Commentaries

Let the Fed regulate

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged.    No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions. (more…)

Has the moment passed for bank reform?

A year on from the collapse of Lehman Brothers and there is plenty being written and broadcast about the lessons, the winners and losers and where we go from here.

Amidst all the noise, a relatively short (765 word) commentary from Barbara Ridpath who is head of the International Centre for Financial Regulation (ICFR) — a think tank set up to shape regulatory cooperation and best practice – makes some worthwhile points:

The sector’s problems are not yet behind us. Loan losses, which lag other indicators, will continue to build and cost banks in provisions for some foreseeable time to come. Nonetheless, some in the financial sector are choosing to think the worst is behind them. They hope that systemic change is not longer necessary because they have begun to make money again in such a low interest rate environment.

Legislators are working to implement G20 proposals either domestically or regionally with mixed results. It is remarkable how much easier it was to act in a concerted fashion when the world was in genuine crisis mode. Now that we appear to have stepped back from the brink, political unity has gone by the wayside. Political expediency, partisanship, and the settling of old scores have come to the fore. This is a shame.

It appears that banks have also returned to ‘business as usual.’ Big bonus payments and hefty pay packages for star teams are back in the news and those banks that can afford to are hiring talent again. Governance reforms are mooted, but most teams are still compensated on revenues, not risk-adjusted returns. Most departments within banks continue to see each other as competitors, instead of having a unified sense of identity, teamwork and strategy for their institutions. Shareholder activism on governance issues has not actually increased.

Commentary from the private sector on regulatory reform mean that many proposals are significantly watered down as self-interest once again predominates in every market segment.  The constant threat of moving business elsewhere is used whenever a proposal is mooted that is not in the direct interest of a particular constituency.

Ridpath — who was previously head of ratings for Europe at Standard & Poor’s and has worked as an economist at the Federal Reserve Bank of New York and also at JP Morgan — sums it up neatly when she says:

What happened to the idea that we could never return to anything like where we had been before? The debate on changing the business models and the culture of financial services appears to have fallen by the wayside.

Except for those who have lost their jobs in financial services, their businesses through lack of credit, or their homes through predatory lending practices, there is little sense that any lessons have been learned or that anything fundamental within the culture of financial services needs to change.

Patience is waning. There is a risk that we arrive at a stand-off, where out of frustration politicians respond to the conflict between populism and bankers’ recalcitrance by becoming ever more shrill in their demands, and bankers become ever more threatening in their responses. We shall end with a ‘dialogue of the deaf.’ 

Ridpath isn’t giving us the answers, but she has put her finger clearly on the problems facing those who had hoped for deep-seated reforms.

Shock! Banker says banks must shrink

One of the most depressing, though predictable, aspects of the financial crisis has been the reluctance of senior bankers to publicly debate the industry’s shortcomings.

Though there has been plenty of finger-pointing in private, bankers have refrained from discussing their own – and each other’s – failures in public. The result is that the debate about the future of banking has been almost entirely conducted by non-bankers.

Bert Heemskerk is an exception. Until a month ago, the 66-year old Dutchman was chairman of Rabobank, the Dutch co-operative lender. Since announcing his retirement, he has embarked on a public crusade for banking to rediscover its traditional roots. He has given lectures and interviews, and published a book with his analysis of what went wrong, and what should be done about it. It’s only available in Dutch, but the title – which translates as “A Healthy Shrinkage” – gives some idea of where he’s coming from.

I interviewed Heemskerk shortly before he retired, and found his views refreshingly blunt. (My write-up of the interview was published today by the Financial Times). Little of what he says that hasn’t already been said by regulators, academics and politicians. But it is still unusual to hear it from a senior banker. His perspective is also a welcome alternative to the measured, but self-serving, arguments against radical reform served up by the likes of Deutsche Bank’s Josef Ackermann.

Heemskerk cannot be easily dismissed. In his forty-year career he rose to the upper ranks of Amro bank, became the first non-family member to run Van Lanschot, the Dutch brokerage firm, and helped steer Rabobank through the crisis virtually unscathed. While other Dutch banks were nationalised or forced to seek state support, Rabobank increased its profits. It is now the only large private bank that still has a ‘AAA’ credit rating.

Of course, one can pick holes in Heemskerk’s arguments. Rabobank is owned by its customers, so it is not entirely surprising that he blames the cult of shareholder value for much of what went wrong. He is also far from clear on how his proposed changes to a more utility-like banking system would be implemented, or how to ease what is likely to be a painful economic transition.

Nevertheless, Heemskerk is a serious banker who has published a serious critique of his industry. For that reason alone, his views deserve to be widely aired.

Shock! Banker says banks must shrink

One of the most depressing, though predictable, aspects of the financial crisis has been the reluctance of senior bankers to publicly debate the industry’s shortcomings.

Though there has been plenty of finger-pointing in private, bankers have refrained from discussing their own – and each other’s – failures in public. The result is that the debate about the future of banking has been almost entirely conducted by non-bankers.

Bert Heemskerk is an exception. Until a month ago, the 66-year old Dutchman was chairman of Rabobank, the Dutch co-operative lender. Since announcing his retirement, he has embarked on a public crusade for banking to rediscover its traditional roots. He has given lectures and interviews, and published a book with his analysis of what went wrong, and what should be done about it. It’s only available in Dutch, but the title – which translates as “A Healthy Shrinkage” – gives some idea of where he’s coming from.

