As the global economy struggles out of recession, attention has remained firmly fixed on banking since it is seen as both a symbol of the crisis – and an easy target for blame.

Angela Knight, chief executive of the British Bankers Association (BBA) believes that “the blame game has gone on far too long and the time has come for a more measured and serious debate”.

“The industry does not duck its responsibility,” she said, “but with the economic problems of some countries that have been present for many years, though masked, now being so obviously displayed, it is clear to all that whilst we are part of the problem – we are by no means all of it.”

Speaking to delegates at the BBA Annual International Conference, Knight stressed: “The banking industry is responsible for banking. It does not run the regulator, it is not in charge of monetary policy and it is not responsible for public spending.”

Add value

Stephen Green, HSBC Holdings group chairman, argued that it is imperative for banks to demonstrate the value they can add to the economy and to society. “We need to focus on the raison d’etre of business and to turn our backs on short-term shareholder maximisation. More urgently, in the short term it is clear that strong banks will be needed to support recovery.”

Green confirmed that “often in the last two years, banks have been seen as being unwilling to meet customer demands, with all the consequent effects on our reputation”.

Green particularly welcomes the Bank of England’s creation of a Financial Policy Committee and its role of managing the overall supply of credit. “I believe,” he said, “that the use of such mechanisms as varying the capital requirements in the banking system, or administrative measures such as loan-to-value caps in key sectors, will be vital to support sustainable economic growth and reduce the probability of a further crisis.”

Far-reaching enquiry

The UK government has asked the Banking Commission (Commission) to undertake a far reaching enquiry into financial regulation. Its remit is wider than expected and will look into the state of competition in the industry and how customers can be sure of the best deal.

Andrew Tyrie MP, chairman of the government Treasury Select Committee, argued that the Commission, for its conclusions to be credible, will need to examine thoroughly all the main ideas on regulatory reform affecting capital and liquidity currently being aired.

Green sounded a warning regarding bank regulation. “It is a difficult path to tread,” he stressed. “Government and regulators need to calibrate carefully the impact of the various banking reform measures on our fragile Western economies. It is essential to recognise that it will take time for many banks to adapt, rebuild and reshape their balance sheets to meet the demands of the ‘new normal’. This means making some delicate judgments about both details and implementation timing of Basel III and Capital Requirements Directive III and IV if we are to avoid choking recovery and plunging into a new credit crunch.”

Tyrie stressed: “Regulation itself is a formidable barrier to entry into the financial services industry. The current, and probably justifiable, intensification of regulation seems likely to raise the barrier even higher, unless strenuous efforts are also made to promote competition.”

Tyrie wondered whether it was the complexity of Basel II rules which served to nullify their value. “If so, Basel III needs a thorough examination too,” he said.

Message from the US

Louis Susman, the US Ambassador suggested that, given that the US has lost some $7tr in stock-market wealth and $6tr in its housing market during the recession, regulation was inevitable.

“The US,” he explained, “is on the verge of passing the most comprehensive financial regulation reforms we have seen since the 1930s. The reforms are not perfect but we can’t let perfect get in the way of good. Along with these reforms we are working in parallel with G20 governments and international institutions, such as the Financial Stability Board, the Basel Committee on Banking Supervision and the IMF to improve the entire financial system.”

The new bill (the House and Senate have completed the conference committee stage of the bill and its now time for the final vote in the Senate) will provide greater scrutiny of large financial firms to prevent any one company from threatening the entire financial system. “If a big firm is failing, regulators will have the ability to shut it down and break it apart in a safe and orderly way without asking taxpayers to pay a dime,” said Susman.

Swans into ugly ducklings

Gordon Nixon, president and chief executive of Royal Bank of Canada, expressed similar concerns about Basel III. He said: “Basel III’s proposed rules are supposed to be a starting point for discussion. Ironically, these proposed rules, for all their good intentions, will negatively impact even the healthiest bank’s balance sheets in terms of capital, leverage ratios and liquidity and compromise economic growth. The proposals are so complex and onerous that we run the risk of an agreement that lacks transparency and integrity, or one that results in non-uniform implementation.”

