tag:blogger.com,1999:blog-71981759540851008672024-03-04T21:53:36.969-08:00World BankingAdminhttp://www.blogger.com/profile/04828932438805495528noreply@blogger.comBlogger233125tag:blogger.com,1999:blog-7198175954085100867.post-64553477839458660502011-11-15T10:40:00.000-08:002011-11-15T10:40:44.595-08:00Banking Trends Worlds<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqeKC3ccYLReYS4aU5D10XX8s4CmWG42jwyLiIFyvrUDL8NaMIB-FMlRdG-E-ANa8Gde5oYLcJfjSEdIF3V91w4l6tlzKHOD92KwYF0oKrjF4KDk4-rCuYZS6NTnlg4xwcEKX3LjsUjraO/s320/bank_worlds_international.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqeKC3ccYLReYS4aU5D10XX8s4CmWG42jwyLiIFyvrUDL8NaMIB-FMlRdG-E-ANa8Gde5oYLcJfjSEdIF3V91w4l6tlzKHOD92KwYF0oKrjF4KDk4-rCuYZS6NTnlg4xwcEKX3LjsUjraO/s400/bank_worlds_international.jpg" width="360" /></a></div><br />
<div style="text-align: justify;">BANK WORLDS INTERNATIONAL The World Bank has not undergone major changes over the last three years, and demonstrate the results of these events in 2011 will continue. shows responses to the economic and financial crisis, consumers have less tolerance for risk, tolerance for less government secrecy, more businesses and consumers move their money toward the shore. But these changes in 2011 in strengthening competition in the low-tax jurisdictions and more money flows between continents.<br />
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Here are some trends for 2011 clock:<br />
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* Competition: Hong Kong, Singapore see competition as areas with low tax rates.<br />
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Emerging markets are the fastest growing high net worth individuals (those with assets of $ 1,000,000) in the world, a new stream of income for consumers, protection of wealth. This will help ensure continued growth in the offshore banking sector in low-tax jurisdictions, particularly since the Asian airports.<br />
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According to a KPMG report on corporate tax rates in Hong Kong "world average evolution of competition in the last ten years that many countries now have corporate tax rates similar or lower levels." low-tax areas are struggling to remain competitive in 2011 or tax rates are not enough to be competitive in the long term.<br />
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Hong Kong estimated last month that the economy as globalized world in 2010, is facing an intense challenge to maintain its status as number one in the context of globalization, "said Agnes Chan, Regional Managing Partner Ernst & Young , Hong Kong and Macao. "Despite its success should not be in the further development of the most globalized economy in the world, Hong Kong will rest on its laurels," said Chan.<br />
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* Right: More transparency for individuals and financial institutions are required, followed by intensified efforts of criminal sanction.<br />
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A series of sanctions imposed foreign bank in 2011, probably during its offshore facilities in the home of many organizations. Requirements include reports of assets stricter and more comprehensive protection of privacy loss, and more control throughout. The United States makes bank accounts for non-residents increased transparency. If the American member of the European Savings Directive (DUST), holders of non-US accounts information will be shared, reducing the attractiveness of investing in America. The directive will give the U.S. greater access to information about its inhabitants offshore bank accounts.<br />
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criminal enforcement efforts are also a priority for governments. The U.S. is also strengthening the enforcement and prosecution of tax evasion through offshore banks. But it could also mean more than a witch hunt, both for individuals and professionals who supported them, and most cases could set precedents and examples to do. Stricter regulation under the Bank Secrecy Act is seeing an increase in filing of returns (FBAR filings), strengthened programs against money laundering and reporting suspicious activities and transactions border. The IRS has announced plans for a new Offshore Voluntary Disclosure Program, but introduces introduce more stringent measures and the impact of a similar program two years ago.<br />
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* Asset Protection: Investors head East.<br />
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With an atmosphere of increasingly unfavorable in offshore facilities in the West and the OECD countries, more investors away from Europe and the United States can led investments for individuals and institutions, their holdings by moving into emerging economies that offer growth prospects for the recovery phases to protect the global recession, and greater intimacy, as in Asia and the Middle East. This is potentially very damaging to these countries have called for greater penalties, such as the legal use of offshore financial centers is a major part of financial revenue for the British banking system and the U.S. - technically the largest offshore jurisdiction worldwide.<br />
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* Technology: Trends, the easier it is to run the country.<br />
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A year ago, amid intense pressure from the IRS and the OECD, UBS Swiss bankers were convinced that the concessions of confidentiality would have minimal impact on the Swiss offshore financial sector. However, a recent case in which identities were sent WikiLeaks site, the ubiquity of the Internet, privacy is becoming a non-option for offshore banking services provider. The future of the industry is weak in the statutory tax hubs.<br />
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Growth in the cloud leads to more business in practice. Prepare yourself to handle more transactions on the Internet and to see more international business. The trends observed in 2011, including security threats for banks, the challenges and opportunities in atomization, Cloud Computing and key management.<br />
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Consumer Behavior *<br />
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Much of what happens will be driven this year by consumer behavior. The recession and pauses property and stock markets, investors are scared away from risk.<br />
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In a recent interview with the magazine's financial assets, ABN AMRO Private Banking Asia CEO Hans Diederen, said the rich in the post-crisis environment, customers have seen their demand for more:<br />
• Products: simple, most liquid investment products that offer more privacy.<br />
• Diversification: the growing diversification in asset classes not stock (and bond funds, for example).<br />
• Proximity: The closer to home investment and the region.<br />
• Information: For more product information<br />
But one thing has not changed, Diederen noted, "the appetite of customers' investment is still driven by market sentiment." With these consumer trends, offshore banking in Singapore and offshore banking in Hong Kong the best places for investment must be mitigated risks. </div>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7198175954085100867.post-85339875080082093982011-11-15T10:34:00.000-08:002011-11-15T10:34:32.754-08:00International Banking Online Transfer Worlds<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOf6YGSDx_mc7FSgcdmlOVNx2qcKUvgx-tr-pnSoJFcNlpacf6sMOhdfnn9oiDOp_WFRknOldI4vO9ESUXFPfMslLyYPzZMYGGQG4PrqqPkdNiWODyK8vDBL0ZPCxiPob-P_jLEFDqJ73h/s1600/international_bank_worlds_online_transfer.jpeg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="395" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOf6YGSDx_mc7FSgcdmlOVNx2qcKUvgx-tr-pnSoJFcNlpacf6sMOhdfnn9oiDOp_WFRknOldI4vO9ESUXFPfMslLyYPzZMYGGQG4PrqqPkdNiWODyK8vDBL0ZPCxiPob-P_jLEFDqJ73h/s400/international_bank_worlds_online_transfer.jpeg" width="400" /></a></div><br />
<div style="text-align: justify;">INTERNATIONAL BANK WORLDS: The money will be transferred across continents everyday. People who send money abroad to relatives who live in their homeland. Foreign companies to work with people around the world in the employee's income to send by wire transfer procedures. Thus, the transfer of money something that happens on a large scale and on a daily basis. There are many ways to transfer money worldwide. Money can, the account holder's account and the account holders to withdraw money when he needs it to be transferred. But the transfer of the safest and most popular is the system of transfer or bank transfer. This is a money transfer by a person or institution to another. It is also possible to transfer money from one bank account to another account. Bank transfer is also possible in various offices of the designated cash. Transfer to transfer money for individual rather than a bulky amount, the contractor is not paid by bank wire group. The money is wired to an account holder of another person or institution.<br />
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Transfers are considered the safest and most reliable currency transfer. It is also one of the fastest ways to transfer money from one person to another. The person who wants to send money goes to a bank or exchange office that occupies the position of the transfer. The details of the transfer, including the recipient's name, bank account, amount, the city and country codes must be completed and submitted to transfer the amount. A bank or an office that sends money in the transfer of the sender's expense fee. This fee depends on the amount sent and have the receiver is charged. The bank then sends in contact with the receiving bank and provide the transfer details and details of the recipient. The transfer may take several hours, and in some cases one or two days. If the currency must be converted, then the exchange rate and the Commission has set before sending the receiver cut a bank account. The fees of the receiver to pay the amount he or she receives an amount slightly less than the actual amount. In this way, international bank accounts and profits generated funds.<br />
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Another form of transfer is the use of debit cards and credit cards. The electronic code on the back of the card with the bank account connected Inter and stolen each time by an e-store code is a transfer between the card account and bank account fund holders will be saved. Thus, the payment, an aspect often in everyday life and one of the best ways to use currency in international perspective transmission. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-44320818871641897072011-11-15T10:33:00.000-08:002011-11-15T10:33:01.482-08:00Worlds Bank Reconciliation<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsES7ID3jkcCLu5IzyzR7iOLRnUphI3CKPRJyDj8FMuPlR8rkxmsDOr4E8A1FxiZZZK2rXMoQ5EnuP8wyYxi_PgK5JZd_J3HmRV19OwcdHHd0I9zz8opsrsAO3WXJn2L1-pBt8YpYazzg-/s320/bank_reconciliation_worlds_international.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsES7ID3jkcCLu5IzyzR7iOLRnUphI3CKPRJyDj8FMuPlR8rkxmsDOr4E8A1FxiZZZK2rXMoQ5EnuP8wyYxi_PgK5JZd_J3HmRV19OwcdHHd0I9zz8opsrsAO3WXJn2L1-pBt8YpYazzg-/s400/bank_reconciliation_worlds_international.jpg" width="267" /></a></div><br />
<div style="text-align: justify;">BANK WORLDS RECONCILIATION : Bank reconciliation is a comparison of the general account at a bank on behalf of the Company by a statement from the bankers of the society at large end of the month sent occupied. It could, by the end of the month, each time after the date the accounting firm of the closure. The bank reconciliation prepared, elements that are missing or not properly treated in the two account found.<br />
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The common differences and their treatment are:<br />
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Each month the bank charges bank usually charges for the operation of the bank account. These fees are generally not up to the final end of the month published. By agreement, the bank can enforce a subscription to the loan interest, so that the repayment of the loan amount can not forget to register in the general ledger.<br />
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To correct this omission [. Debit bank charges, interest, etc., and credit the bank account in the ledger]<br />
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Deposits in transit: It is a time delay is due to the fact that the deposits were not near the end of the month written by the bank when the deposit arrived after the end of the month. No entry in the ledger is essential for this position.<br />
