Pride of lions unthreatened by elephants
August 12th, 2010
If, in our western capitalist economies, we think of profit-hunting banks as being like a pride of lions hunting, non-financial industry is comparable to lionesses who often do the actual work. The banks are the males who spend all day lazing in the sun, but get the first pickings of any kill, and all of the second helpings if they want too.
This (more or less) is how Robert McDowell, the Edinburgh-based banking consultant and author, begins his latest, somewhat disturbing, blog post on what the future holds for banks and whether regulators will ever be able to rein in their excesses.
I urge anyone who is interested in the future of banking and financial regulation to read the full blog post — originally titled “Regulators’ Get Tough But Will They Change Banks’ Profiteering” and published on both Robert’s Banking on Economics blog, and on the Asymptotix blog. Above all else, the piece demonstrates why Barack Obama’s much trumpeted Dodd-Frank-Act is bound to fail.
Here are some (unannotated) excerpts:-
The Fed’s supervision manuals are a groaning bookcase-worth written by legislators for other attorneys into a jungle of verbiage impenetrable except by the most intrepid legalistic risk experts, geeks, nerds like myself and my colleagues ….
There is also the question of insider lending, and for every $ of incestuous lending how many $ are to ‘outsiders’ with over-close connections that negate standard pricing and risk assessment, a commonplace issue in property development lending, as everyone in the property industry knows well — the type of matters that brought down Anglo Irish Bank and fatally wounded many others? …
It took 80 pages of explanatory material before summarising what US Fed supervisors must first do before anything else when risk auditing a financial services firm: “Consider whether the financial-contract activities are closely related to the basic business of banking; that is, taking deposits, making and funding loans, providing services to customers, and operating at a profit for shareholders without taking undue risks.” ….
Lifting the carpet to check what’s underneath, begs some questions, mostly about how risk-taking could be hidden among layers of risk aggregations and how these risks are more exposed when disaggregating?
It seems to me that the real risk measures are those that understand the external financial markets and macroeconomic context factors, because riskiness is rarely obvious in a balance sheet however detailed only by looking at it in the context of itself.
… and something was surely hugely amiss in profit-accounting by the financial sector reliant on booking unrealised profits that were unsustainable.
Regulators before the credit crunch paid little attention to the increase in the amount of mortgage-backed securities on banks’ books. Now, bankers complain that regulators are putting pressure on them to be much more pessimistic in stress tests about their ability to respond to economic shocks. What they are complaining about is that regulators are edemanding more detailed realism. None of the stress tests and results show a capacity to reproduce the events of the recent past, for example, and that should be the first test of the realism of forecasting models ….
If any bank can show me that it has macro-models that can roughly emulate the events of the the shocks of the past four years I will buy its shares and its bonds.
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Short URL: http://www.ianfraser.org/?p=1569
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