By Peter Thal Larsen

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

It’s time for banks to knock ratings agencies off their pedestal. For all their well-documented flaws, credit ratings are still hard-wired into the financial system. An industry-wide downgrade by Moody’s may provide the catalyst to curb the agencies’ power.

In mid-February, Moody’s said it might lower the ratings of 17 large wholesale banks. It has good reason to do so: sovereign turmoil, the burdens of new regulation, and banks’ own lack of transparency are all legitimate concerns. But if Moody’s goes ahead, some lenders may see short-term funding dry up, or have to post additional collateral to derivatives counterparties. With turmoil in the euro zone and JPMorgan’s trading woes already undermining confidence, a downgrade is the last thing that banks need.

Most of the time, ratings agencies lag rather than lead the market. When Moody’s last week lowered ratings on the debt of Spanish banks, investors shrugged – the shift confirmed what they had concluded months earlier. Similarly, many investment banks already pay higher prices for their debt than other companies with similar ratings. That implies a downgrade is already priced in.

Yet while Moody’s opinion is unlikely to tell investors anything they didn’t already know, lower ratings will affect large investment banks in two specific ways. First, it will hurt their derivatives businesses. Many investors will only deal with counterparties with credit ratings above a certain minimum level. A bank whose rating dropped below A3 might lose business, or have to post extra collateral for trades. For example, a three-notch downgrade by Moody’s would require UBS to put up an extra 7 billion Swiss francs of collateral.

Even worse, the downgrade could cut off some sources of funding. As part of its review, Moody’s is considering stripping some banks of their top short-term rating. This will make it difficult to attract investment from U.S. money market funds, many of which are prohibited from buying the commercial paper of companies which do not have the highest short-term ratings from both Moody’s and Standard & Poor’s. Those banks will be forced to seek funding elsewhere.

By Peter Thal Larsen

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

“Don’t blame me, blame the banks.” That, in a nutshell, is Mervyn King’s assessment of Britain’s most severe recession for seventy years. The Bank of England governor admitted in his radio lecture to not shouting loudly enough about financial risks. Yet his retrospective largely ignored the many criticisms of central bank policy, after as well as before the crisis. That’s a missed opportunity.

Anyone who tuned in expecting new insights about the financial crisis will have been disappointed. King offered a conventional – and partial – explanation of what went wrong: banks became risky, interconnected and too big to fail. When the financial system wobbled, taxpayers and central banks were able to avert a total collapse, but not a severe recession. Even King’s mea culpa came with an excuse: because the central bank was stripped of responsibility for regulating banks in 1997, it could not intervene directly.

King’s praise of pre-crisis monetary policy was especially baffling. The governor insisted that the central bank had got it about right, because there was “a bust without a boom”. That totally ignores the giant debt-fuelled property bubble that helped bring about Britain’s subsequent economic woes. And if the Bank of England was broadly correct before, why has it set up a Financial Policy Committee, chaired by the governor, which is seeking far-reaching powers to prevent future bubbles?

King may have felt that a radio broadcast, the first such peacetime address since 1939, was not the best forum in which to explore such contradictions. Besides, Federal Reserve Chairman Ben Bernanke and former European Central Bank President Jean-Claude Trichet have hardly been more apologetic. And lack of contrition has so far proved a successful strategy. The Bank of England has emerged from the crisis more powerful than ever, while the Financial Services Authority, which has completed several painful self-examinations, has been dismembered.

Such stubbornness may yet backfire. The Bank of England is under intense pressure for its expanded responsibilities to be combined with greater transparency and accountability. King’s self-congratulatory revisionism will only embolden his growing band of critics. The governor’s successor, who is due to take over in July 2013, may face greater restraints.

By Peter Thal Larsen

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

Is UBS finally becoming boring? Following its 2008 near-death experience and last year’s rogue trading scandal, the Swiss bank has promised shareholders – and clients – a more predictable, less exciting future. Respectable first-quarter results allowed new chief executive Sergio Ermotti to offer a glimpse of what might be in prospect.

Hopes of stability rest on three pillars. First, UBS’s flagship private bank is once again pulling in wealthy clients. The 6.7 billion Swiss francs ($7.4 billion) of net new money it attracted in the first three months of the year was its fifth successive quarter of substantial inflows. Even though much of the cash is coming from Asia, where intense competition allows clients to demand better prices, gross margins were more or less stable. Even UBS’s U.S. brokerage arm, a serial underperformer, turned in a record quarter.