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These checks are outstanding checks that were issued in a given month, but not yet redeemed by the recipient at the end of the month or the end. No entry in the ledger is essential for this position.<br />
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Checks issued and then canceled These are controls which are lost by the receiver declared. The accountant called the bank and stopped payment but not the entry in the ledger.<br />
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Accounting entry: If the bank account to which the check was credited at the time of payment and debit the appropriate expense account, thus reversing the charge.<br />
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The loan will be issued by the bank can get a loan from the bank to be approved can be exciting. After the excitement of everyone forgets to save the entry in the ledger. To correct this omission, bank debits the account ledger to represent to the amount of credit, credit the loan account relevant determining liability.<br />
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The above list of reconciling items is not exhaustive but provides some of the items that require adjustments at the end.<br />
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The construction of reconciliation:<br />
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With the above elements, conciliation is prepared as follows:<br />
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Balance per bank statement to ...... 2011 ... say, $ 220,000<br />
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Add:<br />
Deposits in transit, say 30 000<br />
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Less:<br />
Cheques issued but not yet paid (35,000)<br />
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Reconciled bank statement balance of $ 215,000<br />
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General ledger bank account balance 111 200<br />
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Add: Bank loans received 100 000<br />
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Check issued in 4000 and then canceled<br />
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Less: Bank charges (200)<br />
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General Ledger Bank $ 215,000<br />
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The above statement shows that the account balance at the end of the period $ 215,000 correct, the residual amount after adjusting journal entries to bank loans, to check record cancellation fee and the bank were displayed in the correct reporting period. The bank statement shows currently $ 220,000 $ 30,000 deposit is due is not paid by the bank and $ 35,000 checks were not paid to the beneficiaries. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-91607107724955199552011-11-15T10:31:00.000-08:002011-11-15T10:31:18.530-08:00Online Banking Tips<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYUu9NaXPaBYNGQa6LgSilVbh8vPbDb-ssZ8hUNxC0Me3IdPh_I4YqQ9vCcCB5JF1Z6b5cRnzk3Y9hGq81dY337Xfs2DfK0FDzmR8Pfue3iilD5zXjMwCl1_WwEWGdKMewNObXctqVWUl3/s320/banking_online_tips_worlds.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="287" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYUu9NaXPaBYNGQa6LgSilVbh8vPbDb-ssZ8hUNxC0Me3IdPh_I4YqQ9vCcCB5JF1Z6b5cRnzk3Y9hGq81dY337Xfs2DfK0FDzmR8Pfue3iilD5zXjMwCl1_WwEWGdKMewNObXctqVWUl3/s400/banking_online_tips_worlds.jpg" width="400" /></a></div><br />
<div style="text-align: justify;">BANK WORLDS ONLINE TIPS : As technology has improved over the past ten years, cleverer and smarter criminals proportionately. This is particularly true in the online world - the universe, in which crooks hide behind e-mails, Web sites and wrong characters. Unfortunately, these same criminals would find their way into your bank account. However, there are some simple tips to follow to secure an online banking experience.<br />
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Protect your password: Your password is the key, the door to your online bank account is opened. As such crooks as to this vital information would know. To avoid this, make sure your password is not too personal. Avoid using your birth date, phone number, social security number or password. Craft a password that combines letters and numbers is impersonal. The more the better. It is also recommended to change your password every few months or more.<br />
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ATTENTION suspicious e-mails: If you want to steal personal information online often use the so-called "phishing." In this exercise, criminals may send e-mails for information about your credit card PIN (Personal Identification Numbers) or passwords. Crooks in online banking e-mails are often to be the legitimate financial institutions seem. These emails may seem convincing, because they contain the logo of a real online bank. However, these emails often contain a link that takes you to a fake site designed to entice you to provide personal information compromise.<br />
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These suspicious e-mails can be easily recognized because they usually do not directly address, they contain numerous grammatical errors, and they have links to suspicious or unknown areas. If an e-mail is questionable, it is always safer to check with your financial institution. legitimate e-mails from your online bank generally follow the same standards every time. They usually address that you ask your own name and will never enter your password, PIN or credit card information. A legitimate online banking in general, you find out about their safety on the official website. If all else fails, call customer service to get clarity on the security policies of your bank.<br />
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Use anti-virus and firewall: When it comes to online banking, can be an anti-virus and firewall invaluable. Ensure the best protection your money can buy to get. High prices not always guarantee the best quality. Compare prices and consult experts in computer or PC magazines to find products with high ratings. Anti-virus and firewall protects your computer from viruses, the space on the hard drive of your computer to steal or steal, your personal information.<br />
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Contact your financial institution: Do not hesitate to ask for help with your financial institution if you think you may have submitted your personal information to a fraudulent website. quickly in fact, the contact, if this ever happens. Also, make sure that your bank has your mailing address and telephone number (s). If you wish to communicate sensitive information, they will tend to make a call and / or send you something in the mail on this topic. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-17589965869320560972011-11-15T10:30:00.000-08:002011-11-15T10:30:05.572-08:00International Bank Worlds Online<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPWMSxk1jgkHZCTgiX-iNKTbKDa2Qai4YvMEhQDKeXYGUGlHW_FPxsN2b3TkuEkcNyqR1PUmtDF6sqf_VxfKZBAZRJhi2o4bWIMgxEIlWhp2qQoPn00uesQL_8mTB4uGZTgYYo840qyaLw/s320/bank_worlds_international_online.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPWMSxk1jgkHZCTgiX-iNKTbKDa2Qai4YvMEhQDKeXYGUGlHW_FPxsN2b3TkuEkcNyqR1PUmtDF6sqf_VxfKZBAZRJhi2o4bWIMgxEIlWhp2qQoPn00uesQL_8mTB4uGZTgYYo840qyaLw/s400/bank_worlds_international_online.jpg" width="277" /></a></div><br />
<div style="text-align: justify;">BANK WORLDS : cotton paper with a weight of about 80 to 90 grams per square meter is mainly used in the preparation of World Bank bonds. The final decision is made on the directives of the Central Bank of each country is based. Here it is decided that the design must be money.<br />
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Cotton that goes into the production of silver is mixed at times with different elements such as abaca and flax. Sometimes, even a couple of other textile fibers. Although the paper used to make money is not the same as that of plain paper in the sense that they are the very properties of wear resistant. On average, there is a bill has a duration of about 2 years.<br />
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With the exception of non-traffic, high quality precious commemorative coins or metal used for lower value of monetary units, while paper money is used for higher values.<br />
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United States during the 10th March 1982, issued paper money. Seven days later he was declared by Congress as a legal tender. Since 1844, the pound sterling as the most common form of currency in the United Kingdom has been accepted. 1. January 1999, the birth of the euro.<br />
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Before the conceptualization of paper money, silver and currency which was used as a precious metal. The preciousness of a metal was determined on its rarity. The Gold Nugget from Australia of $ 10,000 would be the perfect example. Struck In Australia, there may be one of the largest gold coin in the world. Translated, he is proud of one kg of 99.9% pure gold.<br />
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But change all the time and tide slowly but surely. And this was the case with precious metals. The use of them lost over a period of time and money to paper gradually be accepted to the universal standard.<br />
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The physical process of making paper money includes several complex steps. The modern age has invented the invention of many machines called super-tech for the sole purpose of carrying out this task, given top secret.<br />
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Why paper money has even become a very popular hobby and growing fast. People from around the world are now collecting all kinds of bank notes as a hobby. That's because people find tickets for different countries tell a clear story about the original people, art, culture, history and essence of the life of this country. Almost all collectors of currency, the more determined to at least one of several notes from the World Bank, to collect all the countries within their collection. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-9473400157460131952011-11-15T10:28:00.001-08:002011-11-15T10:28:43.127-08:00Privacy Policy<div style="text-align: justify;"><b>Privacy Policy for http://worldsbanking.blogspot.com/</b> <br />
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If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-7582850478403692162011-10-13T01:59:00.000-07:002011-11-15T10:43:32.658-08:00POLITICAL ECONOMIC BRINKMANSHIP<div style="text-align: justify;">After a sojourn to reflect and refocus on developments, what are the questions that dominate the political ether? The question I hear most often socially: "<i>is the government (US or UK) doing the right thing?</i>" My answer is a confident YES. Then I say "<i>but both US and UK governments are failing to paint a clear picture of what they are doing and precisely why!"</i> </div><div style="text-align: justify;">see also: http://lloydsbankgroup.blogspot.com/)</div><div style="text-align: justify;">Republicans in the USA and Conservatives in the UK are successfully twisting the issues to make recession and banking crisis appear domestic political failures. This is most telling for the UK's Labour government with a general election due in less than a year from now. But it has to be clear to intelligent observers that the UK's position is only to be expected and remains prudentially sensible as a proportionate set of responses to the crisis. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbYYwLYZhfG-7QBWh5q0nHH__hCWGtjGIb9ZrhARzWjS7wXuycwGsEIDieKbXSGExscbcczrZ6X9gIhOvkOGhQgNHEedpiOBo1PQ5MkG_GUrxtBiB7oTKdL_vZHDkoj7moex-3GV2XgeI/s1600-h/cq_pi20090202-1.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5361241712001423426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbYYwLYZhfG-7QBWh5q0nHH__hCWGtjGIb9ZrhARzWjS7wXuycwGsEIDieKbXSGExscbcczrZ6X9gIhOvkOGhQgNHEedpiOBo1PQ5MkG_GUrxtBiB7oTKdL_vZHDkoj7moex-3GV2XgeI/s320/cq_pi20090202-1.jpg" style="cursor: pointer; display: block; height: 216px; margin: 0px auto 10px; text-align: center; width: 320px;" /></a> PM Gordon Brown has maintained a stance that in effect says "<i>trust me (us) to do the right thing to get us out of this crisis</i>." The general public, at least the political chattering class, wants detailed explanations, not abstract assurances. The Conservative Opposition, echoed by the Liberals, have in the media created the axiomatic assumption that "public finances are in a mess." There is tremendous anger about banks and bankers, but the effect of ya-boo politics has been to divert anxious blame onto the government. Reading UK media the impression is gained that the UK's public finances and national debt must be the world's worst, if even no-one is quite sure what precisely defines concepts like 'finances in a mess'. Note the example of the following table. This reviews the financial debt of countries relative to GDP. There is a misnomer in the 3rd column (private sector debt) which is really household debt only as may be surmised in any case from column 7 of total bank assets (total loan gross exposures, not domestic only) given that public sector element is typically about half ratio to GDP with a few exceptions. