. But there actually is consensus on one of the most important issues. Paul Schultz, director of the Center for the Study of Financial Regulation at the University of Notre Dame, led a project that brought together scholars of financial regulation from the left, the right and the center to figure out what caused the financial crisis and how to prevent a sequel. They couldn’t agree on anything, he told me. But a great majority favored higher equity requirements, which is bankerspeak for the notion that banks shouldn’t be allowed to borrow so much.

I conducted my own Schultz test by talking to Anat Admati and Charles Calomiris, prominent finance professors at Stanford and Columbia, respectively, who roughly define the opposite ends of the argument over bank regulation. Admati is a Democrat, Calomiris a Republican. In her recent book, “The Bankers’ New Clothes,” for example, Admati has argued that bankers misrepresent their finances. Calomiris, who used to be a banker, is generally seen as friendly to the field. As I spoke to them both, they also disagreed on everything until the conversation turned to borrowing. At which point, they independently explained that banks borrow too much, that the government rules are too confusing and that the public has been misled.

I asked Admati and Calomiris to explain their problem with the current system. I randomly chose Citigroup’s most recent annual S.E.C. report, a 300-page tome filled with complex legal jargon outlining the bank’s performance. The key number that we looked for was the capital-adequacy ratio, which is a measure of how much capital you need to back up the risk of your assets. This is supposed to be the one number that makes clear whether a bank is prepared for a crisis. A high ratio means the bank’s owners could bear most losses without requiring a bailout. A low number means the opposite.

It was extremely hard, though, to know how Citi was faring. Calomiris pointed out that the bank reports several different measures, ranging from what appears to be a safe capital ratio of 17.26 percent (implying the bank maintains a loss-absorbing buffer of $17 for every $100 of the assets it owns) to a potentially worrisome 7.48 percent (with stops at 14.06, 12.67 and 8.7 percent). When I asked Admati how healthy the bank was, she replied, “It’s hopeless for anyone to know.”

Article source: http://www.nytimes.com/2013/08/11/magazine/financial-crisis.html?partner=rss&emc=rss

DealBook: Responding to Financial Crisis, Britain Overhauls Its Regulators

Martin Wheatley will lead Britain's Financial Conduct Authority.Hazel Thompson for The New York TimesMartin Wheatley will lead Britain’s Financial Conduct Authority.

LONDON — After the financial crisis, countries like the United States adopted wide-ranging changes to their banking regulation.

Yet Britain was the only major economic power to go a step further by completely overhauling its regulators.

Taking the place of the current watchdog, the Financial Services Authority, will be two new bodies created to oversee the country’s banks, hedge funds and other financial institutions. The Prudential Regulation Authority will monitor Britain’s largest banks, while the Financial Conduct Authority will be responsible for consumer protection and market abuse. They will take over in April.

“Britain has gone for a complete overhaul,” said James Smethurst, a regulatory partner at the law firm Freshfields Bruckhaus Deringer in London. “It’s a big task to ensure everything will work the way it should.”

By splitting the duties of the Financial Services Authority, policy makers hope to separate the daily monitoring of banks’ financial health from the policing of illegal activity like insider trading. The goal is to allow the separated regulators to focus on their own areas, instead of trying to cover everything from banks’ capital buffers to market abuse.

It is the second time since the late 1990s that Britain has done a major regulatory revamping. In response to the growing complexity in the financial industry, the Financial Services Authority was created starting in 1997 by progressively combining nine smaller agencies. The authority also assumed control of banking regulation from the Bank of England.

Yet as the financial crisis left Britain’s banks on a knife-edge, politicians began to doubt whether the sole regulator could keep on top of the wide-ranging problems facing the country’s financial institutions.

“When a system of regulation fails so spectacularly, people are going to ask what replaces it,” George Osborne, the chancellor of the Exchequer, said in a 2010 speech announcing the most recent major overhaul.

The task awaiting the new regulatory bodies will not be easy.

