Adjusting banking regulation for the economic cycleBankers have a bad habit of making economic cycles worse. They are notorious for lending people umbrellas when the sun is shining and asking for them back when rain starts to fall. When the economy is strong and asset prices are rising, banks are only too eager to lend to those wanting to buy assets, helping to push prices higher. In bad times, when prices are falling, banks ask for their loans back, forcing the borrowers to sell assets and driving prices down further.Right now, banks are desperately plastering over the cracks in their balance sheets created by the credit crunch. This week Royal Bank of Scotland launched a £12 billion ($24 billion) rights issue (see article). Other banks have tapped the bulging wallets of sovereign...
The Financial Stability Forum (FSF) has issued its "Report on Enhancing Market and Institutional Resilience." This work was undertaken at the request of the G-7 Finance Ministers and Central Bank Governors and delivered for their recent meeting in Washington, D.C.Securities and Exchange Commission Chairman Christopher Cox today issued the following statement regarding the FSF report:"The report by the Financial Stability Forum represents an important contribution to ongoing international discussions of these topics. It provides a backdrop for actions considered by the SEC and others to deal with the issues underlying the recent market turmoil. As the Commission prepares to write new rules for credit rating agencies under the recent authority granted us by Congress, this report will be of...
The Financial Stability Forum (FSF) today presented to the G7 Finance Ministers and Central Bank Governors a report making recommendations for enhancing the resilience of markets and financial institutions. The recommended actions are in five areas:o Strengthened prudential oversight of capital, liquidity and risk managemento Enhancing transparency and valuationo Changes in the role and uses of credit ratingso Strengthening the authorities’ responsiveness to riskso Robust arrangements for dealing with stress in the financial systemPublic sector and private sector initiatives are underway in these areas. The FSF will facilitate coordination of these initiatives and oversee their timely implementation, thus preserving the advantages of integrated global financial markets and a level...
Newly created positions such as chief compliance officer are being created to help the ever burdened chief financial officer.Sarbanes Oxley and other regulations have meant that CFOs just don't have enough hours in the day to keep up, says Peter McLean, vice chairman of recruiting firm Spencer Stuart.Some companies that have long had CFOs are now creating compliance positions including roles for a financial controller, the Wall Street Journal reported.McLean says that the search for corporate controller positions had jumped nearly 40% on last years' figures.'These positions add a level of expertise to the compliance role, and it frees up the chief financial officer to tackle the jobs that they are really expert at, such as the financial analysis involved in the business operations,'...
Citigroup to record another $11bn of losses, according to respected analyst.US investment banks are poised to make further huge writedowns to their sub-prime related portfolios this week, as they report first quarter numbers.Citigroup is expected to record a further $11bn (£5.6bn) of writedowns when it reports on Friday, according to one of the most influential analysts on Wall Street.See full...
Argumentative guests do not make for a convivial dinner party. A private dinner at the G7 summit between bankers offering a code of conduct to prevent future credit mishaps, and ministers demanding regulation was always likely to be testy. But while regulatory change is needed, if policymakers want to prevent the next financial crisis rather than insure against a repeat of the last, they need the bankers to scrutinise themselves as well.The Financial Stability Forum’s report to finance ministers of the Group of Seven leading industrialised nations sums up a consensus on regulatory change in response to the credit squeeze. It calls for tougher capital requirements for banks holding structured credit products or lending to off-balance sheet conduits, more prescriptive action on...
Following is a letter sent to the Editor of the Financial Times:It is very good news when a senior manager of a financial institution who has presided over billion euro losses decides to take some responsibility! We have not seen enough of this in Europe (“Bouton to step down as SocGen chief” FT April 17 2008)Keeping the chairmanship is hardly stepping down and taking responsibility.The fact that the executive team heading up Société Générale could secure additional capital from shareholders after having let a junior executive run up billion euro losses continues to amaze and raises questions about shareholders who, not only don´t hold their managers to account, but reinvest their capital for these same managers to mismanage, raises questions about some fund managers as well.If...