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicru54Tc07_MILDEj8zNZIsXeejgF2hYlJVMFejtpn_24MyyE8-PnFG3HgUSE8CkaoJe4OHN-fVhAUb4UJk-KHFdR3Xx8NVyQn4hquOjS1aaDskmDTtn-z0EcpOcCkxtjyYieXeBG8Kzs/s1600-h/country-vulnerability.gif"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5361221822121622770" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicru54Tc07_MILDEj8zNZIsXeejgF2hYlJVMFejtpn_24MyyE8-PnFG3HgUSE8CkaoJe4OHN-fVhAUb4UJk-KHFdR3Xx8NVyQn4hquOjS1aaDskmDTtn-z0EcpOcCkxtjyYieXeBG8Kzs/s320/country-vulnerability.gif" style="cursor: pointer; display: block; height: 243px; margin: 0px auto 10px; text-align: center; width: 320px;" /></a> There is a concerted forgetting that UK private sector gross debt over the past decade grew from 3 times public sector debt to 6 times public sector debt (3 times GDP) while, until the crisis broke, public sector debt held steady and fell slightly. Now the general public are being daily made anxious about the government fiscal deficit and medium term prospect of tax rate rises, most recently by the NIESR report on the economy, which fails to take account of the feedback effects of saving the financial sector. see the following: http://www.niesr.ac.uk/pdf/210709_225037.pdf</div><div style="text-align: justify;">The NIESR has adapted the average recovery for previous recessions to state that incomes will not recover to the pre-crisis level (in real terms before unemployment rose and GDP experienced negative quarterly growth) until after 6 years. This is merely the average peak-to-peak period but has been exaggerated in the media as if a damning indictment of someone or something, similarly that GDP rates forecast are worse than the last published government figures (March Budget)? Yet, in fact there is nothing shocking or surprising about this. What is surprising is the NIESR's assumption that with a lower pound growth recovery will be export-led i.e. a total reversal of the credit boom growth previously! This assumption is conditional on whether government efforts to persuade or force banks to maintain or even increase lending will be effective, especially via the public sector owned banks. A very similar view would apply in the USA. What seems remarkably gauche about this outlook is that both UK and USA remain magnets for other countries foreign exchange surpluses. There is an improvement in growth expected for both insofar as the external account trade deficits will narrow as export-surpluses countries trade surpluses shrink, but this is not a recipe for halting unemployment rises. That depends on fiscal boosts and the banks cushioning the shrinkage of credit (deleveraging by banks to thereby most easily restore their capital ratios and by borrowers, especially households, cutting back their spending). Only restoring some credit boom effect and regaining confidence will slow and halt the domino, knock-on, rippling, or however anyone wants to describe it, negative vortex of beggar-my-neighbour impacts through the economy and all economies.</div><div style="text-align: justify;">The banks have not woken up and smelled the coffee of their collective responsibility for economic recovery alongside government; they continue to live with pre-crisis mindsets, witness their inability and extreme unwillingness anyway, to tackle the bonus-culture. Government (UK and USA) have also not spelled out clearly enough what the banks are obliged by government to do to help both themselves and the economy. Lloyds Banking Group, for example, has improved its capital ratio to over 14% but mainly by reducing its risk weighted assets (loans) by nearly 40%, of which half was gained by an asset for BoE cheque swap with the Bank of England! The remaining half of the deleveraging is largely by retiring loans and not rolling them over. The effect of this alone in the case of but one bank has a 1% negative ratio to GDP and a GDP impact of possible minus 0.5%. Compounded by deleveraging by other major banks and we have a negative pro-cyclicality effect, precisely what banking regulation Basel II is most concerned to identify and avoid! Is the government forecasting or that of NIESR or any other model supposed to have predicted this? Governments created something of a cleft stick here, on the one hand wanting to see their financial interventions repaid soonest and on the other seeking assurances that the banks would maintain substantially more than minimum regulatory capital reserves and also maintain lending at pre-crisis levels. These objectives if not sensibly timed become mutually exclusive! </div><div style="text-align: justify;">It is not hard therefore to conclude that what is less important right now is what caused the crisis and more important is what are the banks doing today? They are making the recession deeper. Bankers have an ready culprit they can blame for causing pro-cyclicality, the Basel II capital adequacy regulations, which ironically were designed with the objjective of addressing precisely this problem!</div><div style="text-align: justify;">The banks still look at the underlying economy as exogenous to their business performance, not as something intrinsic that they can directly effect. They have as yet not embraced and understood Basel II Pillar II stress testing and economic scenario analysis and the central banks, government, and economic institutes like NIESR are not offering guidance and tools for how to analyse better the role of banks in the economy! </div><div style="text-align: justify;">The banks are currently in a period of retrenchment, recoiling like scalded cats in the face of public sarcasm, and therefore unable to take responsibility alongside government in concerted efforts to redeem the economy. The public debate continues to confuse symptoms and underlying disease. The banking crisis may have had viral-like causes that transmitted throughout the whole financial system, but the public, led by politicians, media and pundits, continue to primarily blame all major banks as if they are individually guilty or heinous excessive risk-taking, even though the collective guilt is also obvious. Some pundits say we should have let individual banks fail absolutely as if diseased parts of the body-financial could be cut out to let the healthy parts prosper. This is myopic at best and ego-mania at worst, every cloud has silver linings for some whether short-sellers or doom-monger talking-heads.</div><div style="text-align: justify;">Of course, what is it I'm saying here other than we need more comprehensive clarity delivered to the general public. How easy is that? Not easy at all. Opinions like politics are a market-place. After 2 years of the most intensive news coverage given to any crisis including war coverage, is the general public more attuned to detailed technicalities of what is happening and why, and what is being done, and what should be done, than before? Where can the public plant its feet and say this is real?</div><div style="text-align: justify;">Timothy Geithner recently visited Alistair Darling but they failed to use the meeting adequately. They, both of their governments administration, need each other to validate each other's fiscal responses to the recession and financial interventions to salve the banking crisis. But, it is clear they don't quite get that. No one trusts bankers and only reluctantly trust economists. Politicians are generally mistrusted. Therefore this only leaves the inter-governmental sphere where mutual validation and confidence may be gained. My perception is that there is considerable confidence at this level, but it is not being communicated. In part this is because it lacks the tools for the job to analyse policy interventions sufficiently to know the timing of when to expect the positive benefits of policy measures to become apparent, by which I mean both finance sector interventions and budget fiscal deficits. The US and the UK are in recessions that are 6 and 4 quarters ahead of others, and consequently their fiscal deficits are higher and broadly in agreement. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifyCFu2dsw4hvxpuHpdcujDfEUsbEDvryWBiihfBZ-FsbNdoPCiWA_kZBCjGsKI3l_BD8p_OK2N35VkRleu0i9Idq_KuUPAU0Ol0Xs4c5DenWK2qfH6SISC_IutUkl_EprPJnbt87mVUw/s1600-h/econ-forum.gif"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5361243185743884466" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifyCFu2dsw4hvxpuHpdcujDfEUsbEDvryWBiihfBZ-FsbNdoPCiWA_kZBCjGsKI3l_BD8p_OK2N35VkRleu0i9Idq_KuUPAU0Ol0Xs4c5DenWK2qfH6SISC_IutUkl_EprPJnbt87mVUw/s320/econ-forum.gif" style="cursor: pointer; display: block; height: 320px; margin: 0px auto 10px; text-align: center; width: 215px;" /></a> Politicians are sensibly wary of creating hostages to fortune, however, in making economic projections of qhen their actions should have positive results. This was a similar problem for central banks when trying to issue warnings ahead of the credit crunch, too wishy-washy elegantly shredded into lumpy bit kind of advice, with on the one hand and on the other etc. If there is one experience to be warned about I gained working in banks and as an economist is that too many people in key risk management positions are more risk adverse about their own careers than capable of setting this aside to state clearly what they believe. That said, it is doubtful that any major bank's board had it received cogent and accurate advice in say 2006 or early 2007 mapping out precisely what was about to hit them, would not have had 'shot' the bringer of bad tidings, at best had him or her dragged off to the funny farm. Economics is for various reasons, including bonus culture ones, something that most top bankers resist like the plague, whether qualified in banking or as is equally commonplace not educated about the totality of banking at all. Economics is sobering and not what inebriates can tolerate if given the choice? Perhaps polticians and central banks should take a leaf out of how wartime leaders such as Roosevelt and Churchill dealt with matters of public information and military command when they recognised that confidence mattered most combined with well-judged honesty in appealing to all to do their utmost in these difficult challenging times, etc? The recession and financial crisis is not a place for simply saying "<i>I am your leader so trust me!" </i> Time for more political courage, to step up and say that to the best of our judgment this is what we believe and deliver confidence-boosting expectations and take the political risk. The opposition political parties similarly need to be seen to stop playing party politics on the issue of getting out of recession and the credit crunch crisis. There are plenty of other matters they can be sarcastic about. Obama attempted in the US to gain a bi-partisan approach on the crises. he only half succeeded. In Europe, it seems to me that bi-partisanship has not even been proposed as a necessary or useful way forward! In the UK, Labour is pinning its hopes on being seen to have steered the economy through the recession. That has no precedents as a political strategy that I can recall. Better would be to simply go for honest statesmanship in the interests of what works best to restore public confidence in what it is that politicians are supposed to do best and most responsibly?</div><div style="text-align: justify;">Geithner stated on 13th July that there is a good chance that the U.S. and other leading economies will start growing again over the next two quarters, but there are still significant risks to the outlook. This chimes with UK views (Government and NIESR) that there will be positive GDP growth in 4th quarter 2009. Essentially, this is based on narrowing of the external account and past recessions given that UK and US have both now reached the end of previous average recession periods, with one overlooked aspect that is that UK recovery tends to occur 2 quarters after the US, hence do not expect UK positive GDP before next year! Furthermore, both the official assurances of UK and US governments have been made without analysis of the cycle impacts of what the banks are doing. Their respective national economic models lack that depth; they cannot model for the details of the financial sector statistics within their GDP forecasting models!