Comments on: Credit control will be much more intrusive in future Thu, 21 Jul 2016 07:57:19 +0000 hourly 1 By: Vijay Sun, 15 Feb 2009 07:33:51 +0000 Why this backlash against Basel II?

The first lesson I learned 15 years back when I joined an Indian Bank (incidentally by name Indian Bank) as Probationary Officer was to never ever get in to the Real estate lending. The Real estate lending was seen, is seen and will be seen by the public sector banks in India that cautiously. It’s a kind of taboo for public sector banks in India. Over a period, they have also liberalized their policies but still with a lot of caution. Indian public sector banks have largely survived the present turmoil. I am not blaming the banks who are bullish on the real estate funding. But, it reflects the underlying risks involved in this exposure.

Let’s visit American market for once:

1. Banks knowingly take exposures on sub-prime borrowers.
2. They are nicely wrapped under CDSs
3. CDSs are rated high in the market.
4. Banks buy nicely packed CDSs at high premiums without knowing the crap under the wrap.
5. Sub-prime borrowers default.
6. Banks collapse.
7. Basel II has failed.

Why can’t the so called John Kemps and Alan Greenspans say for once CDSs failed? The high bonus driven profit maximization strategies of the banks with least sympathy to the public funds are prime reasons for the market turmoil.

Let us now get in to a story mode:

I earn 100 bucks a month, I can invest a maximum of 100 bucks in stock market or take an exposure for 5 times of that which is 500 bucks if I do day-trading (depending upon the margin requirements, assuming 20 per cent). I invest in good scrips based on the market research and some kind of tips from my broker. (This is similar to the Standardized Approach for credit risk suggested by Basel II wherein banks take external ratings supplied by Moodys, S&P, Fitch etc. into consideration). Once I get some sort of maturity as a player in the market I develop my own mechanisms to identify which company is good and which company is bad etc. (This can be correlated to the Internal Ratings based approach suggested by Basel II wherein you rate your own customers based on various risk parameters and risk profiling). I make all my sincere efforts to understand the market dynamics before taking any exposure. I leave no stone unturned to dig out the risks involved. After all, it is my hard earned money. I don’t require any Basel II here.

Let us suppose, my stock market exposures are regulated by Basel II, then Basel II has given me ample room to initially understand the market over a period (The Standardized Approach) and then move on to my own developed mechanisms (The Advanced Approach). Do I still expect Basel II suggest me to restrict my exposure to only 500 bucks, as this is the maximum I can leverage? Can’t the so called best brains of the world (Harvards, London BSs, IIMs) working with Lehmans with fab bonus driven packages understand the basic risk management principle in any walk of life, in this case the LEVERAGE (Mind you, there is a leverage point in dealing with spouse also). When Lehmans were collapsed, their leverage was well above 25 times.

Further extension to the above story, If I am greedy enough, I start borrowing from my next door neighbor and invest in the market and when market collapses, I sit pretty and blame my wife (Banks blame Basel II) as I was never told by my wife not to borrow from others. I apply for an IP and there ends my liability to my next door neighbor.

Basel II is aimed at improving the risk management practices, not policing against deeds and misdeeds of the banks. If the Banks’ management chose to be dishonest, Basel 20 or 200 also can not help.

By: kronos_ad Tue, 10 Feb 2009 07:24:38 +0000 Investment is an idea born of sacrafice which is born of religion – our low savings rate is a symptom of all kinds of types bankruptcy. Our banks have no faith because the government has co-opted all faiths by bribing would-be ministers into the military. Think of all the seargents and medics who would be supervisors within companies enforcing a sunny, optimistic but disciplined outlook on these company’s futures but are now fighting a war. The other problem we are wrestling with as a nation is the issue of scale. During the Reagan years it was not un-common to hear complaints from Wall St. that the sheer size of foreign banks and brokerages was so large that the relatively fragmented but healthy economy was falling victim to economies who did not mind the aggregation of wealth into a single company – the grass is always greener. We have big companies now but with only a few in business – who will lend us anything? Where was the oil boom when oil reached 145$ per barrel? Now I remember. Past oil booms were a the product of a scattered S&L system we dismantled for reasons of fraud – oh well.