From 2000 to 2003, Oxford Analytica was commissioned by EStandardsForum, a New York-based advisory firm, to develop and subsequently maintain a globally comprehensive on-line database providing detailed information on country compliance with a set of twelve international financial standards and codes.These standards were endorsed by the IMF, World Bank and G7 in the wake of the Asian crisis, and their implementation is considered to be a key measure for promoting international financial stability. The database, covering 85 countries, addresses various aspects of the financial system, including:See full Press Release (paid subscription...
The Institute of International Finance, an organisation representing many of the world’s largest banks and other financial companies, has issued a pretty frank mea culpa for the litany of errors of omission and commission perpetrated by its members during the financial boom that turned to bust in August 2007. The Interim Report of the IIF Committee om Market Best Practice states a large number of home truths and makes a host of useful suggestions about risk management, liquidity managements, compensation of senior bankers and superstars, over-reliance on formal quantitative models etc.The tone of the report is one of “We know we screwed up, but now we’ve learnt our lesson (really we have!!) and we’ll never do it again; so there is no need to regulate us more severely and...
The latest E&Y report highlights the changing role of CFOs of global banks in the wake of the credit crisisCFOs of global banks must sharpen their focus on strategic issues rather than monitor and report financial information, according to a report by Ernst & Young and CFO Research Services.Rapid growth in the industry has led to financial operations which have become disjointed and inefficient and only when CFOs can improve the financial operations, can they become true strategic partners, help evaluate new products, provide leading indicators on business performance and drive merger and acquisition opportunities.See full...
The Federal Reserve has stepped up scrutiny of investment banks and their potential writedowns in the wake of the credit crunchThe central bank argues that if it is to act as the lender of last resort to the securities firms, it should keep a closer eye on their financial condition.Last week its staff were in Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers' offices to look at their lending and trading policies plus their levels of capital.See full...
Government may need to legislate again to sort out auditor liability mess, says Baker TillyThe government’s new auditor liability limitation regime was lurching towards crisis this week, as one auditor suggested the government may have to legislate again to sort out the mess.Audit firms are frustrated with the Financial Reporting Council for delaying crucial guidance on the moves, which they say will hold up the agreements. Limited liability contracts are unlikely to be signed this AGM season. There are further concerns that companies listed in overseas jurisdictions may not be able to limit liability and some expect the government may have to intervene again.See full...
The IMF predicts that the credit crunch could result in losses of as much as $1trillion (£50bn)The International Monetary Fund has suggested that fair value accounting rules be reviewed, on the back of a report which highlights how the practice exacerbated the asset prices.The global fund is the latest senior organisation calling for a change in the rules, as investment banks, accounting advisory bodies and senior executives criticised the standard in recent weeks.The IMF predicts that the credit crunch could result in losses of as much as $1trillion (£50bn).See full...
When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.See full Article (paid subscription...
Bear Stearns never ran short of capital. It just could not meet its obligations.At least that is the view from Washington, where regulators never stepped in to force the investment bank to reduce its high leverage even after it became clear Bear was struggling last summer. Instead, the regulators issued repeated reassurances that all was well.Bear’s principal regulator was the Securities and Exchange Commission, which says it was watching closely. “At all times,” wrote Christopher Cox, the S.E.C. chairman, in the aftermath of the collapse, “the firm had a capital cushion well above what is required to meet supervisory standards.”See full...
Europe’s finance ministers are expected to agree on Friday to guidelines for handling cross-border banking failures, their first steps to address potential threats brought on by the tight credit markets.In a sign of the growing concern over the international banking system, European ministers will sign an agreement promising deeper European cooperation, and establishing principles to be applied when a financial institution operating in different countries faces difficulties.However, the document will not propose creation of a European regulator or lay down strict rules. Instead it will bind the national authorities to favor private-sector rescues where possible, and urge them to decide in advance who would pay the bill for banks that operate in more than one country if a state bailout...