The investment bank is the second pillar. Leaving aside accounting funnies – mostly the charge arising from narrowing spreads on UBS’s own debt – the division is holding up reasonably well. Fixed-income revenue was down just 10 percent year-on-year. And while equity trading revenue dropped 23 percent compared to the same period of last year, this is largely because it is more exposed to moribund Europe. The performance also looks better when considering that risk-taking in the investment bank has been slashed: daily value at risk in Q1 was less than half the level a year ago.

The final support is capital. UBS took advantage of the first-quarter rally to offload some balance-sheet-hogging assets. Applying new Basel III rules, its core Tier 1 capital ratio is now 7.5 percent. That’s better than rivals like Credit Suisse and Deutsche Bank – though still well short of the levels demanded by Swiss regulators.

There are plenty of potential wobbles to come. Competition from U.S. rivals and renewed euro zone turmoil could undermine the investment bank. The capital rebuild will further squeeze return on equity, which was an acceptable 13 percent in the first quarter. But investors planning to protest about pay levels at UBS’s annual meeting on May 3 shouldn’t lose perspective: if the destination is boring stability, UBS is further down the road than many.

By Peter Thal Larsen

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

Credit Suisse is still shrinking. The Swiss bank returned to the black in the first quarter, even though revenue was well below the same period of 2011. Cost-cutting helped, and balance-sheet contraction boosted returns. But the bank has more to do to meet tough capital targets. Choppy markets won’t help.

After a painful fourth quarter, earnings of just 44 million Swiss francs for the first three months of the year don’t look like much of a recovery. But strip away the perverse write-down triggered by the rally in the bank’s debt, and the one-off charge from distributing unwanted balance-sheet assets to staff, and Credit Suisse earned 1.36 billion Swiss francs in the quarter. That translates into a respectable 15.9 percent return on equity.

The big question is whether that performance can be sustained. Though the investment bank pulled out of its year-end slump, revenue from fixed income, equities and underwriting and advising on M&A deals were all down from the first quarter of last year. The good news is that the capital base that generated that revenue shrank even more. Take risk-weighted assets assigned to the fixed income division, which has in the past consumed much of Credit Suisse’s balance sheet. These dropped 45 percent year-on-year. Yet revenue here was down just 21 percent.

The disappointment is that Credit Suisse still hasn’t got a grip on costs. Operating expenses in the first quarter were down little more than 7 percent year-on-year, even as underlying revenue across the bank dropped 15 percent. Executives say the cost-cutting programme is on track, and dismiss talk of more job losses. But if the revived euro zone crisis chokes off activity, Credit Suisse – like its rivals – may need to chop further.

Meanwhile, the bank still has work to do to get its capital ratios in shape. If the Basel III regime were applied in full, Credit Suisse’s common equity Tier 1 capital ratio would be less than 7 percent – and still a shade below 10 percent by the end of 2013. The bank’s shares, which were largely unmoved by the results, suggest investors remain to be persuaded that Credit Suisse can thrive in its new environment.

By Peter Thal Larsen

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

“Wie boter op het hoofd heeft, moet uit de zon blijven.” The Dutch proverb is particularly appropriate for the country’s right-of-centre government, which has collapsed after failing to agree big budget cuts. In English, it reads: “He who has butter on his head must stay out of the sun”.

Not long ago, the Dutch were among the hardest of hardline enforcers of budgetary discipline in the euro zone. As the crisis intensified last autumn, the country’s prime minister and finance minister argued that states which failed to control their deficits should face external supervision, fines, or even expulsion from the single currency.

That commitment to fiscal rigour abroad has been undermined by domestic economics and politics. The Netherlands has been hard hit by the slowdown: growth went into reverse in the fourth quarter of 2011, and the International Monetary Fund expects the Dutch economy to be the only core euro zone country to endure recession this year. This puts the country at risk of breaching the euro zone’s deficit targets, and forced ministers to consider more austerity. But the planned cuts proved too harsh for the fragile Liberal-Christian Democrat coalition – and for Geert Wilders’ Freedom Party, on whose support the government relied. Elections now look likely, possibly as early as mid-July.

The latest ructions pushed the yield differential between Dutch and German 10-year government bonds to their widest level for three years. However, an immediate fiscal crisis looks unlikely. If opposition parties play ball, parliament could cobble together a budget for 2013 before the summer. This would help prevent a scolding from Brussels and the ratings agencies. And even if the deficit remains above the euro zone’s 3 percent limit the Netherlands, which has a debt-to-GDP ratio of only 65 percent, is a long way from joining the euro zone’s peripheral laggards.