By: Hugh Sat, 07 Feb 2009 10:05:54 +0000 The short-sighted Results-Based Compensation programs which emphasize bonuses for short-term results, which came into vogue in recent years, in combination with insufficient oversight, had more than a little to do with why Greenspan was so wrong.
The simple human truth that Greenspan ignored is that there are in fact no banks, no institutions, as monolithic entities, in any effective sense. Large organizations are fundamentally large bunches of people. And most of them are looking out, more than anything else, for Number One. What does risk matter to a bright young financier, if he can pump his illusory profits (and correspondingly huge bonus) through the roof, (for example, by writing lots of CDS contracts, whose revenue will fall straight to the Bottom Line). So what if the whole thing implodes next year? It’s only this quarter’s profits, and this year’s bonuses, that count. And next year? Well, if this year’s bonus is big enough, what should I care?

By: Marty Abuloc Sat, 07 Feb 2009 06:51:37 +0000 Humbly I offer the thought, “if the law was not implemented, it doesnt mean the law was wrong”

The problem, as the author correctly pointed out was assuming that banks will work in the best interest of their shareholders.

The problem that was not highlighted was the complicated transactions, financial instruments and derivatives that were born out of the idea that risk could be divided until only the beta remained.

Do you think that there is a correlation between Basel compliance and bank failures? Or Basel compliance and income robustness despite the crisis?

Who were at BASEL I and II, and were the most loud during their forum, or had the most voluminous treatises published backed with fanfare and hoopla? Were they actually correct? Did they practice what they preach?

By: Carlos Fri, 06 Feb 2009 21:51:50 +0000 1st – The Basel (not Basle) Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

2nd – The purpose: The Basel II Framework describes a more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures. It seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. In addition, the Basel II Framework is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, today and in the future, and to develop or improve their ability to manage those risks. As a result, it is intended to be more flexible and better able to evolve with advances in markets and risk management practices.

3rd – Do you know what Country/ies is/are most behind implementing ? If you do you should inform your readers !

4th – Ongoing: Basel Committee on Banking Supervision announces enhancements to the Basel II capital framework –

Last – I find you article interesting, I believe your wrong about the third pillar of Basel, the problems were: supervision, supervision, supervision…
I would love to write some more but I have to work ;)

By: John Tue, 03 Feb 2009 12:34:03 +0000 The origins of the debt load that has been accumulating since the Reagan administration, finally precipitating the current “crisis” are quite well understood, but remain unmentioned and unexamined in popular discussion of it.

The rich seek not just a redistribution of wealth, but a reordering of society and the structure of the economy, and by all appearances they shall have it.

By: James Mon, 02 Feb 2009 19:51:11 +0000 Capitalism rules.

The incentives for individual regulators not to regulate, governors not to govern, or prosecutors not to prosecute will always exist not matter what you put on paper.

You might as well propose a race of robots to guard our safety.

I thought of posting what “we” need, but realized that I’d be posting what “I” need: I want to see greater transparency. Then I would be able to judge where to put my money. This is because I am smart and educated. However, this would not help the average and uneducated.

I wonder what your article would look like if you were honest about how you came to the conclusions you did, i.e. what you need and why.


By: Ananda Mon, 02 Feb 2009 07:52:32 +0000 Irregular Deposit Contract is the root cause of all the problems in banking.
What makes the banking industry so special from other industries (like Auto, Steel) that they can legally get away with holding less asset than their liabilities?
In any other industry, it would result in a criminal fraud case. If FORD represents it has more cash than it actually has, by showing its unbuilt Autos as Cash, the next day we would see FORD CEO and CFO being hauled to jail.
This is what a Bank does everyday.
Insist on holding 100% reserve and force the bank to risk its own capital FIRST instead of last (as today), and you will see no more crises.

By: skinner Fri, 30 Jan 2009 02:27:50 +0000 Private Mortgage Insurance (PMI) is paid by borrowers with less than 20% down on most home loans. The insurance polices are written by regulated insurance companies. They all failed early in the foreclosure waves hitting us. Some are zombies begging for bailouts.

As with most insurance today, your policy is only worth their promise to pay. Not comforting given their net worth disappearing.

By: Phil Sher Thu, 29 Jan 2009 17:15:38 +0000 Mr Kemp seems to be forgetting that it was the bad data/information, namely the rating agencies “wrong” ratings of what became known as “toxic” assets, not the banks’ models nor their risk standards that caused the current financial problems.

And some portion of these toxic assests became toxic through variable interest, zero down, poor lending standards loans which were made, not by the banks, but by second rate (fly-by-night?) “brokers”.

These are the regulatory failures that need fixing, not the parts of Basel II that Mr Kemp highlights.

The part of Basel II that might need some review is the strict “mark-to-market” standard. The toxic assests if held to maturity are not worth (nearly?)”zero” as the amrket now holds them. This is a related cause of the banks’ problems.