Opinion

The Great Debate

Is the Fed up to examining your trillion dollar bet?

Mark_Williams_Debate– Mark T. Williams, a professor in the Boston University School of Management’s Finance & Economics Department, was a former Federal Reserve bank examiner in San Francisco and Boston. The views expressed are his own. –

Washington is doling out more than $1 trillion to banks, a hefty capital commitment putting taxpayer money at risk. Meantime, Congress is moving to expand financial sector oversight and the Federal Reserve Bank is likely to take on this additional duty.

As the government’s financial involvement increases, the Fed must be ready for this expanded role. Unfortunately, the current fleet of Fed examiners is in way over their heads. I should know: I used to be one.

The root cause of the financial crisis has been bank driven. Under the Fed’s watch, Wall Street wizards were allowed to concoct, sell and speculate on risky credit-related products. In addition to monetary policy, the Fed has an important duty to maintain a safe and sound banking system. Although this supervisory role is well understood, banks still overdosed on risk — not overnight but over time. This significant risk trend was missed by the Fed and its examination force.

In maintaining safety and soundness, bank examiners are the first line of defense. They are the foot soldiers, the Fed’s eyes and ears. The examination process includes physical sampling, on-site visits, and executive interviews, culminating in a formalized bank rating and written report. These ratings are an important risk measurement and provide a bank’s financial health scorecard. The Fed does not make these ratings public but uses these to assemble lists of the weaker banks that need further attention and oversight.

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.

First 100 Days: Fix the banks

morici– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —

For every new president, campaign promises and inaugural idealism must give way to the hard choices that measure the mettle of their leadership.

Now Barack Obama must act pragmatically to fix the banks or the economy will sink under their weight.

UK suffers from banks’ Darwinian hibernation

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Britain’s banks are fulfilling their Darwinian role, to survive, rather than their economic one, to lend, and there is no easy or painless way out.

A glance at the latest Bank of England Credit Conditions Survey makes grim reading, with yet another marked tightening of lending conditions to households and businesses. Loans are harder to get and more expensive where available, which is hardly surprising given rising defaults and a hardening view that the UK will suffer a long and deep recession.

from Reuters Editors:

And the band played on: covering the economic crisis

dean-150I recently visited one of the most frightening sites on the Web—the place where I look at my shrinking retirement account.

As I calculated the investment loss since the steep decline in the markets began, and particularly since the collapse of Lehman Brothers in mid-September, some questions arose (in addition to: Will I ever be able to retire?).

--Did we in the media do our job in reporting on the run-up to the crisis?

--Now that an “official” recession has been declared in the U.S. and the depth of the crisis is becoming clearer around the world, are we in the media keeping things in perspective? Should we even be using words like “crisis” or “meltdown?”

Banking spins destruction myth: Hoocoodanode?

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Just as every society has a creation myth, banking is now busily writing a destruction myth that seeks to explain and soothe in a world torn to its foundations.

The myth, as expounded by regulators, bankers and their various service providers, is that we were hit by a perfect storm, a 1,000-year flood so unpredictable that we can’t possibly be held accountable for it. An act of god, rather than the folly of man.

Uncertainty paralyzes U.S. banking system

John Kemp Great Debate– John Kemp is a Reuters columnist. The opinions expressed are his own –

Extreme uncertainty about the economic outlook and the depth of the recession has paralyzed normal lending activity by commercial banks in the United States and elsewhere. Even as the Federal Reserve has added liquidity and boosted bank reserves, the credit creation process has remained stalled as banks struggle to identify good borrowers willing and able to repay in a wide range of future economic conditions.

The attached chart is adapted from the Federal Reserve’s weekly H.8 release on “Assets and Liabilities of Commercial Banks in the United States” (https://customers.reuters.com/d/graphics/US_CRDT1108.gif).

Petrodollar drought another blow to banks

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own –

Banks in Europe and Britain, and their unfortunate would-be borrowers, face another blow as plunging oil prices tighten the spigot of petrodollar deposits.

Billions of dollars worth of funds from oil exporting nations have made their way into banks from Zurich to London in recent years. These inflows helped banks withstand credit crisis losses and, given much of the money was in dollars, was a source of dollar liquidity during recent money market difficulties.

  •