There will be another crisis, it’s inevitable (#Sibos 10)

So I just left the main plenary session on regulation and rebuilding trust, ably chaired by John Gapper, Chief Business Commentator and Associate Editor of the Financial Times.

The panel consisted of four people representing various regions and operations around the world:

• Werner Steinmuller, Head of Transaction Banking for Deutsche Bank (Europe)
• May Abulnaga, Head of Regulatory Affairs, Central Bank of Egypt (Middle East, Africa)
• Andrew Sheng, President, Fung Global Institute (Asia)
• Stefan Gavell, EVP Regulatory, Industry and Government Affairs, State Street (America)

John began with a series of background issues and questions:

• Have governments regulated in a unified fashion or is their regional arbitrage
• The regulators are asking banks to keep more capital and lend more: is that a conflict
• Emerging markets, especially China, Brazil, and Russia are seeing slower growth: what will contracting markets mean?

As well as a nice question to the audience asking whether they agreed or disagreed with the statement: the new regulations are well planned and implemented.  Only 19% of the audience agreed, whilst 81% disagreed.

That kicked off the panel, with a few highlights and comments for me as follows (not direct quotes but my interpretations).

Stefan Gavell, EVP Regulatory, Industry and Government Affairs, State Street

We may talk bout it being five years since this crisis started, but it’s four years since the G20 Pittsburgh meeting that agreed a global regulatory framework.  Is that framework implemented?  Not yet, and it has not dealt with key issues such as the shadow banking sector.

In addition, the regulators need to push for far more information.  The thing that was missing in the crisis is that we did not have good information about who has what.  With LEIs and trade  reporting we will not be in that position again, and the best defence against another crisis is to have good information.

Andrew Sheng, President, Fung Global Institute

I’m not surprised that the regulations are poorly planned because there is a panic in the system due to a systemic crash in the industry.  What needs to change?  Everything needs to change. We need to rebuild trust and make finance more inclusive.   We need to think of long-term and not short-term. We need to think of social interests not self-interests.

Have the regulations fixed this so far? In developed markets yes, but in emerging markets there are a whole set of other problems.  This has not been addressed and the regulations need to be fit for purpose.  The question is: are the regulations fit for purpose?

May Abulnaga, Head of Regulatory Affairs, Central Bank of Egypt

The Capital Accord has been implemented too fast, and the capital buffers now required will be implemented in a different way in different markets, making some banks stronger whilst others will still be weak.

Werner Steinmuller, Head of Transaction Banking for Deutsche Bank

Basel III leverage ratios are an issue.  The leverage ratio is meant to be there so that banks are avoiding the risk but, in reality, it will increase risk as it will mean that banks will get rid of lower yielding assets and invest in higher yielding assets.  I’m not against leverage ratios but a single ratio is not appropriate to address this complex issue.

Andrew

Basel III is targeted at the developed markets but what does that mean for other markets, such as Asia.  In Asia, Trade Finance has collapsed due to the big banks focusing upon their capital buffers and Basel III actually increased the cost of Trade Finance too. 

The leverage ratio is an issue as well, in that instead of creating a line that, when crossed, would ring alarm bells it has left us with a balance sheet game of what do I add, subtract or move to make that ratio more interesting for the bank’s returns.

Stefan

We should not be focusing so much on leverage but on liquidity.  If you look at the assets when the crisis hit, most of the assets were being valued at 95 cents to the dollar when the market didn’t value them that way.  That’s where the liquidity shortage occurred and where the issue lay.

May

Unfortunately there are two ratios in play here: leverage and liquidity coverage.  They would make sense if they had the same implementation dates but they are set for different dates.  That’s a mistake.  They should be on the same date and consistent.

Werner

The relationship between banks and the regulator, acting on behalf of society, is broken.  Banks have to change and recognise the interests of the client, not the bank.  If we are not acting fast and fixing this broken relationship, we will end up with more regulation because that is the reaction of society.  That will mean less risky structures and more focus upon the economic health of the markets we serve. 

Andrew

We've only thought about debt and not enough about equity.  And banks should focus more upon
how to support SMEs to create job growth.  Unfortunately, using pure risk-weighted asset views, SMEs are being squeezed  out of the market and, if we do that, then growth and economic prosperity will fail.

Stefan

We need to look at shadow banking, which is the wrong phrase because it implies it’s evil.  It’s not
all evil.   Microfinance is shadow banking for example, so we should work out what is happening in this area and also regulate it effectively, supporting the areas that are good and locking down the areas that work against the interests of society.

Werner

There appears to be some competition amongst the regulators to show who is the first and who is the toughest.  Instead of talking about the next reregulation and the one after that, why not talk about deregulation?

May

Most of the banks are too opaque and do not offer transparency, even between the central bank and the banks they regulate, and this is going to be a big focus of gaining more transparency and insight.

Werner

The Deutsche main board took several days out of the bank to focus upon what we have to do to change the culture of the bank.  If you think of short-term gains, you make a lot of money in the short term but then, a few years later, the regulators gives you a lot of large fines.  We have to think of long term therefore, not the short term gain.

As mentioned, these are not direct quotes but my interpretations.

The session finished with a fascinating interactive vote with the audience about what will happen in the future.

Asked to agree or disagree with a series of statements, the audience voted as follows.

We can have safer banks whilst stimulating greater economic growth

• Agree – 84%
• Disagree – 16%

Countries are co-operating effectively in regulation

• Agree – 22%
• Disagree – 78%

There is a high risk of another banking crisis

• Agree – 69%
• Disagree – 31%

Obviously, this audience is not confident that any of this regulatory work is working.

Is it effective?

Will it succeed?

We ask the same questions every year and the answer is always no.

Why?

Because regulators are always running behind the markets and can never regulate for what’s in fort.  That’s why there’s a financial crisis every five to seven years, and there will be another big one.  My bet is for 2045.

Luckily, by that time, I’ll be attending my 50^th SIBOS, so see you there.

Now it’s time for some food.