The Great Debate UK

from Breakingviews:

“Too big to fail” will get partial cure in 2011

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

The "too big to fail" problem will be partly fixed in 2011. Global regulators should end up agreeing to make a select group of big global banks hold higher levels of capital. That will make them safer, while removing some of the benefit they get from being big. But eliminating the taxpayer guarantee enjoyed by large lenders will require more fundamental measures. That will take years to achieve.
Regulators everywhere agree that banks deemed too big to fail are dangerous. Because of their importance they enjoy implicit -- and sometimes explicit -- government support. As a result, large lenders tend to have higher credit ratings and pay less for deposits and wholesale funding. This encourages them to become even larger and more interconnected.
Broadly speaking, there are two ways to tackle this problem. One is to make big banks less likely to fail. The other is to reorganize them so that they can be allowed to fail without threatening the system. In 2011, regulators are likely to concentrate on the first option.

The Basel Committee on Banking Supervision, which sets global rules, is planning to make large and interconnected banks hold more capital. Most big bank executives believe they will be forced to hold an additional buffer equivalent to at least 3 percent of risk-weighted assets. This will take their minimum capital ratios north of 10 percent, compared to 7 percent for smaller lenders. The buffer may be in the form of so-called contingent convertible bonds, or CoCos: debt that converts into equity if the bank gets into trouble. However, small countries with large banks may demand even bigger buffers. Swiss regulators have already told UBS and Credit Suisse to lift their capital ratios to 19 percent.
Higher capital ratios will make big banks safer, while the cost of the extra equity will offset some of the benefits of cheap funding. But the approach has flaws. First, it's not easy to spot systemic banks. Lehman Brothers, for instance, was not particularly large by U.S. standards. But it was so enmeshed in the financial system -- and its failure so chaotic -- that it triggered a global meltdown.
Second, by drawing up a list of systemic institutions, regulators risk sending a signal that these banks are totally safe -- essentially making a commitment to bail them out. That would make the too-big-to-fail problem even worse. Finally, national regulators are bound to interpret the rules differently, creating an uneven playing field.
The alternative is to restructure banks so that they pose less of a risk. Here -- setting aside the draconian idea of breaking them up into small pieces -- there are two broad schools of thought. The first is to force lenders to organize themselves so that they can be wound down safely. This is why regulators have asked large banks to draw up so-called "living wills", setting out what they will do if they get into trouble. This could involve selling a business to raise extra capital. But it could also involve ring-fencing important bits of the bank, like those that take deposits or process payments, while declaring less systemic parts insolvent.
This is what the Federal Deposit Insurance Corp already does with smaller U.S. lenders. But designing rules to tackle large cross-border banks is harder: it probably requires most of the world's developed economies to introduce new rules, and that will take years.
Meanwhile, some regulators are pushing to introduce mechanisms that will allow them to recapitalize failing banks without winding them down or bailing them out. This approach -- known as the "bail-in" option -- involves converting a bank's debt into equity when its capital ratios fall below a certain point. The advantage is that the bank remains intact, while creditors take a haircut and shareholders suffer what Thomas Huertas, of the UK's Financial Services Authority, has dubbed "death by dilution".
It's too early to say whether living wills or bail-ins -- or some combination of the two -- will prevail. As long as the problem remains unsolved, politicians and regulators will remain under pressure to resort to more radical solutions, such as putting an explicit cap on bank size. Privately, regulators hope that the measures they do take will eventually prompt big lenders to voluntarily shrink or dissolve into their constituent parts.
What is clear is that just making big banks hold more capital will not solve the too-big-to-fail problem. But it is probably the best that regulators can hope to achieve in 2011.

from The Great Debate:

SEC’s case against Goldman highlights need for Wall Street reform

-- Ed Mierzwinski is the longtime consumer program director of U.S. PIRG, the federation of state Public Interest Research Groups. U.S. PIRG is a founding member of Americans for Financial Reform, an unprecedented coalition of over 250 labor, senior, civil rights, community and consumer organizations. --

Over 18 months ago, U.S. taxpayers bailed out the reckless Wall Street banks. Yet, despite widespread and overwhelmingly public support for Wall Street reform and dramatic House action in December, efforts to move a Wall Street bill through the Senate have been stalled for months by a phalanx of powerful Wall Street lobbyists. While we cannot count them out, because they’ve increased their lobby and campaign spending as we move toward the endgame, Banking Committee Chairman Chris Dodd’s (D-CT) coup in moving a strong bill closer to floor action gave us some wind in our sails.

from The Great Debate:

China’s yuan, not the dollar, is too cheap

morici-- Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former chief economist at the United States International Trade Commission. The views expressed are his own. --

From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.

from Commentaries:

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.

from UK News:

Financial regulation plan: white paper or white flag?

Chancellor Alistair Darling set out new plans to strengthen regulation of financial markets on Wednesday. The white paper proposes enforcing higher levels of capital for banks and increasing liquidity to prevent a re-run of the credit crunch.

Darling wants banking pay packages to be policed and for a new Council for Financial Stability to bring together the work of the Bank of England, Financial Services Authority and the Treasury.

from The Great Debate:

Regulation reform hints of “Old Europe”

bob-bench-- Robert R. Bench, a former Deputy Comptroller of the Currency in the Reagan administration, is a senior fellow at the Boston University School of Law’s Morin Center for Banking and Financial Law. The views expressed are his own. --

“Le laissey faire, c’est fini” – French President Nicolas Sarkozy

There indeed is a French flavor to the administration’s proposals for reforming the structure of regulation and supervision of financial institutions operating across the United States. In many ways the proposals resemble the “Commission Bancaire,” the French regime for financial oversight.

Greenbury’s Damascene conversion


– Neil Collins is a Reuters columnist. The opinions expressed are his own –

REUTERSSir Richard Greenbury has had a Damascene conversion. The former boss of Marks & Spencer tells The Times that he’s now in favour of continental-style two-tier boards, contrary to his own report into corporate governance 14 years ago.

from The Great Debate:

Challenges for the G20: The IMF and regulation

StephanyGriffith-Jones-- Stephany Griffith-Jones is executive director of the Initiative for Policy Dialogue at Columbia University. The views expressed are her own. --

There are many important challenges facing G20 leaders when they meet in London in early April.

from The Great Debate:

New rules won’t end London’s golden lure

-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --

alex-smithNew regulations may be cooked up to curb the excesses of its bankers but London will always attract those who believe its streets are paved with gold.

Some predict that the financial crisis spells the end for London as a major global financial centre, arguing it has thrived on lax regulation and a quasi-tax haven status and that the regulatory backlash which inevitably follows such a catastrophic economic debacle will suffocate the innovation and the financial incentives which have driven the growth of services in the British capital.

from The Great Debate:

Credit control will be much more intrusive in future

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

The international system of bank regulation, epitomised by the Basle II process and the light-touch principles-based regulation of Britain's Financial Services Authority (FSA) has comprehensively failed.

In too many instances, light-touch principles-based regulation with an emphasis on banks' internal risk controls turned out to be no effective regulation at all.