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Banking industry gears for fundamental change - ‘Intense discussions’ under way
29-06-2010
June/July 2010 ATI Magazine
SYDNEY — In what would be a fundamental change to banking principles, a peak global banking body is proposing that banks prepare to expose both their shareholders — and, even more significantly, their creditors — to losses in the event of a collapse.
The Washington-based Institute of International Finance (IIF), private-sector equivalent of the International Monetary Fund (IMF), is finalising plans to restore the reputation of banking as the sector comes under intense pressure from governments to reform in the aftermath of the global financial crisis.
Billions of dollars have been spent shoring up global bank behemoths to prevent them from going to the wall. "We want to move away from a world where any bank is too big to fall," Charles Dallara, IIF Managing Director, told ATI during a fleeting visit to Australia.
"We do not want a (banking) world which puts a burden on taxpayers. We need to protect taxpayers from future liability. No-one wants to see taxpayers hit with a future burden, as they were this time. Therefore, banks should be willing to expose not only their own shareholders but their creditors at the time of crisis. This is a new step by the banking community to make bank creditors available for serious haircuts in the event of a collapse."
Through the auspices of the IIF, the banking sector is talking to industry leaders, central bankers and governments to co-ordinate what would be fundamental changes.
The banking sector now believes that an industry fund of sorts could be set up to pay for residual costs involved in winding up a bank. "We in the banking community believe we should be prepared to contribute to some sort of post-resolution fund on a modest scale — not to recapitalise, but to help wind down a bank," Dallara told ATI..
Co-operation with outside parties will be the key to any attempt to develop such a fund, he says. "It could be a global fund with every bank pre-agreeing to put in the money "in ex-post fashion", according to certain conditions and purposes. Or we could do it through national funds. The problem with national funds is that they would all be managed differently."
At this preliminary stage, Dallara thinks an organisation like the Bank of International Settlements (BIS) — rather than the International Monetary Fund — could be the appropriate custodian of such a fund. "The BIS has an historic role along these lines. I am not sure private banks are going to be so comfortable with the IMF," he says. Governments in the United States and Europe are working on their own domestic regulations to rein in the banking sector. Overlaying these national pushes is a global campaign, led by the
Group of 20.
But the IIF is hoping to forestall some of the more stringent government regulations proposed, especially in regard to higher capital provisions which would not just tie down the banking sector but, in Dallara’s opinion, would also torpedo the nascent global recovery.
The G20 proposals are being considered by the Basel Committee and, if adopted, will come into effect as Basel III regulations for the global banking industry. The committee needs to complete and agree on a package of regulations by October. "We are having intense discussions right now,” says Dallara. “There are three points that I would stress.
"First, we do support regulatory reform. We support increases in capital liquidity requirements. But these need to be reasonably framed for every bank in the world, not just to solve the problems of US and European banks
"Being here in Australia, I am reminded that, if some of the G20 proposals were applied, they would have serious adverse consequences here. Let's take the rigid application of leverage ratios. Australian banks are highly-leveraged but with low risk assets, mainly mortgages. If the proposed changes are implemented, Australian banks would be forced to shed assets and to curtail credit. This could have a major macro-economic effect."
For example, it has been suggested that the reserve ratio of Tier One capital should be lifted by 2.0 per cent, from the current 4.0 per cent. The industry is concerned that such liquidity reform could be difficult to implement, and would pose severe problems without any convincing reason. "It would require even well-managed banks to raise billions and billions of dollars to bolster their liquidity," says Dallara.
"Over coming months it is very important that the Basel Committee consider carefully how to modify the proposals, and to implement them on a phased basis.
"This is going to be very difficult to get right. We need to work with the Basel Committee — while at the same time cautioning them against prematurely locking in the changes."
In an interim report, released at its spring meeting in Vienna in June, the IIF said if new banking regulations are implemented as currently proposed, by 2015 the level of real gross domestic global production would be about 3.1 per cent below what it would otherwise be. "This amounts to an average of about 0.5-0.8 per cent annually clipped from the pace of the recovery,” the IIF said.
Based on its estimates of regulatory impact on the financial systems of the G-3 (the US,EU and Japan), banks in these three economies would need to raise US$0.7 trillion of common equity and issue US$5.4 trillion, net, of long-term wholesale debt over the period 2010-2015 to meet new capital and liquidity requirements.
On a different front, the banking industry is also facing potential additional taxes. Acting on a request by the G-20 countries, the IMF has suggested three taxes — a Financial Stability Contribution, a Financial Activities Tax and a Financial Transaction Tax — as possible options which governments could impose on financial services firms to help pay for any burden associated with government intervention required to repair the banking system.
According to the IMF, the cost of bailing out financial institutions amounted to 2.7 per cent of GDP of the advanced G-20 countries. This figure blows out to 25 per cent when guarantees and other contingent liabilities are taken into account. Overall, the IMF says, indirect fiscal costs — in the form of a cumulative loss of output — amounted to around 27 per cent of GDP.
While new taxes are not irrelevant, says Dallara, they are somewhat beside the point today. He questions the wisdom of setting aside billions of dollars to deal with an unknown crisis, saying it presents a huge moral hazard. He points to the US, which established a relief fund known as TARP (the Troubled Asset Relief Program). "TARP money was meant to save banks, and, ultimately, the government distributed it around to car companies, small businesses and so on," Dallara says.
The latest scare on the banking sector comes from problems in Europe. Dallara says the total exposure of all banks in Europe to Greece is 75 billion euro in government debt.
"Of course, if the sovereign debt problem spreads into Southern Europe, this could be more of a concern for the European banking system. European banks are relatively exposed to Spain and Portugal. But there is no fundamental reason why the debt problem should spread," he told ATI. |
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