Friday, October 31, 2014

Bankers with Borders

LONDON – When Mark Carney replaces Mervyn King as Governor of the Bank of England in July 2013, the world will be deprived of King’s witty public utterances. My personal favorite came when, commenting on strong retail-sales figures during one Christmas period, he cast doubt on their significance for assessing the state of the economy. “The true meaning of the story of Christmas” he solemnly intoned, “will not be revealed until Easter, or possibly much later.” A new career on the stage, or in the pulpit, surely beckons.

King’s most quoted phrase is that “global banking institutions are global in life, but national in death.” They trade globally, across porous borders, attaching little significance to the geographical location of capital and liquidity. But, when the music stops, it is the home regulator, and the home central bank, that picks up the tab, even if the losses were incurred elsewhere. By the same token, a failing bank may leave behind a mess in third countries, which its home authorities may not clean up.

Icelandic banks, for example, took deposits in the United Kingdom and the Netherlands, and swept them back to Reykjavik, leaving the host countries out of pocket. Likewise, the collapse of Lehman Brothers left European creditors more exposed than those in the US, whose funds had been wired home to New York on the Friday before the end.

Regulators have been wrestling with this problem for years, without conspicuous success. In mid-December, the Bank of England (BoE) and the United States Federal Deposit Insurance Corporation (FDIC) announced what seemed like a breakthrough, at least concerning the major banks headquartered in the US or the UK – that is, 12 of the 28 institutions regarded by the Financial Stability Board as globally systemic. In their case, a resolution authority, in London or Washington, would take control of the parent company, remove senior management, and apportion losses to shareholders and unsecured creditors.

It sounded plausible. BoE officials declared firmly that they were prepared to trust their American counterparts, and would not step in to grab subsidiaries or assets based in the UK. “This is a journey that involves trust,” said BoE Deputy Governor Paul Tucker. But the Anglo-American love-in quickly soured when the FDIC chairman was asked to give the same assurances of confidence in the British authorities. According to the Financial Times, he “laughingly declined.”

Indeed, while the FDIC and the BoE were working on their plan, the US Federal Reserve was developing proposals that will expose overseas banks in the US to a far tighter set of controls, and closer supervision, than they have hitherto experienced. The Fed is seeking to oblige foreign banks to create a holding company to own their separately capitalized subsidiaries, effectively giving the Fed direct oversight of their business. They will also be required to maintain stronger capital and liquidity positions in the US.

The justification offered for these new impositions is that overseas banks have moved beyond their traditional lending business to engage in substantial and often complex capital-market activities. “The crisis revealed the resulting risks to US financial stability,” said Fed Governor Daniel Tarullo. The UK’s Financial Services Authority has been invoking the same rationale for requiring foreign banks to establish local subsidiaries, rather than taking deposits or lending through a branch of the parent bank.

On the face of it, these moves appear to be well justified, given the mayhem created by poorly regulated banks in the major financial centers. But we should be clear that these changes are not just tinkering at the edges. They amount to a reversal of decades of policy by American and British regulators.

Ernest Patrikis, a former Fed supervisor, points to the clear implication that in the US domestic banks will have a strong advantage over foreign banks. More dramatically, he asserts that “subsidiarization would be the end of international banking.”

Larry Fink, the CEO of the multinational investment-management firm BlackRock, takes a similar view: “It really throws into question [the] whole globalization of these firms,” with “each country for [itself].” He adds: “I wouldn’t call it a trade war, but I would certainly call it a high level of protectionism.” One delicious irony in Europe is that Chinese banks are contesting the requirement to subsidiarize in London on precisely those grounds.

For now, high-octane worries about protectionism are probably overdone. And it is difficult to deny that the Fed should take a close interest in the funding strategies of foreign banks operating in the US. Another Fed governor, Jeremy Stein, has pointed out that foreign banks have dollar liabilities of roughly $8 trillion, much of it short-term wholesale funding.

But there is a risk that these interventions are the thin end of a dangerous wedge. Forced subsidiarization causes capital and liquidity to be trapped in local legal entities, reducing the effectiveness with which that capital is used. At a time when bank capital is scarce, that impediment carries significant economic costs.

Moreover, tools that may be used wisely and well by institutions with a global outlook, like the Fed and the Bank of England, could take on a different character in countries where a commitment to free and open markets cannot be taken for granted. So we must hope that the US and British authorities move carefully and do not use their new powers to freeze out foreign competition. “Be careful what you wish for” is wise advice in the regulatory world, as it is elsewhere.

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  1. CommentedJonathan Lam

    Gamesmith94Gamesmith94134: banker with borders

    “The Fed is seeking to oblige foreign banks to create a holding company to own their separately capitalized subsidiaries, effectively giving the Fed direct oversight of their business.” It seems reasonable under the jurisdiction or trade treaty of the US; but it did not protect the sovereignty right in trade or banking. The FED direct oversight could be overwhelming for other including the underdeveloped nations. Perhaps, the policing on FED or ECB became impossible when commodities comes in allotments that who pay more for its industry or at what price the exchange rate could be is being predictable or not predictable under the condition like Libor or rogue trader cases. Specifically, I would question on the present interest rates and the currencies exchange that their oversight on the holding companies is not admirable especially there are tricky finger on the buttons to bid if there is no systemic control available. In some case, the price on the missing item jumped significantly on the exchange, and some must pay extra in saving its industry.