</div><div style="text-align: justify;">Geithner said, "In my view there are still significant risks and challenges ahead," Geithner said when asked if he was concerned about the possibility of a <i>double-dip </i>recession. The issue is less double-dip in my view than simply 'double' given that the financial crisis is doubling the depth of what would have been a more normal to-be-expected recession. He said the world's major economies were largely in agreement on the steps that needed to be taken to boost economic activity. Yes indeed, but hard to guess that from statements by politicians except when speaking under the G8 and G20 umbrella. "I think we have remarkably strong consensus in place on core elements," Geithner said. This is not strictly true on the face of data, but is as good as it gets. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZZmQSqLzvZ0ynMjSCjUF5dOe6vwkcT3XcsjFo6GCMF6otEyZlK6p7Yp2UmmEkhoTiPJT3Qf553B5sGgTQSmLZZsIR7-kqLvFCRMxyzV79nWe3_nunqSD80wPJ0fGclp5rgmDXvhGE5-s/s1600-h/FTGovEuroBudgets2009.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5361237394810155954" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZZmQSqLzvZ0ynMjSCjUF5dOe6vwkcT3XcsjFo6GCMF6otEyZlK6p7Yp2UmmEkhoTiPJT3Qf553B5sGgTQSmLZZsIR7-kqLvFCRMxyzV79nWe3_nunqSD80wPJ0fGclp5rgmDXvhGE5-s/s320/FTGovEuroBudgets2009.jpg" style="cursor: pointer; display: block; height: 315px; margin: 0px auto 10px; text-align: center; width: 320px;" /></a> He was speaking after talks with UK's Alistair Darling as part of a trip that will take in the Middle East and Paris. Geithner and Darling said leaders of industrialised nations would discuss the measures they are taking when the G20 meets in Pittsburgh in September. This is a critical month for the USA when its annual government budget ends and a new one has to be announced and voted through Congress. The number of state interventions in the banking crisis has slowed compared to last year. Everyone is treading water waiting to see what happens to banks balances by the end of the second quarter to then gauge what the US especially will decide it needs as a fiscal boost after September and in off-budget fiat (money market) interventions and command economy edicts to the banks. By then we should also have the measure of Quantitative Easing plus government bond auctions and we will probably be in the maelstrom of another nervous stcok market fall. Geithner will seek to reassure Gulf Arab states this week that U.S. dollar assets they hold in large quantities remain a strong investment. This is bolstered by scare stories about the Euro trillions of toxic debt in the Eurozone. On the one hand a strengthened dollar and weaker Euro should add to containment on oil prices on top of fall in demand, on the other hand there is a strong motive by foreign investors to anticipate another dip in US equity and asset values. A recent decline in Saudi foreign assets shows the purchase of U.S. Treasuries by Washington's Gulf allies, five having currencies pegged to the dollar, at levels seen in the past decades should no longer be taken for granted. This reflects narrowing of the US external account, hoiwever, and is not worrisome since the US, like the UK, now want their government bond new issues to be bought by domestic buyers, principally by the banks. The banks may foolishly insist on quid pro quo: "<i>we'll buy your debt if you lessen the pressure on us to maintain lending levels and let us deleverage further!"</i> Negative growth pro-cyclicality by banks has some way yet to run. If we take our best bets on this from past recessions, expect the banks to continue shrinking their household and corporate loan books at least up to the 3rd quarter of 2010!</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-51976488911684754782011-04-20T03:32:00.000-07:002011-11-15T10:43:32.658-08:00Property lending and rules to save banks from themselves<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9tQrSn8FiH6zVzyOPHFobUHI9_00t8JbZGAlHNKwOAPpXeQhauhYJNa8c__YG9EBdGcaXfADE5wjgG50_bUBpiD3RYR9TdtevlTDABmgSNzlh9jSkS-ScWInJrB87wl7G0HyrIgCs8lE/s1600/Basel+BIS.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 252px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9tQrSn8FiH6zVzyOPHFobUHI9_00t8JbZGAlHNKwOAPpXeQhauhYJNa8c__YG9EBdGcaXfADE5wjgG50_bUBpiD3RYR9TdtevlTDABmgSNzlh9jSkS-ScWInJrB87wl7G0HyrIgCs8lE/s320/Basel+BIS.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5597612404580089234" /></a>Millions are frustrated because banks wll not lend them money to buy or develop property. Banks ascribe their lending restrictions to the new "Basel III" capital requirements (effective in 2012). This is not strictly a valid reason. Borrowers and others are given such simple reasons because the total picture is fraught with difficulties in striking the right balance between opposing demands, dogs and fire hydrants, rock and hard place etc. What is going on, or not?<br />Banks are shrinking their balance sheets and that inevitably means property lending (70% of UK and USA banks' customer loans - after exclusing loans to rest of finance sector which are also shrinking) and also hoping desperately to sell on bundles of property loans and foreclosed properties, if only they can find long term deep pockets to sell to without too steep a discount. <br />The retreat by banks from property is one reason why insurers and other institutional investors are getting into property lending, seeing an opportunity to do so without competition from banks and expecting higher returns than the banks can achieve.<br /><span style="font-weight:bold;">The bankerspeak financial technicalities.</span><br />Basel III changes to higher capital reserves and more core capital of banks (higher amounts and higher loss-absorbing quality) are not genuine reasons for reducing the general loan exposure - it is really about narrowing the funding gap (between deposits & loans) that is filled by selling Medium Term Notes into the "wholesale interbank funding market" and banks are each fearful of when they next have to go to market to replace their MTNs on maturity (big amounts periodically every 3,6, 12, 18 months etc.). <br />"Internally generated capital" is recovery of monies loaned plus net interest income and other realised profits, and the banks are torn between using those gains to reduce their funding gaps or to increase their capital and liquidity reserves (as regulators under the name of "Basel III" require). They are also torn about how much they can allocate to bonuses rather than dividends. Hence, the banks blame Basel III for lower lending and want everyone to know that as part of their pressure on regulators and governments to soften or postpone Basel III and even on shareholders re. dividends and government and other pref bond holders to expect lower % coupons for longer - when actually it is really about narrowing their exposure to wholesale lenders i.e. to severely reduce their funding gaps, which UK banks have already halved from £1 trillion to £500bn, and falling, and that is a lot of balance sheet liquidated and internal capital generated.<br />The banks know the wholesale funders well and what is looked for an expected because they are also such funders in terms of their large loan exposures to other financial sector borrowers and have been liquidating cross-border interbank loans dramatically.<br />When (how soon) a bank has to next replace/refresh its "funding gap" finance will dictate its current openness to agreeing new loans; they are keen to say to their funders here is £5bn matured MTN repaid to you and we only want you to roll-over and buy £2.5bn of new MTNs back from us, which is supposed to sound good to the lenders and there should therefore be minimum fuss or embarassment (narrower spreads) that could leak out to market and damage the share price.<br />Property (development especially) is seen as riskier, and in addition UK banks are being warned by regulators to reduce the concentration of risk they hold in this one sector (property), especially while they are holding large amounts of receovered property collateral and seeking to sell on about 20% of their property loans (i.e. £260bn), probably with 15% haircuts = £40bn, some % of which could appear as paper loss relative to the outstanding loans, interest & charges that relate to the collateral recovered, perhaps £5-10bn (a wild guess).<br />The banks are in a bind partly of their own making insofar as the property market (asset prices) cannot recover until new property lending grows and yet until there is recovery they cannot sell their property exposures without risk of substantial loss, and without clearing out of a lot of property they cannot resume property lending.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7E9waKEaXoCmz5y4miDsXBpI3_d14M9X0Xjerv_NZG9Dgf76KbJJ2It_YfM7KBqnHkJUgYPoRsccFV0UPvDzddDq6UfB-IkjsI3yVbbB4_B0BfCAlTt7LpuAJzFv-HDvaqq4HGi5blm8/s1600/Reserve.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 236px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7E9waKEaXoCmz5y4miDsXBpI3_d14M9X0Xjerv_NZG9Dgf76KbJJ2It_YfM7KBqnHkJUgYPoRsccFV0UPvDzddDq6UfB-IkjsI3yVbbB4_B0BfCAlTt7LpuAJzFv-HDvaqq4HGi5blm8/s320/Reserve.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5597614219885784370" /></a>Therefore, if institutional investors (who are the major shareholders in bank other than governments) step in to make up the shortage in new property lending this, if on a large enough scale, could be important to breaking the logjam, and should be profitable to institutions in two ways (for themselves directly and via improved balance sheets of the banks), and given that property conditions are a major aspect of economic growth recovery. <br />But, when property lending is resumed by banks more assiduously the first port of call may be to refinance troubled loans rather than agree new loans to new borrowers, that is long term loans especially, while short term lending only looks relatively attractive to many banks. Medium to long term lending appears to have too many uncertainties i.e. the risks are very hard for them to compute.<br />The wider context includes policy that is torn between being seen to put in place measures that can be claimed to make sure the credit crunch recession never re-occurs, while also needing bank lending to stop shrinking and then to grow to generate more certainty of substantially higher economic growth. This facing in contradictory directions is why there is much fudging about the impoact of Basel III regulation including the Vickers Commmission recommendations that many outside UK as well as in UK hoped would provide a clear new line to follow and refresh the impetus of the G20 agenda of about 100 adjustments, policies and new institutions to protect the financial system from itself.<br />So-called "Basel III" rulings aim to increase banks’ tier 1 capital base from 2% to 4.5% (ratio to gross loans, or twice this to risk adjusted loans) to improve the resilience of banks. These discourage securitisation transactions, and there are four ways banks can increase their capital base to meet new ratios: raise more long term capital themselves (internally generated by cutting costs, bonuses, dividends and coupons), raise more in deposits, shrink loan balance sheets, commit less own capital to investment banking (market trading & derivatives), and reduce exposure (in economies where property dominates) to property and property loans.<br />There is the hope that interbank lending and funding gap finance and securitisation of loanbooks will sooner than later return as a reliable and substantial option, but only once the banks look safer bets i.e. the banks are strong enough to again dictate the loan spreads to those they borrow from. That is unlikely so long as the sovereign debt crisis reflects badly on banks and so long as Basel III looks hard for banks to comply with, even if these are very much parts of the banks own PR to shift the blame (playing up the sovereign debt crisis) and to soften new capital rules (foot-dragging on Basel III).<br />From the point of view of individual borrowers going to the banks with wonderful schemes of great quality all this bigger picture about future impacts reasons given for refusing loans is an immense frustration. It is actually the excat inverse of the pre-credit crunch past when banks ignored the bigger macro-economic and regulatory picture and approved any loans that passed merely microeconomic tests based on past high growth experience and not on forecasting future downturns. Yet, while the medium term future should be one of renewed growth and recovery, Basel III is ensuring future risks are assessed in terms of possible repeat of economic down turn (double-dip or another recession)!