The world’s biggest banks and financial groups are trying to offer a deal to regulators by accepting blame for the current problems with the world economy and financial markets, in exchange for no tightening of the rules and laws controlling banks and banking.
The Institute of International Finance represents over 375 of the world’s largest financial companies: it’s the big end of big money’s global lobbyist. Overnight it issued a report that will be considered at this weekend’s meetings of the International Monetary Fund, World Bank and various other groups.
In the report, the Institute acknowledged “major points of weaknesses in business practices”, including bankers’ pay and the management of risk. Dr Josef Ackermann, Chairman of the Board of Directors of the IIF, stated:
The leadership of our industry recognises its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future. We are fully committed to raising standards and improving best practices in the financial services industry.
That acceptance of blame is a sham, because it was made in an attempt to fend off calls for more regulation of banks and other financiers.
The Institute said it would be “completely wrong” for the authorities to impose much greater regulation on the industry and promised a code of conduct for better self-regulation of the industry in future.
Well, they’ve had their chance, and they fluffed it badly, so badly in fact that world economic stability and the wellbeing of a lot of people are threatened.
The IIF report analysed banks’ failings in managing risks, the conflicts of interest over bankers’ pay, the over-reliance on computer models and the inadequate protection against liquidity shortages. It also pointed the finger at the roles of credit ratings agencies and the dangers of current global accounting rules which force banks and others, at times of illiquidity, in creating a spiral of forced asset sales, lower prices and further write-downs.
The current international accounting rules were introduced to give greater transparency to corporate accounting, especially that of banks and insurers, because of problems found in the wake of the tech and net crash. And ratings agencies certainly played a role in creating dodgy credit ratings for securities that have been shown to be flawed and valueless in some cases. But the rating agencies accepted fees from banks, including Ackermann’s Deutsche Bank.
The banks needed the favourable ratings to make their collaterallised debt (and loan) obligations and other derivatives look attractive to investors. Without the banks wanting to create these new assets, based on loans of doubtful provenance, many of the subprime problems wouldn’t have been so dire. They would have, on the whole, stayed in the US housing industry.
No-one forced the banks to create these dodgy loans: greed and a desire for more earnings, profits, bigger bonuses, share options and other payment methods drove the whole grubby mess.
Many of the problems first encountered by banks were in off balance sheet products called “conduits” and “SIVs” (structured investment vehicles). Australia’s big four banks mostly had a SIV each. These enabled the banks to get around regulatory rules and lend more money, write more business, make more profits and pay themselves more. These vehicles collapsed or needed rescuing, triggering the stress on the banks’ balance sheets which continues today.
This was done to avoid regulation, which investment analysts knew all about, as did most regulators, who did nothing. Regulators should force all commercial and investment banking to be conducted separately with independent boards, managements and balance sheets. There can still be economic and shareholding links but no cross guarantees of assets or debts.
Commercial bankers in Australia have became infected with the cowboy approach of the most US investment bankers.
It’s time to tighten the rules.
Couldn’t agree more. The banks and other financial institutions have always been willing to do and say what it takes to lessen restrictions even if it goes against their long-term interests for a stable (and still liberal) financial system. This current crisis is a debacle for the financial sector and unfortunately for many other people as well.
It is a crisis made worse by regulations that allowed a lack of transparency and by a belief among policy-makers and financial players that short-term strategies to make truck loads of money were not systemically dangerous.
Any follower of financial crises will note the pattern of crisis, followed by discussion about new architecture etc, followed by inaction followed by crisis. The difference this time is that the crisis is so widespread because of the massive increases in the globalisation of finance (see, for example, McKinsey’s surveys of global capital markets [http://www.mckinsey.com/mgi/publications/mapping_global/index.asp])