    Personally, I thought the FED or ECB may have overdone themselves getting into the monopoly setting with the Euronext or ICE that they could have brought the global finance to Atlantic City or placed the global finance going underwater. In avoidance of the monopoly in its sovereignty disputes or litigation through the judiciary process, we could have another Central Bank of the global finance through the UN and World Bank that we can develop its system in using Zoning instead of borders in its transfers of funds. Zones like OCED for Europe, ASEAN +3 for Asia, African Union for Africa, America, Canada and Mexico for North America and OAS for the South America.
    “They will also be required to maintain stronger capital and liquidity positions in the US.” Is not being unreasonable but those with no FDIC may have a common insurance through the system of Zones. In resolution of the Banker with border, I would suggest the 1% charge on the transfer from one continent to another and it allows 2% total as withdrawal to the origin. Then, in the process it would protect the national and lesser conflict in the global trades. Then, the transfer fees can be distributed to the banks or community that was looted.

    Perhaps, I do not believe in the free-market system even Basel II can do justice on the deal; especially when some come to destroy the integrity of the exchange rate system by manipulation. So, some can trade its currencies to make other expensive for its hosting population; and remorse over the withdrawal. Therefore, I prefer the fixed rate on all currencies and commodities; and they must be traded under the scrutiny of the IMF and WTO if the exchanges would cause hardship for the hosting entities. In all word, invisible hands or enterprises or not, harmony should be the top priority of the global economies, and profit can come afterward; officially, the oversights of the IMF and WTO can make adjustment on the change of all values.

    I personally suggested the multi-speed, and multi-currencies in maintaining the sanity of the financial system; and Euro-dollar may not be the only international reserves only that counts; because they certainly lost count of themselves. Then, Zone must be developed to monitor the flow of currencies and its rates to exchange that participating in the throw weight including the deficits and displacement of investment of the surpluses. In time, we can really control the interest rates to compensate when inflation or deflation would take their effects even assistance to growth and not just valuation to shift in order to maintain gain or loss. In final, I think the exchange rate must apply to the ambience of zone not forsake of profit or loss, and its performance counts not by the value of the currencies it converts. We must give the Sovereignty Bonds another attitude too, if we can use promotion on coupons for import/export to maintain the domestic sanity and privatization of the state owned projects to advance growth that guarantee the balance of payments either domestic or foreign.

    I wish there is a better solution that can prompt to success in solving the default without changing the present, but the use of peseta in Spain inspire me most for another alternative to change.

    May the Buddha bless you?

  2. CommentedJonathan Lam

    Gamesmith94134: Banker with Border
    “Global banking institutions are global in life, but national in death.” They trade globally, across porous borders, attaching little significance to the geographical location of capital and liquidity.
    As the history passed by, from the Fleet Street incident, Lloyds of London, Libor Incident, and so on, we see the many failures occurred in the financial systemic control run by the regulators of England. “Another Fed governor, Jeremy Stein, has pointed out that foreign banks have dollar liabilities of roughly $8 trillion, much of it short-term wholesale funding.” how is the financial stability Board is going to work.

    There are words from the economists--Schumpeter
    So much for the buttonwood tree

    Illuminati19Dec 21st, 22:15
    As for increased scrutiny TE, you can forget about it. The reason ICE can't lose money, (yes, CAN'T) is because ICE is regulator, originator, salesman and warehouse operator for vast swathes of opaque contracts.
    Shame you didn't add that link from the NY Times "A Secretive Banking Elite Rules Derivaties"
    While it is impossible for me to prove any of this, a commonly held view amongst critics is that ICE is made up of these 10 firms: Goldman Sachs, BoA, Barclays, Wells Fargo, JP Morgan Chase, Credit Suisse, UBS, Citigroup, Deutsche Bank and Morgan Stanley.
    If you examine the folks who made a killing out of the subprime crash, such as John Paulson, who reportedly made $14billion+ shorting the market in a few months, there seems to be a common thread - ICE firms.
    While I am not pretending Deutsche and its shareholders didn't lose a fortune in the crash, those at the top, like Greg Lippmann, Deutsche's global advisor on CDOs, were aware of the problem long before the crash (as were all ICE firms, which is why Barclays survived without gov bailouts in the UK, being the only UK based ICE firm with the inside track).
    I see the coming of IntercontintalExchange (ICE) and Euronext would becoming the clearing house of all commodities and resources for members only. Even today, ICE refuses entry to this market to non-ICE firms (Bank of NY Melon) to preserve their informational monopoly.

    Howard Davies, tell MOM the Octopussy come back to life. Run for your life.

    May the Buddha bless you?