<br />In the case of seeking loans from banks that are underwritten or otherwise backed by government should ensure that banks can lend comfortably because the risk is low. But, low risk also means low net interest income when banks are anxious to raise their % net interest income, and given uncertainties about even government finance (subject to unexpected renewed cost-cutting at budget time) state-support may not of itself be sufficient to get the banks to lend. Institutional investors seeking to fill the gap also may not be attracted sufficiently by the low margins despite state guarantees. They are attracted by commercial property, not residential, and are not stepping into property lending because they are attracted by low margins of bank lending. Insurers are attracted by the higher interest income generated by commercial property loans compared with government bonds.<br />Over half a £/€trillion in commercial property loans are maturing in C.Europe over next 3 years and possibly a third of that additionally in the UK. Institutional investors will step in where banks fail to roll over what is of good quality and cannot be all repaid, and are already now financing about one quarter of comemrcial property lending.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-12736904166805967642010-11-20T04:47:00.000-08:002011-11-15T10:43:32.658-08:00Accounting principle- Accrual Basis<div class="separator" style="clear: both; text-align: center;"><a href="http://t2.gstatic.com/images?q=tbn:jIOuqSBqocSihM:http://www.armsoft.am/pict/scheng1.gif&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="185" src="http://t2.gstatic.com/images?q=tbn:jIOuqSBqocSihM:http://www.armsoft.am/pict/scheng1.gif&t=1" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://t0.gstatic.com/images?q=tbn:IDugCeKMHT9-gM:http://photos.demandstudios.com/162/187/fotolia_2564414_XS.jpg&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="212" src="http://t0.gstatic.com/images?q=tbn:IDugCeKMHT9-gM:http://photos.demandstudios.com/162/187/fotolia_2564414_XS.jpg&t=1" width="320" /></a></div><div style="text-align: justify;"> Figures generated / kept in accordance to accounting principle is prepared on accrual basis. For instance, accountant record the provision for warranty ( based on estimate) even though there's no actual cash/ economic outflow yet.<br /><br />In finance, cash basis figures are more relatively more valuable , as compared to accrual basis ( advocated by accounting principle), in order to value a business.<br /><br />What do you think ? You prefer a an accrual method or cash method in valuing a business? </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-56322770878270949112010-11-20T04:45:00.000-08:002011-11-15T10:43:32.659-08:00Auditing Creditors- Creditor Turnover Analysis<div class="separator" style="clear: both; text-align: center;"><a href="http://t1.gstatic.com/images?q=tbn:lVY1oxVeLSGZiM:http://richardleecpa.com/ESW/Images/rkl2.JPG?xcache=7656&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="280" src="http://t1.gstatic.com/images?q=tbn:lVY1oxVeLSGZiM:http://richardleecpa.com/ESW/Images/rkl2.JPG?xcache=7656&t=1" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://t0.gstatic.com/images?q=tbn:A9PsLkQUnO02BM:http://www.planware.org/images/workcyc.gif&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="234" src="http://t0.gstatic.com/images?q=tbn:A9PsLkQUnO02BM:http://www.planware.org/images/workcyc.gif&t=1" width="320" /></a></div><div style="text-align: justify;"> In audit, it's essential to form an expectation of the Company's results before we really drill into the details. We compare the actual Company's results to our expectation, and investigate the variances accordingly. This is the analytical procedures adopted by most of the audit Company. Besides, we also compare the result / financial position with prior period.<br /><br />Creditors' turnover anlaysis is one of the auditing procedure we performed. What are we expecting from the audit client, in general. We expect the creditors turnover (days) to increase, as compared to prior period.<br /><br />To illustrate, majority of our audit clients are affected by the economy turmoil. They are squeezing suppliers' credit ( by delyaing the repayment), in order to maintain the Company's working capital, as our audit client's working capital are most likely affected by the delay of repayment from customers.<br /><br />We have formed an expectation, and we will compare the actual result with our expectation. Any unusual movements need to be identified. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-15138372792834423712010-11-20T04:42:00.000-08:002011-11-15T10:43:32.659-08:00Auditing: Annual Budget vs Actual Results<div class="separator" style="clear: both; text-align: center;"><a href="http://t1.gstatic.com/images?q=tbn:VJb5qDYVEHuKUM:http://economyleague.org/files/Image/issuesphiladelphia/2007_MayorOpBudget.gif&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="http://t1.gstatic.com/images?q=tbn:VJb5qDYVEHuKUM:http://economyleague.org/files/Image/issuesphiladelphia/2007_MayorOpBudget.gif&t=1" width="277" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://t1.gstatic.com/images?q=tbn:tMqV_suIxkIt_M:http://www.international.gc.ca/about-a_propos/assets/images/evaluation/ggst_hmst08_2en.gif&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="195" src="http://t1.gstatic.com/images?q=tbn:tMqV_suIxkIt_M:http://www.international.gc.ca/about-a_propos/assets/images/evaluation/ggst_hmst08_2en.gif&t=1" width="320" /></a></div><div style="text-align: justify;"> Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.<br /><br />Budget has incorporated management's forecast, estimation and outlook of the business in the coming times. <br /><br />Is management's budget useful to auditor?<br /><br />The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year. <br /><br />Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-48982414846810459272010-11-20T04:39:00.000-08:002011-11-15T10:43:32.659-08:00Disposing capital-intensive business<div class="separator" style="clear: both; text-align: center;"><a href="http://blog.mintek.com/Portals/54417/images/SIR%20Chart.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="210" src="http://blog.mintek.com/Portals/54417/images/SIR%20Chart.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://www.buzzle.com/img/articleImages/360485-34325-28.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="213" src="http://www.buzzle.com/img/articleImages/360485-34325-28.jpg" width="320" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What's happening in the corporate world now?<br /><br />Capital-intensive require heavy investment of resources, including, but not limimted to: cash, human resource,management's effort, etc. As part of the restructuring exercise to scale down, there are evidence that a lot of corporate are disposing off capital-intensive business.<br /><br />How would disposing capital-intensive business benefit the corporate?<br /><br />- immediate liquidity ( i.e. proceeds from disposal)<br />- better working capital management<br />- allow management to evaluate other business opportunities<br />- lesser resources are required, which allow the business to scale down<br />- higher return on asset ("ROA") ratio<br /><br />However, it's always not easy to dispose off a capital-intensive business unit/ busines during this business environment, unless a substantial discount is given to the potential buyers. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-52793715605163044252010-11-20T04:35:00.000-08:002011-11-15T10:43:32.659-08:00Accounting treatment for tax penalty<div class="separator" style="clear: both; text-align: center;"><a href="http://t3.gstatic.com/images?q=tbn:rTWTCRytIz4ArM:http://i237.photobucket.com/albums/ff263/dharma-putra/AccountingTreatmentforDebt.png&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="227" src="http://t3.gstatic.com/images?q=tbn:rTWTCRytIz4ArM:http://i237.photobucket.com/albums/ff263/dharma-putra/AccountingTreatmentforDebt.png&t=1" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://blogs.reuters.com/deep-pocket//files/2010/10/cr_mega_444_taxes.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="http://blogs.reuters.com/deep-pocket//files/2010/10/cr_mega_444_taxes.jpg" width="320" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">One of our Accounting & Audiitng blog reader inquired us the following:<br /><br />" How should penalty on late repayment for tax been accounted for?"<br /><br />Should it be a tax expense? Should it be other expenses?<br /><br />To clarify: penalty imposed by inland revenue authority on late repayment for tax should not be accounted for as tax expense; it should be accounted for as administrative expense/ other expense. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-72372763786019508122010-11-20T04:33:00.000-08:002011-11-15T10:43:32.659-08:00No depreciation charge on asset held for sale<div class="separator" style="clear: both; text-align: center;"><a href="http://t2.gstatic.com/images?q=tbn:uE8qF1LrtiF3kM:http://content.edgar-online.com/edgar_conv_img/2009/02/03/0001144204-09-004790_IMG040.JPG&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://t2.gstatic.com/images?q=tbn:uE8qF1LrtiF3kM:http://content.edgar-online.com/edgar_conv_img/2009/02/03/0001144204-09-004790_IMG040.JPG&t=1" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://www.faqs.org/sec-filings/091216/INLAND-WESTERN-RETAIL-REAL-ESTATE-TRUST-INC_8-K/g354141mmi003.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="http://www.faqs.org/sec-filings/091216/INLAND-WESTERN-RETAIL-REAL-ESTATE-TRUST-INC_8-K/g354141mmi003.gif" width="320" /></a></div><div style="text-align: justify;">This is to confirm that if a property is classified as asset held for sale, no depreciation is to be recorded.<br /><br />To illustrate, Company ABC entered into Sales & Purchase agreement with 3rd party to dispose one of its property. The Sales & Purchase agreement may take months to complete. In this instance, Company ABC re-classified the property from Property, Plant & Equipment to Asset held for Sale upon entering the Sales & Purchase agreement.<br /><br />Asset held for sale is de-recognised from the balance sheet upon the completion of the Sales & Purchase agreement. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-16466176315037725482010-11-20T04:30:00.000-08:002011-11-15T10:43:32.660-08:00Auditing Creditors<div class="separator" style="clear: both; text-align: center;"><a href="http://t3.gstatic.com/images?q=tbn:9pgjsP9xMl8ZBM:http://deltaauditingltd.com/images/Audit2.png&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="213" src="http://t3.gstatic.com/images?q=tbn:9pgjsP9xMl8ZBM:http://deltaauditingltd.com/images/Audit2.png&t=1" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://t0.gstatic.com/images?q=tbn:dLqEACoJyisRmM:http://www.brelinaccounting.co.za/images/default_r4_c3.jpg&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="http://t0.gstatic.com/images?q=tbn:dLqEACoJyisRmM:http://www.brelinaccounting.co.za/images/default_r4_c3.jpg&t=1" width="357" /></a></div><div style="text-align: justify;">One of the procedures required to audit trade creditors account is to audit the creditors' statement received from the audit client's suppliers (i.e. external audit evidence).<br /><br />In normal business circumstances, suppliers will send their monthly Statement of Account to their customers to inform the customers in relation to the outstanding balances. Hence, our audit client will , most likely, receive statement of account from the suppliers.<br /><br />As part of audit procedure, we can check the suppliers' statement (received by our audit customers) against the creditors' balance recorded in their book. Discrepancies need to be investigated. Statement of account served as an external confirmation to check if our audit client's book has been prepared properly.<br /><br />However, there are suppliers who do not have practices of sending out Statement of Account to their customers. In this instance, we can send external audit confirmation to the suppliers to confirm outstanding balances. </div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-26738129495469454942010-11-20T04:23:00.000-08:002011-11-15T10:43:32.660-08:00Cash audit- internal controls in cash process- cash payment<div class="separator" style="clear: both; text-align: center;"><a href="http://www.qasia-solutions.com/images/cash.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="262" src="http://www.qasia-solutions.com/images/cash.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://t1.gstatic.com/images?q=tbn:p41dapeNEcF9qM:http://i.ehow.com/images/a05/pf/2u/internal-controls-description-200X200.jpg&t=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="http://t1.gstatic.com/images?q=tbn:p41dapeNEcF9qM:http://i.ehow.com/images/a05/pf/2u/internal-controls-description-200X200.jpg&t=1" width="320" /></a></div><div style="text-align: justify;">In our earlies entries in relation to cash audit, we discussed about the audit procedures of auditing unpresented cheques. We will discuss more extensively for audit procedures in auditing cash and bank balances of our audit clients.