Nixon added: “It has re-defined capital and risk assets, the effect of which is to turn swans into ugly ducklings”.

Canadian banks, for example, would be lifted from their position as well capitalised, liquid financial institutions – and recast as undercapitalised. “Banks that passed the ‘real life’ stress test may fail the theoretical one – a pretty good indication of flawed methodology,” he said.

Competition and transparency

Andrew Tyrie told BBA Conference delegates:  “Concern about inadequate competition in retail banking is widespread. So today I can announce that the Treasury Select Committee will begin an examination of the issue – competition in retail banking as well as the future of so-called free banking.”

He added: “Lack of competition within financial services has been a long-standing concern of mine, pre-dating the recent financial crisis. Examining competition within the sector is now more crucial than ever. The complaints, some justified, simply don’t go away.”

Tyrie also suggested that large bank bonuses are probably a consequence of inadequate competition in investment banking.

Another crucial ingredient is greater transparency. “Regulators are often needed to protect customers whenever there are complex products, whether in manufacturing or the service sector. And a crucial weapon in their armoury can be sunlight. Transparency, rather than heaps of further detailed regulation, can often curb concentrations of power, vested interest and provide better outcomes for consumers.”

Future resolutions

As the economic storm subsides, Gordon Nixon believes that strong banks will get stronger and weak banks will be pressured to re-structure.

“This suggests an era of opportunity for potential acquisitions but not until we have a clear line of sight on the true value of assets and clarity on regulation,” he explained. “As long as uncertainty and volatility remain, finding the right time to buy at the right price is like trying to catch a falling knife – but ultimately our industry will re-structure.”

Nixon forecast: “Banks will have to re-structure their business mix to ensure that capital is being deployed in the most efficient manner because neither the marketplace, nor regulators, will tolerate marginal returns on excess capital. The result will be re-structuring of balance sheets and assets and those that can adapt will benefit and those that are complacent and hope for a return to the ‘good old days’ will atrophy.”

Return of securitisation

Deven Sharma, president of Standard & Poor’s argued that securitisation may return in the near future. “As things stand,” he said, “regulatory uncertainty is likely a major factor behind the dearth of securitisation internationally. In Europe, about €30bn of securitised bonds have been sold this year compared with more than €500bn before the crisis – and some 95% has gone to central banks, not the private sector.”

He added: “Nobody expects a return to the levels or complexity of securitisation that we saw before 2007. But the comatose state of securitisation leaves a big hole in the pool of financing available to financial institutions and their customers. That in turn has a real impact on activity and jobs in the wider economy.”

Initiatives are underway, Sharma confirmed, to support a healthy and sustainable securitisation market for the future. More information about asset pools is being made available to investors, as well as ratings firms, to help them take a more informed view of credit risk. Industry bodies such as the European Securitisation Forum are seeking to bring greater transparency through standardised data reporting. “New structures are less leveraged, simpler and easier to understand,” he said.

Future vision

Stephen Green stressed that a sound banking system was imperative for the economic recovery.

“But we will never achieve this,” he said, “unless we can change the perception that financial services is an industry which is preoccupied with serving itself and its own short-term advantage into one where our primary objective is to service the needs of the wider economy.”

He added: “We have considerable work to do on this. We need to continue to show that we understand that parts of our industry behaved very badly in the run up to the crisis. We need to demonstrate that we recognise our obligations to behave responsibly to manage and understand risk and to create the sustainable value that the economy and wider society needs.”

Ambassador Susman concluded: “As an ex-banker I take great pride in the contribution of the financial industry in the past to the wealth and growth of the world economies. I have also felt the pain of the abuses of the past, which created hardships for so many and, quite frankly, let to populist anger against the industry.”

“However, I look to the future with optimism in that we have learned from the past. I am confident that whatever laws and regulations are passed will be appropriate, reasonable and not punishing to the financial sector, so that the banking industry will be allowed to remain the strong engine that leads the world to growth and recovery. We must constantly remember to retain the political will and the courage to do what is right for our employees, shareholders and for the people and communities we serve.”

Article contributed by Edward Peck – Asset Finance International

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