The new Banking Code and Business Banking Code contain an enhanced promise by banks and building societies to treat customers fairly and reasonably. That promise is supported by eight key commitments and the standards of the revised Code.The new Codes take effect today following an independent review. Changes to the codes were made after consultation with consumer groups, HM Treasury, the Financial Services Authority, the Office of Fair Trading and other interested parties.As well as the enhanced promise of fairness, further key improvements to the Banking Code include: * a new commitment on responsible lending; * more help for customers who may be heading towards financial difficulties; * strengthened credit assessment practices to enhance responsible lending; * clearer...
While it is not possible to know how today’s financial crisis will unfold, the one certainty is that there will be a wave of new financial regulation in the US. The US Treasury has just released its “blueprint” and both Houses of Congress are preparing their own legislative proposals. Nevertheless, both efforts are bound to fall short of what will be required. Certainly the overwhelming focus for the US Treasury in its recommendations is organisational reform and not the content of regulation. As such, it must be considered no more than an opening gambit. As for Congress, its preoccupation with the immediate housing crisis, which is soon to be embodied in a law easing pressure on homeowners, will also have to be enlarged.Here is just a sampling of the important issues that...
The Financial Services Authority is thought to be preparing to reopen the debate on the disclosure of positions accumulated on the stock market but not held through direct share ownership.The City regulator held a detailed consultation on the matter this year but is thought to be ready to concede that it needs to do more work on the matter.The consultation about contracts for difference (CFDs), which give holders exposure to a company more cheaply than buying its shares outright, provoked a wide range of responses from the City.It is thought the regulator has been particularly influenced by a document submitted by investor body the Association of British Insurers which argued that a combination of the proposals put forward by the FSA was needed.See full...
Stringent rules should be imposed to rein in the reckless lendersThe Americans have semi-nationalised a bank. The British are planning a system whereby City workers can grass up their mates suspected of manipulating markets. Central banks everywhere are scratching their heads in an attempt to find a way of purging the market of the most toxic forms of assets. As Mervyn King noted last week, the credit crunch has clearly moved into a "new and different phase".What the outcome of this "phase" will be is not yet clear. Figures from the United States last week painted a grim picture; plummeting house prices, collapsing consumer confidence, a big drop in investment spending. All of that spells recession - and probably quite a long and deep one at that. In Britain, though, the picture so far is...
Make strategic decisions that maximize expected future value—even at the expense of lower near-term earnings.Many firms sacrifice sustained growth for short-term financial gain. For example, a whopping 80% of executives would intentionally limit critical R&D spending just to meet quarterly earnings benchmarks. Result? They miss opportunities to create enduring value for their companies and their shareholders.How to cultivate the future growth your firm needs to succeed? Rappaport identifies 10 powerful practices. First among them: Don’t get sucked into the short-term earnings-expectation game—it only tempts you to forgo value-creating investments to report rosy earnings now. Another practice: Ensure that executives bear the same risks of ownership that shareholders do—by requiring...
US regulators are to give companies a chance to provide a fuller explanation of the huge paper losses they are being forced to record under controversial accounting rules, in a move that could help them to cushion the blow of the credit crunch.The new guidance, likely to be issued by the Securities and Exchange Commission in the next few days, stops short of Wall Street demands for a suspension of the “fair value” rules that require companies to mark assets to current market value.But it underlines the SEC’s interest in an issue that is of crucial importance for financial groups, whose balance sheets and share prices have been rocked by the liquidity squeeze.Wall Street executives argue that a large portion of the losses recorded under fair value accounting will never materialise...
Regulatory watchdogs, including the Financial Services Authority and the US Federal Reserve, are proposing a review of accounting rules following the credit crunchThe news comes in the wake of the collapse of US investment bank Bear Stearns, brought down by the sub-prime crisis.The Financial Stability Forum’s Senior Supervisor’s Group reviewed 11 of the largest banking and securities institutions. It said some companies failed to properly price the risk of exposures to off-balance sheet vehicles, at precisely the time that it became difficult or expensive to raise funds to deal with the issue.‘Several firms challenged by market events acknowledged the need to improve theirintegration of credit and market risk management with accounting and financial control functions,’ last...