<br /><br />Auditors may consider test the internal controls of the client's cash process. For this entry, we will provide an overview of the possible audit procedures to test the internal controls in cash payment process:<br /><br />(a) select certain number of random samples, and test that payment voucher are properly prepared and authorised<br /><br />(b) select certain number of random samples, and test that bank reconciliations are properly prepared and reviewed<br /><br />(c) select certain number of random samples, and test that journal entries are properly posted into General Ledger<br /><br />(d) select certain number of random samples, and test that payment voucher details match with the corresponding payment details</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-19144989424752193412010-11-11T09:14:00.000-08:002011-11-15T10:43:32.660-08:00The Types Of Accounting<div class="separator" style="clear: both; text-align: center;"><a href="http://www.drlillie.com/KIA1/MM/Ch2new/NotesImages/Topic8NotesImage4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="250" src="http://www.drlillie.com/KIA1/MM/Ch2new/NotesImages/Topic8NotesImage4.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://simplestudies.com/repository/lectures/ch1_accounting_types_users.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="239" src="http://simplestudies.com/repository/lectures/ch1_accounting_types_users.gif" width="320" /></a></div><div style="text-align: justify;">Accounting is the art of analyzing and interpreting data. It may not be apparent to some but every business and every individual uses accounting in some form. An individual may knowingly or unknowingly use accounting when he evaluates his financial information and relays the results to others. Accounting is an indispensable tool in any business, may it be small or multi-national.</div><div id="body"><div> </div><div style="text-align: justify;">The term "accounting" covers many different types of accounting on the basis of the group or groups served. The following are the types of accounting.</div><div style="text-align: justify;">1. Private or Industrial Accounting: This type of accounting refers to accounting activity that is limited only to a single firm. A private accountant provides his skills and services to a single employer and receives salary on an employer-employee basis. The term private is applied to the accountant and the accounting service he renders. The term is used when an employer-employee type of relationship exists even though the employer is some case is a public corporation.</div><div style="text-align: justify;">2. Public Accounting: Public accounting refers to the accounting service offered by a public accountant to the general public. When a practitioner-client relationship exists, the accountant is referred to as a public accountant. Public accounting is considered to be more professional than private accounting. Both certified and non certified public accountants can provide public accounting services. Certified accountants can be single practitioners or by partnership ranging in size from two to hundreds of members. The scope of these accounting firms can include local, national and international clientele.</div><div style="text-align: justify;">3. Governmental Accounting: Governmental accounting refers to accounting for a branch or unit of government at any level, may it be federal, state, or local. Governmental accounting is very similar to conventional accounting methods. Both the governmental and conventional accounting methods use the double-entry system of accounting and journals and ledgers. The object of government accounting units is to give service rather than make profits. Since profit motive cannot be used as a measure of efficiency in government units, other control measures must be developed. To enhance control, special funds accounting is used. Governmental units can use the services of both private and public accountant just as any business entity.</div><div style="text-align: justify;">4. Fiduciary Accounting: Fiduciary accounting lies in the notion of trust. This type of accounting is done by a trustee, administrator, executor, or anyone in a position of trust. His work is to keep the records and prepares the reports. This may be authorized by or under the jurisdiction of a court of law. The fiduciary accountant should seek out and control all property subject to the estate or trust. The concept of proprietorship that is common in the usual types of accounting is non-existent or greatly modified in fiduciary accounting.</div><div style="text-align: justify;">5. National Income Accounting: National income accounting uses the economic or social concept in establishing accounting rather than the usual business entity concept. The national income accounting is responsible in providing the public an estimate of the nation's annual purchasing power. The GNP or the gross national product is a related term, which refers to the total market value of all the goods and services produced by a country within a given period of time, usually a calendar year.</div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-980021866788555222010-11-11T09:08:00.000-08:002011-11-15T10:43:32.660-08:00Should I Practice Public Or Private Accounting<div class="separator" style="clear: both; text-align: center;"><a href="http://rphrm.curtin.edu.au/2009/issue1/emiratisation03.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="208" src="http://rphrm.curtin.edu.au/2009/issue1/emiratisation03.png" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://www.heritage.org/research/reports/2010/07/%7E/media/Images/Reports/2010/CDA1005/cda1005_chart1_600px.ashx?w=600&h=367&as=1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="195" src="http://www.heritage.org/research/reports/2010/07/%7E/media/Images/Reports/2010/CDA1005/cda1005_chart1_600px.ashx?w=600&h=367&as=1" width="320" /></a></div><br /><div id="body"><div style="text-align: justify;"> </div><div style="text-align: justify;">Bachelor of Science in Accountancy is one of the picked courses among college students. Many have chosen this field of study because it has a wide scope of availability in terms of future stable job with attach high rate of pay. Career opportunities in this course have two categories and these are Public and Private Accounting.</div><div style="text-align: justify;">Professionals who worked for a particular Accounting Firm and worked for several clients are called Public Accountants. These kind of firms employ thousands of accountants because their services are offered from one-person operations to multinational organizations. Audit or tax is two paths where in a Public accountant is going to be. Auditors as you called for those in the audit practice strictly and carefully audit financial records and business transactions of a client. Accounting records that are reported by the companies are ensured by the auditors that those documents accurately abide with national accounting standards. Professionals who are in the tax practice provide services similar with that of an auditor but with a more focus specialization. Professionals who handles tax ensures that clients tax record are well documented and do follow the guidelines established by government taxing policies. Another role of a tax accountant is to help minimize the tax liability of a client.</div><div style="text-align: justify;">On the other hand Private Accounting is more concern with internal accounting. This internal accounting is the accounting functions of the company. Corporate Accountants which is another name for private accountant performs the same duties as the Public accountant but this task are limited towards the companies that they are employed.</div><div style="text-align: justify;">The distinction between Public and private Accounting is that Public is more involved with collecting external financial information's while Private is much inclined with the use of internal information's to aid managers in giving effective decisions.</div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-36761456292921968832010-11-11T09:05:00.000-08:002011-11-15T10:43:32.660-08:00Questions and Answers About Starting an Accounting Career<div id="body" style="text-align: justify;"><div style="text-align: justify;"> </div><div class="separator" style="clear: both; text-align: center;"><a href="http://www.greatbooksandaudiobooks.com/product_images/217.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="http://www.greatbooksandaudiobooks.com/product_images/217.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://www.fpanet.org/docs/assets/B30EC833-1D09-67A1-7AF41C6A5635BAF6/VanZutphenFig1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="242" src="http://www.fpanet.org/docs/assets/B30EC833-1D09-67A1-7AF41C6A5635BAF6/VanZutphenFig1.jpg" width="320" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">An accountant plays a very important role in the functioning and efficiency of a corporation. They provide a number of vital business services to clients including the management of financial matters, auditing, and handling tax issues. However, the specific duties performed in an accounting career will differ depending on what field the practitioner works in, be it public accounting, management accounting, government accounting, or internal auditing.</div><div style="text-align: justify;">Accountants will generally use computers and special accounting programs to assist them in their duties. Accountants can summarize and organize data in particular formats to make them more suitable for storage or analysis. The programs also remove a lot of the tedious manual work of accounting out of the job. For this reason, accountants will generally have a very high level of competence with computers and many employers will require them to be proficient in these programs to help keep their work accurate.</div><div style="text-align: justify;">The environment in which an accountant works will generally vary depending on what field of accounting he/she is in as well as what type of company or organization he/she works for. The vast majority of accountants work in an office setting, often with many other coworkers and colleagues; although, some accountants are self-employed and may be able to work part of their job at home as well. Most accountants work a standard 40-hour week; though, there are exceptions especially in the case of tax specialists and self-employed accountants who may work longer hours during certain times of the year.</div><div style="text-align: justify;">Public accounting firms often send their accountants to their clients' place of work or residence to perform audits. In this scenario, there can also be a lot of traveling involved. Accountants who travel often will most likely use a laptop to allow for the increased mobility of their accounting programs, data, and other information needed on the job.</div><div style="text-align: justify;">Accountants, regardless of their chosen field, require a proficiency in mathematics as well as business. Many accountants are unlicensed, especially in the fields of government accounting, management accounting, and internal auditing. A bachelor's degree in accounting or a related field is required to become licensed as a Certified Public Accountant (CPA), Public Accountant (PA), Registered Public Accountant (RPA), or Accounting Practitioner (AP). Some companies will require their accountants to hold master's degrees as well.</div><div style="text-align: justify;">There is a large demand for accountants, and as more businesses are created in the coming years, the demand is expected to increase. The rapid expansion of business is also expected to have a large effect on the types of responsibilities accountants will have. Nevertheless, these jobs can be very competitive, and many businesses are increasing their standards by which they hire and the qualifications they demand.</div><div style="text-align: justify;">Accountants who have a great knowledge of computers and many different accounting software will have a better change of employment. Also, those who have more education, training, and experience will also have an edge in the job market. It is also important for accountants to demonstrate interpersonal skills as this will also help them perform their job more effectively and get along better with clients.</div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-87753022313343540922010-11-11T09:02:00.000-08:002011-11-15T10:43:32.661-08:00Find the Right Type of Accountant to Hire<div id="body" style="text-align: justify;"><div style="text-align: justify;"> </div><div class="separator" style="clear: both; text-align: center;"><a href="http://accountinghelpinfo.blogspot.com/"><img border="0" height="213" src="http://bettyjung.files.wordpress.com/2008/11/j0406830.