A bigger concern is whether elections will lead to a new political consensus. Though support for Wilders has shrunk, opinion polls suggest that the left-wing Socialist Party, which has campaigned against the euro zone’s austerity policies, might become the second-biggest grouping in a new parliament. It could be a hot summer for Dutch butter.

By Peter Thal Larsen

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

Must the governor of the Bank of England be English? That’s the intriguing question raised by a report that Mark Carney, the governor of the Bank of Canada, has been sounded out as a possible replacement for Mervyn King, who is due to retire next year.

In most other developed countries, the question would not even arise. It’s inconceivable that, say, an American could be head of the European Central Bank, or that the Federal Reserve would choose a German or Chinese chairman.

The UK is different. It has long shown an admirable willingness to install foreigners into senior positions. Almost half the chief executives of the constituents of the FTSE 100 index aren’t British. Quintessentially English sporting events like Wimbledon and the Oxford-Cambridge boat race are dominated by foreign contestants. Even England’s national football team was, until recently, managed by an Italian.

But such internationalism has its limits. The governor of the Bank of England is no faceless technocrat; he is the most powerful non-elected official in the country. The job has become more powerful, and more political, since the financial crisis. The central bank has embarked on a controversial bond-buying spree and is set to receive sweeping new powers for regulating banks and pricking future financial bubbles.

The governor will be at the very heart of economic and social policy. King has been rightly criticised for the Bank of England’s lack of transparency and accountability. The last thing his successor will need is a row over nationality.

By Peter Thal Larsen

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

No-one can accuse the Financial Services Authority of avoiding big targets. Indeed, the UK watchdog has trained its sights on one of the City of London’s most prominent dealmakers by fining Ian Hannam the best part of half a million pounds for passing on price-sensitive information about his client, Heritage Oil.

The penalty looks harsh given that the JPMorgan banker’s slip was accidental, and nobody traded on the tip. But even if Hannam – who has resigned in order to take the case to a tribunal – can get the ruling overturned, corporate advisers will have to re-think how they work.

Hannam is no stranger to controversy. As chairman of capital markets at JPMorgan he has been responsible for persuading a string of emerging markets mining and oil companies to list their shares in London. This has led to an inevitable clash between the business practices of oligarchs and the corporate governance standards expected by UK institutional investors.

This is not the first time that shares in Heritage Oil have attracted the FSA’s interest: two years ago, the regulator fined the chief executive of Genel Enerji, the Turkish oil company, almost 1 million pounds for trading on the basis of inside information about an oil discovery in Kurdistan. Nevertheless, the FSA’s case against Hannam looks sparse. It rests on two emails he sent in the autumn of 2008. The first alerted a potential bidder for Heritage – Hannam’s client – about a possible rival offer. The second signalled Heritage’s progress in finding oil. Hannam did not trade on this information, and there is no evidence that the emails’ recipients did either.

Without the trail supplied by the emails, there would be no case. The FSA maintains that simply passing on inside information constitutes a breach: it has successfully brought two similar “insider non-trading” cases in recent months. It also makes the point that somebody of Hannam’s seniority and experience should have known better.

By Peter Thal Larsen

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

Britain’s bubble-prickers are aiming high. The Bank of England’s new Financial Policy Committee, which is charged with averting future crises, has asked the government for sweeping powers to rein in banks, insurers and fund managers. Even if it doesn’t get everything it wants, the FPC will clearly have muscle. The snag is that it has few ideas for solving the most pressing current problem: excessive risk aversion.

Most of the FPC’s wish list is pretty sensible. It wants to set and vary banks’ counter-cyclical capital buffers – the tool specifically designed to allow regulators to “lean against the wind” of excessive exuberance or caution. It also wants to control the size of banks’ balance sheets by setting the leverage ratio, which measures equity as a proportion of total assets. And it wants to be able to apply its powers to any regulated entity, including insurers and investment funds. That should allow it to quickly whack risk-taking that shifts from banks to other parts of the system.

More troublesome is the FPC’s desire to vary capital ratios for lending to different sectors. Such micro-management could undermine investors’ already-fragile confidence in the accuracy of banks’ ratios. It is also hard to reconcile with the European Commission’s efforts to ensure that new capital rules are applied consistently across the European Union.

True, the proposed tool would have allowed regulators to rein in banks’ property lending during the last bubble. However, the same aim could be achieved more easily by capping loans as a proportion of the value of a property, or a multiple of the borrower’s income. Sadly, the FPC appears to have concluded that demanding such powers is a political non-starter.