FSA’s report reveals a dysfunctional regulator, paralysed by high staff turnover and organisational changesStaff at Britain’s main City regulator paid scant attention to Northern Rock in the two years before its collapse, kept few records of meetings and failed to act on signals that the lender was acting recklessly.This is what Financial Services Authority (FSA) admits in its internal report, which reveals a disfunctional organisation paralysed by high staff turnover, regular organisational changes and a constant series of events in the City which dominates all their time, according to The Guardian.The report reveals supervisors presented their managers with few reports on the risks taken by Northern Rock, leaving managers unable to form a strong view of the bank's business model,...
Staff monitoring Britain's banks paid little attention to Northern Rock in the two years before its collapse, kept few records of meetings and failed to act on signals that it was acting recklessly, according to the main City regulator, the Financial Services Authority.In an internal report, the FSA paints a picture of a supervisory team faced with high staff turnover, regular organisational changes and a constant diet of events in the City that absorbed all their time. It said supervisors presented their managers with few reports on the risks taken by Northern Rock, leading to a view at the top of the regulator that it was a low risk.Without the reports, managers were unable to form a strong view of the bank's business model, which has since been described as "reckless". Managers, in...
Securities and Exchange Commission Chairman Christopher Cox today sent the following letter to the chairman of the Basel Committee on Banking Supervision expressing strong support for their planned updated guidance on liquidity management for banking organizations in light of the recent market turmoil.Re: Sound Practices for Managing Liquidity in Banking OrganizationsDear Dr. Wellink:I am writing in connection with the announcement by the Basel Committee on Banking Supervision that your Working Group on Liquidity intends to update the February 2000 guidance entitled "Sound Practices for Managing Liquidity in Banking Organizations" in light of the recent market turmoil. I strongly agree with you that the events earlier this month leading up to the acquisition of Bear Stearns by JP Morgan...
Pakistan needs best corporate practices: ShamshadGovernor State Bank of Pakistan Shamshad Akhter Thursday said that owing to high operational cost, mark-up rates of the banks had gone up. She asked banks to inform their customers before increasing or decreasing interest rates.Addressing as chief guest at the convocation and prize distribution ceremony of the Institute of Bankers Pakistan, she opined that operational cost of the local banks could be curtailed by corporate governance. "Though Pakistan ranks first in South Asia in corporate governance, it still needs to adopt the best corporate practices implemented in more developed courtiers," Dr Shamshad said.She maintained that keeping in view financial issues in America and other European countries, there was an urgent need to tighten...
Corporate Governance is the system by which the Capital Market Institutions (entities) are directed, controlled and held to account.It also refers to the process of directing and managing business affairs of a Capital Markets Institution for enhanced performance and corporate accountability so as to maximise shareholders long- term value and the interest of all stakeholders.If management means running a Capital Market Institution (entity), then corporate governance means running the Capital Market Institution better.See full...
As vice chairman of the China Banking Regulatory Commission, or CBRC, Jiang Dingzhi helps oversee an industry that has changed radically in recent years. Early in this decade, China's big lenders were entirely state-owned and sat on mountains of bad loans generated by decades of government-directed lending. Five years ago, a government bailout cleared their books of many of the rotten assets, and several of the banks went on to raise tens of billions of dollars in global initial public offerings.Still, huge challenges remain. While their lending practices have improved -- thanks in large part to the role of foreign shareholders and partners -- the Chinese banks still need major improvements to how they operate. And they are now facing a possible global economic slowdown that could hurt...
Study says one out of five employees never read company policyCompliance policies at large financial institutions are outdated and often ignored by employees, a new survey has found.The survey of 550 financial services professionals in London and New York found that 14% are not confident their organization’s policies are up to date with the most recent changes to regulations issued by governments, stock markets and other institutions. One out of five survey respondents admit they have never even read their firm’s policy manuals. Another 15% have read the manual at least once but do not continue to read it regularly. “A lot of people don’t have any faith in the policy manuals,” says Paul Johns, chief marketing officer for Complinet, a compliance vendor that conducted the survey....