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://accountinghelpinfo.blogspot.com/"><img border="0" height="228" src="http://www.missouristate.edu/assets/soa/Accountant_Calculator.jpg" width="320" /></a></div><div style="text-align: justify;"> In today's world of regulated business, there is increasing pressure on companies to have transparency in their financial statements. This push from shareholders and government agencies has caused a large increase in the need for external accounting, transforming audit and tax services into a commodity. The fact that these firms are now so popular means they will offer you many discounts and incentives to obtain your business as a client. In order to obtain the correct firm, it is important to know what type of service professional you need.</div><div style="text-align: justify;">First, you need to prioritize the main reason in reaching out to a professional. If you are looking specifically for help with taxes or tax planning there are many small firms available to assist your business. Many of these firms can be franchises such as H&R Block or LedgerPlus or they can also be local private firms. Before committing, it is important to look at the tax firm's employees. Many will have what is called an EA, or enrolled agent. These are licensed tax professionals who are certified by the IRS after taking a test covering all types of business taxes from public to private. This type of professional will be able to do sufficient work for a small business and can be significantly cheaper than hiring a larger or public accounting firm.</div><div style="text-align: justify;">If your company is in need of an audit for shareholders, or you are a private firm looking for a professional audit, it is a good idea to go with a public accounting firm. These large firms consist of Certified Public Accountants, or CPAs. CPAs are held to the highest standards by the PCAOB and have to pass a rigorous test and continue education throughout their career. Although public firms will bill you more, they hold themselves to a much higher standard for quality of work. Also, public accounting firms will do a preliminary audit of your business before they decide to take on your company as a client. This is to make sure they do not see any red flags or feel that they could give your company an adverse opinion.</div><div style="text-align: justify;">Because of this, you can trust these public firms more being that they do not want to be liable for assuring your financial statements if it later comes out your company has committed fraud. Another bonus of a public firm is their representation if there is ever any litigation against your business. Many times upset shareholders want to sue a publicly traded company because they lost their investment based on so called misleading financial statements. In this case the accounting firm will stand up for you in court and defend your numbers against the prosecuting party.</div><div style="text-align: justify;">These are just two basic reasons to choose an accounting firm to help your business. It is very important to evaluate your individual situation before deciding on a specific accounting professional.</div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-55528541296497600492010-09-27T00:41:00.000-07:002011-11-15T10:43:32.661-08:00Banks and Basel III: blackmail or chainmail?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY9lIxUaqgDhNbf2KjMd_Y2SibFA1sGnwozwJuG92x3lHPJm418g_eb97g-4AQLnVGy5kUqlCJC8FWOrHy5ZhkT_ra1IQtYUghxCCN_NdcB6IgynU2Hm7J7oywTHFkv0silKCpQnFveic/s1600/sea+defences2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 145px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY9lIxUaqgDhNbf2KjMd_Y2SibFA1sGnwozwJuG92x3lHPJm418g_eb97g-4AQLnVGy5kUqlCJC8FWOrHy5ZhkT_ra1IQtYUghxCCN_NdcB6IgynU2Hm7J7oywTHFkv0silKCpQnFveic/s320/sea+defences2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5522421924851270882" /></a>Will the various new so-called “Basel III” rules make the world safer from financial crises? There should not be a short answer to such a complex question – but my answer is yes, and no, not much either way, and, looking back, taking the metaphor of New Orleans sea defences and levees, higher equity in banks core capital reserves means the same as adding only inches to the height of ‘sea defences’. Protecting the financial system is a systemic challenge; individual breaches in flood defenses may be contained or lead to general failure. <br />Erecting barriers, by setting global prudential standards, to prevent calamity is the job of the Basel Committee on Banking Supervision (BCBS), to mitigate, prevent or postpone, another Credit Crunch, its job is to agree techniques, laws, rules and guidelines to resist a 1/25 tidal surge or the 1/100 that some say defined the Credit Crunch. <br />But, what do we think of bankers’ response to new safety rules? They sound like road drivers opposing lower speed limits. <br />The banks publicly resent being told to increase reserve ratios. It is the same reaction if government asked the private sector to build and pay for sea defenses. The banks’ lobbyists such as the BBA and IIF warn gloomily of a probable £1 trillion less lending in the UK alone over the next decade - maybe €7 trillion less lending across the EU. <br />Our inglorious banks have, it seems, regained a bold-faced confidence sufficiently to complain loudly about new prudential rules, as if these ingrates* have superior information to warn us not to kill the Golden Goose**, and as if everyone else will trust that judgement and believe the banks?<br />But, is it realistic to suppose that excessive fear of another financial crisis and mistrust of banks by regulators and taxpayers could lead to borrowers and the economy paying a big penalty for higher equity-capital reserve ratios? <br />Alongside the new capital rules, the Basel Committee also published two papers on economic impact that media commentators and banks’ lobbyists, appear not to have read? These assessments are more sanguine and define it as a (very) “<span style="font-style:italic;">conservative</span>” view to assume all the impact of Basel III will be borne by higher customer borrowing costs and reduced lending.<br />The Committee agreed higher equity capital ratios (announced 12th September) to oblige banks to hold more to absorb the inevitable losses of a recession. The changes are intended to mitigate and or postpone the next “financial crisis”. More equity means shareholders will bear the losses, as they have done so already in the Credit Crunch? <br />Reserves are ratios to loans and investments net of collateral after risk adjustments. New rules require twice as much equity reserve as before, but with years to get there, by when the USA and UK will probably be in recession again? Higher “capital buffers” are also imposed, but only in the proportions that national supervisory regulators are already demanding.<br />Bankers’ bleat that capital hikes mean higher customer costs, less lending, and will only jeopardize recovery. But, by the time the ratios kick in we’ll be past recovery and into the next boom. Bankers, it seems, don’t want us to see the many ways they can generate more “own capital”, including via higher profit-retention and paying smaller bonuses! <br />The BIS paper on macro-impacts finds that for each 1% increase in the capital ratio loan costs could maximally rise by 13bp, and for every 1% higher liquidity reserves loan margins rise 25bp, assuming RWA is unchanged. This falls to 14bp or less if RWA falls by shifting the risk diversity to less risky assets without any fall in gross assets. If banks adjust their expected return on equity from 15% to 10%, then each 1% increase in capital ratio is recovered by a 7bp rise in loan margin, well within what can also be achieved by cost-cutting or other relatively painless measures.<br />BIS is very clear: “<span style="font-style:italic;">Banks have various options to adjust to changes in required capital and liquidity requirements other than increasing loan rates, including by reducing ROE, reducing operating expenses and increasing non-interest sources of income. Each of them could cut the costs of meeting the requirements. For example, on average across countries, a 4% reduction in operating expenses, or a 2 % fall in ROE, is sufficient to absorb a 1% increase in the capital/RWA ratio. In practice, banks are likely to follow a combination of strategies</span>.”<br />Cost of borrowing by banks should reflect the riskiness of banks. If banks are safer because of new rules then the risk spread banks pay to borrow should fall. But, if bankers don’t rediscover prudence, alongside a humbler piece of the pie, as governments anxious to balance their budgets exit from bank-aid measures, then the banks will have to pay more to borrow funding gap finance and to attract and retain deposits. <br />Let’s not forget that the Credit Crunch was caused by funding gap finance cost (risk spreads) becoming uneconomic, too high to ensure positive corporate lending margins. Why, because banks lost credibility and it is not at all clear that they can presume to have that back now, not while ratings agencies keep so many banks on the bottom-most rungs of unsecured credit grades.<br />The rates borrowers are charged should be dictated more in future by competition and demand than by banks seeking again the super profits of the years before 2008, and in Europe especially if cross-border lending is to recover and grow? Banks may accommodate higher reserve ratios by requiring more collateral and by exercising other risk mitigations including diversifying better across all economic sectors and by changed business models. Banks in trade-deficit countries are biased to property lending and in export-surplus countries to industrial trade. <br />In the years up to 2007, banks grew faster than underlying economies, earning dispro-portionately high profits, 25% - 50% of all profits of publicly quoted companies, which should be unsustainable. Shouldn’t they adjust to more realistic or reasonable profit targets?<br />The new rules are a cornerstone of the G20 response, a global effort to ensure stable international banking. The rules redefine “core tier one capital”, a measure of a bank’s solvency, plus sufficient liquidity to survive a short-run crisis with less dependence on short-term borrowing. The new ratios would not have saved the banks that crashed in the credit crunch but are a step in that direction to take some pressure off future government budgets.<br />Dame Angela Knight, chief executive and spokesperson of the BBA, was almost entirely negative about the announcements. She warned that banks have no choice except higher loan margins that will “<span style="font-style:italic;">suck money out of the economy</span>” – by which she means the non-financial economy - as if banks’ profits, bonuses, and speculation can’t do that already. German banks made similar objections, and others too. <br />Three major UK banks have threatened to domicile themselves elsewhere if the UK government and its Banking Commission decide to split retail from investment banking - Paris and Frankfurt are offering lower tax to induce UK banks to move! Is this further evidence of a return to confident arrogance, of which resisting new capital ratios are shots across the bows of the regulators? <br />The threats are poor thanks for Government and Bank of England’s heroic roles as lenders of last resort in baling underwater banks. All banks were helped by state aid packages. Banks that did not require direct aid, or not as much as others, yet benefited massively from the help given to others. When Lehman Brothers collapsed, for example, among a host of emergency measures there was $2.5 trillion alone in temporary liquidity by the Fed, BoE and ECB to resolve failed money market trades. <br />Dame Angela (for the BBA) wants the new rules carefully handled to avoid “<span style="font-style:italic;">prolonging the downtur</span>n”. The banks got eight years, a long time in banking. She says, “The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.” Surely, a fun remark when the central bank rates continue negative in real terms. A lobbyist for bankers, the IIF used similarly dramatic language to persuade the Basel committee to dilute its reforms. Do bankers think we, politicians and taxpayers, learned nothing about how banks operate, or about how blinkered, self-serving, solipsic and short-termist their thinking can be? <br />The job of bank risk regulators can seem like herding cats!