Monday, April 24, 2017

No Regulatory Relief for Securities Finance

Financial CHOICE Act leaves constraints intact

The latest legislative offering in the U.S., the Financial CHOICE Act, does nothing for securities finance. Nothing in the bill provides an exemption to the funding markets from the crushing weight of regulatory reform. At present, both political parties in the US seem willing to accept an outcome where the global funding markets are road kill from the reform steamroller. Many experts believe this legislative failure is due to analytic omissions on the regulators’ part. In that scenario, regulatory analysts simply don’t understand the global funding mechanism. Therefore, it is thought that regulators have not advised the legislators to offer relief, notwithstanding a steady chorus of complaints from securities lenders and borrowers. However, there is no omission. The regulators are fully aware of the effect of the impact of their rules. They simply choose to leave the new rules intact. 

Wednesday, April 12, 2017

All the Bonds in Christendom

Part I: The Relationship Factor

The 180th anniversary of J.P. Morgan’s birth will fall on Monday, April 17th, 2017. The great financier died aged 76, a few months after testifying before the U.S. Congress in the Money Trust hearings. By all accounts, Morgan shocked the national media when he said that a strong relationship was more important than collateral when extending bank credit. Risk management, to Morgan, was personal, concise and pithy:

Sunday, February 26, 2017

The Overlooked Merits of Bank Disclosure

  • What if banks were to get a capital benefit from investing in superior risk management technology – and if that benefit was disclosed to the market?
  • Should not the costs of risk management investments by FDIC-insured banks be partly repaid by taxpayers in the form of capital relief?
  • Why don’t capital rules allow a reduction in risk-weighted requirements, to help offset the lost revenue and encourage conservative risk management?
  • Dynamic metrics are far more relevant for understanding the levels of stability in securities finance than are static sizing and demographics alone.

European bankers are caught up in a debate over whether to disclose their full supervisory capital demands to market participants. That’s an issue because bank supervisors, under Pillar 2 of the Basel III accord, can set a bank’s regulatory capital “guidance” at a level higher than its Pillar 1 “requirements.” Bank analysts and investors can discount the securities of banks with relatively high guidance, assuming that supervisors have learned something negative in their confidential reviews. That’s the essence of Pillar 3: Market Discipline.

Sunday, February 12, 2017

For the Want of a Nail … the Details of Regulatory Reform

UNANTICIPATED COSTS - AND BENEFITS

To look for the effect of new rules on banks, regulators rely on academic models that treat banks as aggregates. In truth, global banks are collections of service businesses, not simply larger versions of George Bailey’s 1946 community lender. Missing that fact may be one reason why the list of unintended consequences from regulatory reform is growing. Critics in the U.S., without anticipating a challenge, are calling for the repeal of the Dodd-Frank Act. But expecting repeal is a dangerous strategy for bankers.

Wednesday, November 30, 2016

Enlightened, not Reactive Regulation: Now It Starts

Since passage of the Dodd-Frank Act in 2010, the financial industry has been dealing with an almost unstoppable wave of regulatory reforms. Most, if not all have been designed to prevent a repetition of the problems that followed the failure of AIG and Lehman Brothers in 2008. Now, after the U.S. election of a conservative majority in two (and soon to be all three) branches of the U.S. federal government, many bankers feel that a huge regulatory weight is about to be lifted. Some bankers expect a reversal of the drive toward reforms, perhaps even repeal of Dodd-Frank. That’s not going to happen, at least not without a lot of work.

Although there may be receptive listeners in government, it will take more than a supportive administration to ease the pressure for reforms. The nation has been repeatedly told that the financial industry brought the economy to the brink. Reform is now expected by Main Street voters. A new narrative must be formulated before the conservatives can delay imposition of the final rules, much less repeal the most restrictive measures.

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