A series of recent scandals has tarnished London’s reputation as a global financial center. The wrongdoing raised questions about why regulators had failed to spot a glut of risky lending by British banks, money laundering for drug cartels and other illicit activity that has cost consumers around the world billions of dollars.

Further scandals, including a $2.3 billion loss from illegal activity in London by a former UBS trader, Kweku M. Adoboli, and a $6 billion trading loss at a London-based unit of JPMorgan Chase, have heaped further pressure on British regulators.

“When we look back, last year will be seen as the low point,” said Martin Wheatley, who will take control of the Financial Conduct Authority after six years with the Securities and Futures Commission, the regulator in Hong Kong. “The time is right; we can rebuild from here.”

This is the toughest job of Mr. Wheatley’s career. After earning a philosophy and English degree from the University of York, Mr. Wheatley, 54, worked for the London Stock Exchange for almost two decades before becoming a regulator. Over 6 feet tall, he comes off as relaxed and laid-back — traits that will inevitably be tested by future financial crises.

His counterpart at the Prudential Regulation Authority will be Andrew Bailey, a Cambridge-educated economist, whose sometimes rambling comments would not be out of place at a university lecture hall.

Mr. Bailey, 53, who has spent more than 25 years working at the Bank of England, will oversee 1,300 regulators based in a building in London’s historic financial district, just around the corner from the British central bank. “We are holding institutions to higher standards than before the crisis,” he said.

In an odd twist, the regulators will work from the desks formerly used by one of the banks they regulate — JPMorgan Chase. The authority leased the building when JPMorgan moved its staff to Canary Wharf last year and bought much of the furniture in the building.

Canary Wharf, London’s newer financial hub, will also be home to the Financial Conduct Authority and its staff of 2,600.

Not everyone believes the two new bodies will have an impact.

While the regulatory structure has changed, the enforcement powers remain essentially unchanged. London’s financial community is awash with skeptics who question how dividing regulatory powers into two new bodies will safeguard against future abuses.

“Regulators never had a lack of powers — they had an unwillingness to use them,” said Bob Penn, a regulatory partner at the law firm Allen Overy in London. “Regulators failed, not the regulatory structure.”

Both Mr. Bailey and Mr. Wheatley admit the new regulatory structure may not have stopped the recent failures that have blackened London’s reputation as a financial hub.

At the Prudential Regulation Authority, which will focus on banks’ governance and capital reserves, regulators will be expected to take a more aggressive stance on how firms price risk. That will include questioning boards on risky trading activity that may leave banks underfinanced, as well as subjecting senior management to greater scrutiny over how they run their businesses.

The efforts to change banking culture follow widespread criticism of Barclays’ senior executives after the bank announced it would pay a $450 million fine to settle claims by American and British authorities related to manipulation of the London interbank offered rate, or Libor. In testimony to British politicians, Mr. Bailey accused the bank of having a “culture of gaming” the regulatory system.

“You can’t regulate culture,” Mr. Bailey said. “We expect standards that put more emphasis on the public interest.”

For its part, the Financial Conduct Authority plans to place a priority on industrywide investigations over those that take aim at individual firms.

In late January, British regulators demanded that local lenders review the sale of certain interest-rate hedging products to small businesses after 90 percent of a sample of the instruments was found to have been sold improperly. The case, which already has forced banks to set aside more than $1 billion in potential payouts, resulted from a yearlong investigation that showed the misconduct was endemic across the country’s banking industry.

British regulators and their United States and international counterparts also continue to investigate several global banks over the manipulation of important global benchmark rates like Libor. So far, the abuses have been limited mostly to low-ranking traders and managers, though authorities will hold senior executives accountable if they are implicated.

“In most cases, a direct line to the top management hasn’t been there,” Mr. Wheatley said. “If we see a clear guiding hand from boards, we would take a stronger line.”

In the countdown to the regulatory changeover in early April, some analysts fear that the pending changes will lead to turf wars between the two new bodies.

Many of the country’s largest institutions will be policed by both institutions, though the separate authorities have different priorities.