I interviewed Heemskerk shortly before he retired, and found his views refreshingly blunt. (My write-up of the interview was published today by the Financial Times). Little of what he says that hasn’t already been said by regulators, academics and politicians. But it is still unusual to hear it from a senior banker. His perspective is also a welcome alternative to the measured, but self-serving, arguments against radical reform served up by the likes of Deutsche Bank’s Josef Ackermann.

Heemskerk cannot be easily dismissed. In his 40-year career he rose to the upper ranks of Amro bank, became the first non-family member to run Van Lanschot, the Dutch brokerage firm, and helped steer Rabobank through the crisis virtually unscathed. While other Dutch banks were nationalized or forced to seek state support, Rabobank increased its profits. It is now the only large private bank that still has a AAA credit rating.

Of course, one can pick holes in Heemskerk’s arguments. Rabobank is owned by its customers, so it is not entirely surprising that he blames the cult of shareholder value for much of what went wrong. He is also far from clear on how his proposed changes to a more utility-like banking system would be implemented, or how to ease what is likely to be a painful economic transition.

Nevertheless, Heemskerk is a serious banker who has published a serious critique of his industry. For that reason alone, his views deserve to be widely aired.

Ackermann makes half-baked case for reform

In the debate about the future of financial regulation, most senior bank executives have been notable by their silence, preferring to lobby behind the scenes rather than argue their case in public.

So we should welcome Josef Ackermann’s effort to publicly put the case for big banks. In a long screed published in today’s FT, the chief executive of Deutsche Bank makes the argument that cross-border financial institutions are important for the success of the global economy, and that cutting them back to size would be a mistake.

It would be easy to dismiss Ackermann’s views as self-serving. After all, he runs a global investment bank that has much to lose from increased regulation, and is chairman of the Institute for International Finance, the talking shop for big banks. 

His argument is thoughtful and deserves a more measured response. Nevertheless it has a couple of significant flaws.

from Margaret Doyle:

IASB sticks to its fair value guns

LONDON, July 15 (Reuters) –David Tweedie, chairman of the International Accounting Standards Board, has responded to demands that he revise the controversial standard on financial instruments by strengthening controversial “mark to market” accounting. He should be careful he does not derail progress towards global accounting standards in the process.

The existing standard, IAS39, allows banks and insurers to classify financial instruments and measure impairment in many ways. Tweedie wants just two measurement bases – amortised cost and fair value -  and one impairment method for amortised cost.

Mark to market (fair value) accounting was sorely tested in the financial fire, because it obliged banks and insurers to take writedowns, shrinking their capital bases and requiring some to dump assets. This depressed values still further, triggering more writedowns and forced sales.

Fair value accounting is based on the premise that markets are efficient. This was an article of faith in the finance industry but since the crisis broke it has been widely questioned, except in the Tweedie Standards factory.

The post-crisis argument against it is that fair value makes financial crises worse, while taking adjustments through the profit and loss has contributed to draining all meaning from the p&l account.

Tweedie’s response is for some gains and losses on equities to be recognised in “comprehensive income” instead, but some accounting firms fear that any step back would allow companies to hide the true position from outside investors. The purpose of accounts, after all, is to inform, not to allow management to “smooth” earnings.

Last year’s experience going into the banking crisis showed that shareholders will ignore management assurances if they don’t believe the numbers, whether audited or not.

Defining financial stability

By my count, the British government’s new paper setting out its plans for overhauling the banking industry mentions the words “financial stability” 141 times in its 147 pages. So it comes as some surprise that the document makes no attempt to define the phrase.

The paper talks at length about restoring, maintaining and protecting financial stability. Its main proposal is to create a Council for Financial Stability, to be chaired by the Chancellor. Meanwhile the Financial Services Authority is to be given explicit responsibility for maintaining the stability of the financial system rather than just regulating individual banks.

Bank of England already has a Financial Stability Objective, and has set up a Financial Stability Committee to worry about it. But at no point has anyone said what this actually means.

The Banking Act 2009, which passed into law earlier this year, is not much help. In a particularly fine example of circular bureaucratic logic, the description of the Financial Stability Objective says the Bank of England should “contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.

To be fair to the government, it acknowledges that it is much easier to define, say, targets for inflation. On page 47 it writes:

“By contrast, financial stability cannot be defined in any simple or straightforward manner; no single indicator can capture it; the actions of many players (in both the official and private sectors) have a major bearing on it and a wide range of policy instruments can be (and must be) deployed to deliver stability and prevent instability.”

This would be funny if it wasn’t so important. In principle, everyone agrees that a stable financial system is good. But there are degrees of stability.

from Margaret Doyle:

COLUMN –One cheer for Darling’s reform: Margaret Doyle

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 8 (Reuters) – Alastair Darling has ignored the first rule of holes: if you’re in one, stop digging. He could have produced a few motherhood-and-apple pie reforms of the banking system, to give the impression of activity. Instead, he has dug in, proposing an upgrade of Britain’s failed “tripartite” system of regulation.

No one expected him to admit as much, but the arrangement that split responsibility between the Treasury, the Bank of England and the Financial Services Authority (FSA), was doomed from the start.

Unfortunately, the Conservative opposition has already pledged to dismantle it and give more power to the Bank so, faced with political reality, Darling has plumped for reinforcing failure. His new “Council for Financial Stability” is effectively the tripartite authority on a statutory footing. It will be required to review the Bank’s and FSA’s publications on financial stability and to make public recommendations.

The FSA is also given a “statutory objective” to strive for financial stability.

It’s hard to see how this will make any difference. The FSA and Bank are engaged in a turf war, while Mervyn King, the Bank’s governor, revealed recently that the Treasury had not shared this White Paper (policy document) with him.