A more pressing problem, however, is that the FPC’s proposed powers are asymmetric: they are much better suited to tackling exaggerated optimism than in countering the undue caution currently gripping Britain’s economy. This tension is evident from the minutes of FPC’s latest meeting: it concluded that UK banks should raise capital to further strengthen their buffers, even as the government attempts to stimulate the flow of credit to small businesses and housebuyers. Even if the FPC gets the tools it wants, it could be years before they are used.

By Peter Thal Larsen

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

Sergio Ermotti is taking a gamble. The UBS chief executive is preparing to install his former colleague Andrea Orcel as co-head of the Swiss group’s investment banking division. Luring the BofA Merrill Lynch dealmaker would be a sign that battle- and scandal-scarred UBS can still attract big names. But given Orcel’s patchy management track record, he has a lot to prove.

There’s no question that UBS could do with a shot in the arm. The combination of its 2008 near-death experience, last year’s 2 billion Swiss franc rogue trading loss, and the departures of a string of senior bankers have prompted rivals to predict its demise. Orcel’s famed contacts book should ensure a steady stream of deals: he was closely involved in BofA Merrill’s decision to underwrite last year’s hair-raising – but ultimately successful – 7.5 billion euro rights issue by Italian lender UniCredit. And though his work on the 2007 break-up bid for ABN Amro, which helped drag down Royal Bank of Scotland and Fortis, must count as a black mark, it was a bold and imaginative deal – not to mention the lucrative fees.

As investment banks like UBS shrink their trading arms and concentrate on fostering relationships with senior corporate clients, Orcel’s skills will arguably become more valuable. The bigger question is whether he is capable of leading a large and complex investment bank. His defenders would argue that he has not yet had the chance to prove himself, and that BofA Merrill was preparing to install him as its European chief when he decided to leave. However, the acrimonious nature of his departure is hardly exemplary. According to a person familiar with the matter, Orcel did not tell his superiors he was in talks with UBS until after they had told BofA’s current European chief, and the UK regulator, about the planned internal reshuffle.

Orcel’s reputation as a lone operator will also prompt questions about his ability to coexist with Carsten Kengeter, the former Goldman Sachs trader who is currently UBS’s sole investment banking chief. It will no doubt also prompt unease among UBS investment bankers unused to having outsiders parachuted in from above.

Ermotti may feel that a shake-up is precisely what UBS’s investment bank needs right now. Nevertheless, Orcel will have to prove he can deliver more than fees.

By Peter Thal Larsen The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Greg Smith’s biggest impact on Goldman Sachs may have been the manner in which he departed. On Wednesday, the equity derivatives banker kissed goodbye to his employer of a dozen years with a resignation letter, published in the New York Times op-ed pages, in which he accused Goldman of putting its interests ahead of those of clients, who he said are regularly described as “muppets.”

Though Smith’s complaints may be familiar, they tend to be aired in private. The worry for Goldman is that some employees are no longer scared of criticising the firm, nor take much pride in its pedigree.

It’s not hard to pick holes in Smith’s broadside. His Goldman career doesn’t seem to have been stellar. After more than a decade he was still an executive director when most bankers would hope to have made it to managing director or even partner. And his misty-eyed description of Goldman’s principled past sounds stretched. When Smith joined, Goldman – and the rest of Wall Street – was flogging speculative Internet start-ups to tech-mad investors – hardly a case study for prioritising clients’ long-term interests.

And Smith’s description will hold few surprises for those familiar with the Securities and Exchange Commission’s case against the firm over its structuring of toxic sub-prime mortgage debt, or the Senate report that highlighted an executive’s emailed description of a “shitty deal” shunted to clients.

Indeed, the complaint that Goldman puts its own interests first can be regularly heard from customers, counterparties and even ex-employees. If Smith’s letter is an accurate reflection of reality – he offers no specific evidence – it is just another reminder of how far Goldman still has to go in rediscovering former senior partner Gus Levy’s mantra of being “long-term greedy.”

What’s unusual is for criticism to spill into the open. Despite its recent travails, Goldman has managed to keep internal disputes private, while even disgruntled clients have tended to keep quiet. Goldman’s famed ability to maintain close links with its alumni – who in the past wore their tenure as a badge of pride rather than disavowing it the way Smith has – also persuades most ex-employees to keep their counsel.

Smith’s chances of continuing a career in finance look slim. Rivals will think twice before hiring someone willing to air his dirty laundry. But for Goldman, which just named a new communications chief, the challenge will be discouraging others from following Smith’s lead.