The focus of the Prudential Regulation Authority, for example, is on banks’ financial well-being, while the Financial Conduct Authority will emphasize consumer protection. Sometimes, regulatory experts say, these different goals will lead to contradictory rulings with little clarity over who will act as referee between the two agencies.

For Britain to regain its reputation as a global financial center, a lot is riding on how Mr. Bailey and Mr. Wheatley will work with each other. Both men have put in all-nighters together dealing with scandals like the implosion of MF Global, and each will sit on the other institution’s management board, though potential conflicts — particularly at times of financial crisis — are almost inevitable.

“We have to make it work,” Mr. Bailey said. “The system won’t succeed if we don’t work together.”

Article source: http://dealbook.nytimes.com/2013/03/11/responding-to-financial-crisis-britain-overhauls-its-regulators/?partner=rss&emc=rss

Disagreement Over Banking Regulation Marks Second Day of E.U. Talks

A plan to establish a single banking supervisor under the aegis of the European Central Bank to oversee the 6,000 lenders in the euro area was on the agenda for a second day of talks that had concentrated Monday on the Greek situation, which still threatens to derail the euro zone after dragging on for more than two years.

The creation of the single banking supervisor is seen as a key step to breaking the so-called doom loop between lenders and governments that has brought a number of economies in Europe, including Spain’s, to the brink.

Germany made the creation of the single supervisor a prerequisite for states to tap a newly created European bailout fund and use the money to bailout their banks directly.

But Luc Freiden, the finance minister for Luxembourg, said on Tuesday that the system still could be months away.

“We shouldn’t be fixed to dates,” said Mr. Freiden. “If it takes three months longer, it’s no problem.”

The European Commission has said a unified system of regulation could be up and running in the new year.

Germany is among countries that have urged caution, saying that rushing the system would risk creating new loopholes. Britain and Sweden say much work still needs to be done to ensure the new system does not discriminate against countries that remain outside of the euro area.

“We cannot see a compromise with only the current modalities on the table,” Anders Borg, the Swedish finance minister, said on Tuesday morning. “The E.C.B. could be the supervisor but then we need to consider a treaty change,” he said. “Either you must change the treaty so it’s clear that every member is treated equitably, or you need to move it outside of the E.C.B.”

Finance ministers were also expected to discuss increasing capital requirements for banks and how to more closely monitor the draft budgets of E.U. members and correct excessive deficits.

In a sign that fixing the Greek economy and the euro would continue to be a rancorous process even after three years of continuous crisis, Jean-Claude Juncker, the prime minister of Luxembourg, and Christine Lagarde, the managing director of the International Monetary Fund, drew strikingly different conclusions late on Monday about how long it should take to bring the towering Greek debt under control.

The disagreement is a hugely sensitive matter for Greece’s biggest creditors in the euro area and for Germany in particular. The government in Berlin wants to avoid the political fallout from paying higher costs associated with meeting a target set by the I.M.F. for cutting Greek debt to 120 percent of gross domestic product by 2020.

Wolfgang Schäuble, the German finance minister, told a news conference on Tuesday morning that meeting the I.M.F. target was “possibly a little too ambitious” given the worsening economy across Europe.

Mr. Schäuble also said Greek creditors would be able to find ways to help the country meet the higher costs of delaying some of its previously agreed targets to 2016, without handing over more money.

“There are no considerations to top up the program,” said Mr. Schäuble, referring to giving additional support for Greece. “In the end it will be all about guarantees, not transfer for Greece.”

Creditors could agree instead to “take some measures to reduce interest rates that will have an immediate effect on the budget” in Greece to ensure that “problems will be solved within the financial framework of the second program,” Mr. Schäuble said.

A draft copy of a report by the troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that was circulating at the meeting said the bill for allowing Greece the additional time would be €32.6 billion.

Helping Greece through 2014 would require €15 billion partly to make up for lower than expected proceeds from privatizations, according to the draft report.

