Summit Notebook

What if there were no “too big to fail”? Fed’s Hoenig has a vision

Democrats and Republicans alike on Capitol Hill say they want to toss out the concept of “too big to fail” in the financial regulation reform they are tussling over. That way if a financial firm is going to go under, it will go under, with no thought for a taxpayer handout.

Since the concept of “too big to fail” has yet to be erased by law, and its demise yet to be tested by a failing financial institution, it was interesting to hear how Kansas City Federal Reserve Bank President Thomas Hoenig envisioned the financial industry without that concept to lean on.

Looking back in time — “If you had a clear resolution process, and you had clear rules on leverage,” a domino-like string of large bank failures may have been less likely.

“And if the other institutions were sound but only had liquidity problems, the discount window could have been and would have been used in those instances,” he said at a Reuters Global Financial Regulation Summit.

“So, I don’t know the counter-factuals, but I know there’s a reasonable case to say if the market knows the rules are firm, that the resolution process is under the rule of law, that you will be held accountable, and here are the steps we’re going to take, would you have had the same outcome?”

“If you cannot say that we can address this, then you need to break them up,” he said.

Hoenig sees financial regulation reform as a measure of prevention that will mitigate another banking crisis. “But no one can guarantee anything. But I do know that if we don’t address it, then I know exactly what the outcome is.”

Tax evaders on the run

  By Neil Chatterjee     The U.S. has promised it will hunt down tax evaders.     And it seems tax evaders are on the run.     DBS bank, based in the growing offshore financial centre of Singapore, told Reuters it had been approached by U.S. citizens asking for its private banking services. But when told they would have to sign U.S. tax declaration forms, the potential clients disappeared.       Swiss banks also approached DBS on the hope they could offload troublesome U.S. clients to a location that so far has not been reached by the strong arms of Washington or Brussels.     DBS said no thanks. In fact many private banks and boutique advisors now seem to be avoiding U.S. clients.     Will this spread to other nationalities, as governments invest in tax spies and tax havens invest in white paint?     Is this the end of offshore private private banking?

Don’t mention the R word

Policitians are often scared to use the “R” word, because a recession makes them unpopular. Investment bankers dislike the “R” word too, but in this case it stands for regulation. Regulation and lots of it is being cooked up in Washington and Brussels in response to the excessive risk-taking that helped bring on the credit crisis. Credit derivatives are in the firing line as the bad guys of the credit crisis and derivatives in energy and commodities could get caught in the cross-fire. Oil could also take a hit after rampant speculation was blamed for driving the price to a record of nearly $150 a barrel last year. Although the quest to get rid of excesses is driven by good intentions, industry insiders say there will be unintended consequences and argue the regulators could have underestimated the difficulty of their task. “It’s not easy to bring back the genie into the bottle,” Libya’s top oil official Shokri Ghanem told the Reuters Global Energy Summit.

Bankers’ chief says “vilification” of bankers tough to take

As the president of the American Bankers Association, Edward Yingling has soaked up a lot of criticism of the nation’s bankers in the past year. He has also had to work many hours to fight to ensure that crisis measures by the government don’t cause long-term damage to his members. But the one thing he has had difficulty in coping with is the assault on banking as a profession and links made by politicians and the media between any financial institution that has problems and bankers. He told the Reuters Global Financial Regulation Summit on Tuesday he is angry about the “vilification of the banking industry” given that many bankers had nothing to do with creating the financial crisis. He said the word “bank” appeared in stories in which it didn’t belong. “AIG was not actually a bank,” he said.

Mind you, Yingling remains uncompromising when pushed on how much banks are to blame for the events of the past two years. While acknowledging that some of his members made mistakes, he blames accounting rules that forced banks to value their investments at market levels, even if that didn’t reflect their longer-term value, for much of the damage to the financial system. And, he says, it was liquidity problems and a loss of confidence that caused a bank like Wachovia to be rescued more than the weak quality of the mortgage assets held by Golden West, which it bought in 2006. If anyone is looking for apologies — they won’t get them from this direction.

Central Europeans frown at state bank ownership

Talk in western Europe of possibly nationalising private banks to save them from the credit crisis is sending shivers down the spine of policymakers in ex-communist central Europe.

They remember how their government controlled financial systems completely collapsed in the 1990s and threatened to take the countries’ economies along with them due to pouring money into firms with little prospect of returning it.

“There are very strong attempts to nationalise banks, which, in my opinion, is a very short sighted approach,” Slovak central bank Vice-Governor Martin Barto told the Reuters Central European Investment Summit in Vienna this week.

He pointed to what he said was “very extensive experience with state owned banks” in Slovakia.

The Slovaks bought non-performing assets from state-controlled banks for over 100 billion Slovak crowns ($4.13 billion), or roughly around 12 percent of GDP, prior to their sale to western investors early this decade.

Polish Deputy Finance Minister was also unimpressed when asked about government ownership. “This is a very delicate issue particularly for countries in our region because 20 years ago banks were not private but public,” she said at the summit.

The central Europeans may shrug off the notion of nationalisation at least for now. Their banks, after being cleaned up and sold, have fed on domestic financial services growth in the past decade and have largely avoided the scraping for profit that forced western banks invest into highly leveraged assets that have turned sour.

We’re in this mess now, so stop moaning!

Regulation is a word bankers love to hate.

But according to Sebastian Dovey, managing partner of wealth management consultancy Scorpio Partnership, they need to spend less time moaning about it and more time working with regulators to communicate the benefits of the industry.

“It’s not good enough to sit back and say this is going to cost us,” he says. “We’re here now, we’re in this mess. We’ve got to try and manage our way out of it.

“Bankers are always complaining about regulation and saying that’s the reasons for costs … It’s the wrong statement to make to say regulation is not necessarily going to help our business.”

While protecting an industry dedicated to making money for the most wealthy in society may be a tough political sell at the moment, Dovey suggests the industry talks to regulators about what the industry really does, how big it is and how important it is for incomes and jobs.

This sounds like sensible advice. Because when the current crisis is finally over, it looks less like a question of if and more like a question of how much regulation will come.