Article source: http://www.nytimes.com/2012/11/14/business/global/disagreement-over-banking-regulation-marks-second-day-of-eu-talks.html?partner=rss&emc=rss

DealBook: Britain Backs Banking Overhaul

George Osborne, Britain's Chancellor of the Exchequer, displayed the 2011 budget.Rupert Hartley/Bloomberg NewsGeorge Osborne, Britain’s chancellor of the Exchequer, with the 2011 budget.

LONDON — The British government plans stricter banking regulation that would force banks to separate their investment banking operations from those businesses that take deposits.

The chancellor of the Exchequer, George Osborne, said on Monday that the government would seek to pass laws by 2015 to strengthen financial regulation as proposed by an independent commission led by John Vickers, a former Bank of England chief economist. The new laws would then apply by 2019 the latest.

“These are the most far-reaching reforms of British banking in modern history,” Mr. Osborne said in a speech to Parliament. The reforms are intended to allow Britain to stay “home to one of the world’s leading financial centers without exposing British taxpayers to the massive costs of those banks failing.”

The new rules represent a bigger change for the banking industry here than the Dodd-Frank overhaul has meant for banks in the United States, some analysts have argued. Under the British regulation, investment banking and retail banking operations would be different legal entities and financed separately. The rules would also require banks to set aside a slightly bigger capital cushion than required by the Basel III regulations. Only Switzerland has asked its banks to hold more capital to absorb future potential losses so far.

British banks would have to shield deposits of individuals and small and medium-size companies in their consumer bank from investment banking activities, like trading. This means banks would no longer be able to use deposits to finance investment banking units. Investment banking businesses would also be allowed to fail without affecting the rest of the bank. The new rules would not apply to subsidiaries of non-British banks in Britain.

“The face and structure of banking has changed for good, and we’ve reached a point of no return,” Jon Pain, head of financial services risk consulting in Britain at KPMG, said. “Business models need to be fundamentally overhauled.” Major banks should not be “fooled” by the timetable as they “will need to make some serious decisions before June,” he added.

Angela Knight, head of the British Bankers’ Association, played down the impact of the changes, saying that the government’s decision was just “the next stage of a program of reform” and that “banks have already made significant changes to how they operate.”

Some banking executives have argued that the new rules would be expensive for the banks at a time when the industry is already struggling with sluggish growth and volatile markets.

The government, however, has said that banking regulation would have to change after Britain’s securities regulator, the Financial Services Authority, acknowledged that it made mistakes leading up to the financial crisis, when the government had to inject billions of pounds into the banking system.

Mr. Osborne said the reforms were expected to cost the banking industry as much as £8 billion, or $12 billion, as banks would no longer benefit from the perceived guarantee that the government would bail them out. The costs to gross domestic product could amount to as much as £1.8 billion but would be “far outweighed by the benefits,” Mr. Osborne said.

The government asked the Vickers commission last year to come up with proposals of how best to protect taxpayers from having to bail out financial institutions during any future banking crises. Britain’s government spent more than $1 trillion in bailing out ailing financial institutions during the recent financial crisis and still owns stakes in two of the country’s largest banks, Royal Bank of Scotland and the Lloyds Banking Group.

The government said Monday it accepted all the commission’s proposals, which also includes ways to increase competition among local banks and make it easier for customers to switch banks.

Barclays’ chief executive, Robert E. Diamond Jr., has criticized the regulation overhaul, saying the proposals were not the best way to protect depositors and would just burden the banking sector with additional costs. Stephen Hester, the chief executive of Royal Bank of Scotland, has said the new rules would put British banks at a disadvantage to global competitors.

Some banks, including HSBC, have previously said they would consider moving their headquarters abroad if the new regulation was too punishing. Mr. Osborne denied Monday that the rules would make London less attractive as a financial center.

The new banking laws come in addition to changes to the structure of the financial supervisors. David Cameron’s government decided in 2009 to abolish the Financial Services Authority and move most of its supervisory responsibilities to the Bank of England next year.

Article source: http://feeds.nytimes.com/click.phdo?i=9f05499d377f5c3a715a70ecb7d348d7