<br />The WSJ’s David Weidner wrote: “<span style="font-style:italic;">Judging by their hokey scare tactics, you'd think the act of raising capital requirements during an eight-year span was the final blow to capitalism. But it's not. Basel III is a compromise tilted toward an international banking community that's woefully undercapitalized and vulnerable to breakdowns.</span>”<br />In truth, banks have far flexibility and head-room than their lobbyists want us to see. The public was not fond of banks before the crisis and now views them with mistrust, hatred, and derision. What other industry can prosper when so unpopular? <br />Banks do not have to make their customers pay; bankers can reduce their own bonus levels for a start, or perhaps regulators should do so – they now have that power! Banks’ pretence that certain people will only work for guaranteed bonuses, as for example for managers of ‘prime services’ to lend to hedge funds. Remarkably, it is so hard to lend them money this requires $5m guranteed bonuses? <br />Saving losses, what risk managers do, is never so generously incentivized, not remotely so? It is like paying football midfielders thirty times what the goalie gets, and strikers and team manager fifty times as much!<br />Privately, bankers, regulators, and most everyone else know that “incentivising” star players by handing them bonuses in excess of either group profit or loss damages credibility, solvency and shareholders. Fiduciary prudence is replaced by something else, poorly understood or defined except to call it ‘daylight bank robbery’ or ‘greed’. That is the dominant political and general voting public’s view. Are they wrong?<br />As someone who enjoys a spendthrift life on high-fees, I understand that heady culture that I am also part of, if better looking than Dick Fuld and freer than Bernie Madoff. Ah sure, wouldn’t we all be somewhat poorer for not having outrageously super-rich like us to gawk at, demonize and blame – but not if the consequence are distorted values that risk our whole economy! Martin Wolf in the FT wrote, “<span style="font-style:italic;">withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former</span>.”<br />Banks may reduce the capital they have committed to proprietary trading, to speculation, to profit from markets beyond lending to them. Banks may cash in realizable profits and sell non-core assets. Over the years banks can generate internal capital without upping borrowing costs of households and small firms. UK banks would do well to lend more to small firms who employ 40% of all jobs but only get 1.5% of non-financial loans – in the USA 10% and in Germany 19%. Banks can tap equity and bond markets for capital and retain more of net earnings before bonuses. When will they tell shareholders how much bonus is performance related or guaranteed?<br />The lobbying by IIF used the difficulties of Europe’s local savings banks such as in Germany and Spain, resulted in all banks getting a suspiciously long time to build new reserves, from 2013 to 2019. By then, all current top execs will have retired, rich, and we’ll be in the next recession when government again has to reflate the economy without help from banks!<br />Rather than scaremongering, bankers should grow up and recognise their priority is to rebuild moral authority and trust by customers, taxpayers and others, not least shareholders, show willingness to adapt their business models and pay themselves less. Scare-mongering fools no-one except the gullible of whom there are precious few left for banks to rely on for support today? <br />The banking lobbyists’ churlish failure to apologize or acknowledge that they must mend their ways and change how they do business and what is realistic and reasonable risk-based profit only does more damage to the recovery, not of the economy only, but that banks need to make to recover customer and taxpayer trust and loyalty, real self-belief and fiduciary responsibility, including in macro-prudential terms, i.e. real banking professionalism – or maybe I’m just old-fashioned, a grumpy old banker well past my sell-by-date?<br />______________________________________________<br />*Note: Ingrate, n. One who receives a benefit from another, or is otherwise an object of charity -Devil’s Dictionary.<br />**Note: Reminding us of, from “<span style="font-style:italic;">The madness of Crowds</span>”, about the inventor of modern bonds, John Law, “<span style="font-style:italic;">he understood the monetary question better than any man of his day; and if his system fell with a crash so tremendous, it was not so much his fault as that of the people amongst whom he had erected it. He did not calculate upon the avaricious frenzy of a whole nation; he did not see that confidence, like mistrust, could be increased almost ad infinitum, and that hope was as extravagant as fear. How was he to foretell that the French people, like the man in the fable who killed in frantic eagerness the fine goose he bought to lay golden eggs?</span>” (Charles Mackay writing in 1841)Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-4568075580909690922010-09-01T06:19:00.000-07:002011-11-15T10:43:32.661-08:00MOODY'S BUGS CLEARED ON A TECHNICALITYMoody’s has avoided prosecution by SEC and others on a technicality, announced some three years after the SEC investigation began! <br />Sam Jones, wrote in FT’s Alphaville over two years ago about bugs in Moody’s model for rating securitization issues that mistakenly gave top ratings for bonds.<br />When re-rated after June 2007 using a model in which the bugs had been fixed tens of $billions of CDOS, RMBS, ABS bonds dropped in value by up to 17 risk grades, sometimes from Aaa straight to 'Junk'! Moody's between 2005 and 2007 risk rated about 10,000 Residential Mortgage Backed Securities (RMBS).<br />http://ftalphaville.ft.com/blog/2008/05/21/13198/ft-alphaville-exclusive-moodys-error-gavetopratings-todebtproducts/<br />This was based on a fuller account that appeared in a few blogs including my own. Moody’s awarded incorrect triple A ratings to tens of billions of dollars worth of a type of asset covered bonds. The FT wrote, “Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower…” In 2007 moody's downgraded about one third of all RMBS. This was the mild form of the story.<br />It was not just about ratings in 2006; between 2000 and 2007, Moody's rated $4.7 trillion in RMBS! <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZdkMMwTDBr_aw02mUWGbVPmGB7Eftq5Czpf0cl_9rAQFAdUwprpOVG7YgB9KOrDmvmgpnnI4tX7uj8WmzviuFwcbjo5ah8pzptR8sU67z9sqUK0-Q0xIK5WdgmA8nnPyZijSndq5j4zM/s1600/Mratings.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 282px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZdkMMwTDBr_aw02mUWGbVPmGB7Eftq5Czpf0cl_9rAQFAdUwprpOVG7YgB9KOrDmvmgpnnI4tX7uj8WmzviuFwcbjo5ah8pzptR8sU67z9sqUK0-Q0xIK5WdgmA8nnPyZijSndq5j4zM/s320/Mratings.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511955963880168034" /></a>For some model descriptions: Moody’s used its Moody's Individual Loans Analysis (MILAN) model for collateral analysis with a cash flow model such as Moody’s Analyser of Residential Cash Flows (MARCO) or ABSROM. Moody’s analysis was intended to provide RMBS investors with a consistent and transparent system of gradation by which relative credit quality is expressed. <br />The lack of transparency issue has however been the leading criticism by regulators. The Moody’s objective was laudable - to assign the same ratings to all debt instruments exposed to equivalent credit risks over time, irrespective of the country of origin, the industry sector or the structure of the security. This aim is however subject to differences in law regarding the underlying rights of mortgage borrowers and how the property collateral may be recovered. <br />Moody's aim was that over the same period of time, portfolios of structured finance securities with the same ratings should sustain similar credit losses. But, the problem remained of not just the history of defaults in the models (or not if they failed to be updated and when the models appeared indifferent to default rates) but also the forecasting of defaults under various economic scenarios?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsNty15ujgmxZLAP8XOpxgWZwxUtvIqRVn6jvFHvvyP1IvescHonF0V8fL_phV8_aWWbcok984aiBRBMhUFyZn7XIcaTl3rwt8r7KYvzbxIb7ubXpIe-ErZXAP_KQCBX8wQBdk0sdwOwg/s1600/Mdown.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 284px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsNty15ujgmxZLAP8XOpxgWZwxUtvIqRVn6jvFHvvyP1IvescHonF0V8fL_phV8_aWWbcok984aiBRBMhUFyZn7XIcaTl3rwt8r7KYvzbxIb7ubXpIe-ErZXAP_KQCBX8wQBdk0sdwOwg/s320/Mdown.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956807428427858" /></a>What happened was that Moody’s modelers noted a speech by Ben Bernanke in January 2007 where he reported that default rates were below 2%, which seemed both counter-intuitive and contrary to other earlier reported figures of 4% and rising. Bernanke had taken his data from Freddy Mac and Fanny Mae, data that was actually post-adjustment after many mortgage deals had been restructured. The modelers decided to put progressively higher default data into their models only to find that every time they cranked the numbers the result was always triple-A or otherwise unchanged from before i.e. the bugs in the model meant they were indifferent to default rates – seriously flawed fundamental errors! And, then they discovered that the models in any case had not been updated for default rates for some years! <br />When Moody's announced on June 5, 2007 that it was introducing changes to its model, it did not reveal how fundamental this was. It said "<span style="font-style:italic;">Moody's Expands Loan Characteristics in Subprime RMBS Ratings Analysis - New York, June 05, 2007 -- Moody's Investors Service announced today that its analysis of securities backed<br />by pools of sub-prime residential mortgages closing after July 1, 2007 will be expanded to include a systematic assessment of certain variables described in the Special Report, "Moody's Revised US Mortgage Loan-by-Loan Data Fields," published April 3, 2007. In addition, Moody's will be modifying the way it incorporates some other factors into its analysis. The refinement of its rating methodology is part of Moody's continuing effort to incorporate the expanding range of loan and borrower characteristics now being captured by many mortgage originators as well as the<br />performance data that has been accumulated during the past few years in the rapidly growing and evolving sub-prime mortgage market. Moody's expects to continue to refine its methodology in the future as it continues to analyze the increasing amount of performance information that becomes available.</span>"<br />This made the changes seem merely benign, when in fact they heralded the bottom falling out of the interbank credit market. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8_G4CuVeSc9OVi501MyJbzNS-0BJNdVW5LE3GCQT4Q_8KIzWOCauaG5UL3HYLGiL6xLyV2jMFvXBBKDw8b1n6m9QkbJCqly10cCGHKNyqvg7q22qrbhXy0NfGe3CNIXxdDxegDhKWG1Y/s1600/Mdown.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 284px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8_G4CuVeSc9OVi501MyJbzNS-0BJNdVW5LE3GCQT4Q_8KIzWOCauaG5UL3HYLGiL6xLyV2jMFvXBBKDw8b1n6m9QkbJCqly10cCGHKNyqvg7q22qrbhXy0NfGe3CNIXxdDxegDhKWG1Y/s320/Mdown.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511957741000137618" /></a>To those who need to know a little of the technicalities, it may be of interest to note that given limited historical data, Moody’s used three parameters to determine the "lognormal loss distribution": − expected loss (base case losses) of the portfolio − adjusted MILAN Credit Enhancement, and − average life of the portfolio.<br />Moody’s assessed the expected loss using historical default and recovery data "provided by the Originator" or "based on comparable portfolios and benchmarking". All very well, but range of possible loss data is surely the main feature that the ratings agency model should be bringing to the analysis, not merely using the issuer's own data?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiWZdEXVbt1oExv2kNA3Rkz3U-ypAS6B1lJlMWCEdDskcpUSFm5pxdrYTL7hQ3CfqhllM4FsIYhvV6bBVkMmiuDFfu-uevRGb6oMSzmLwyHEWharBQ_abJxde7rKvjLlMi9ARmbZqD5Ps/s1600/M00.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 295px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiWZdEXVbt1oExv2kNA3Rkz3U-ypAS6B1lJlMWCEdDskcpUSFm5pxdrYTL7hQ3CfqhllM4FsIYhvV6bBVkMmiuDFfu-uevRGb6oMSzmLwyHEWharBQ_abJxde7rKvjLlMi9ARmbZqD5Ps/s320/M00.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956294172813170" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJI9N7seFN0bkD8UVKM2cR8hwA6xbZefFYSYW4Sqm59aCF73vt6SEWOdEXzZKevG9IQq6x7rcabjZWhawiuhN1Tzvpq6U4rqs5dDg-_q3RjhClasHWcST3qnP73eFyUPwpqsms1puoonQ/s1600/M000.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 276px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJI9N7seFN0bkD8UVKM2cR8hwA6xbZefFYSYW4Sqm59aCF73vt6SEWOdEXzZKevG9IQq6x7rcabjZWhawiuhN1Tzvpq6U4rqs5dDg-_q3RjhClasHWcST3qnP73eFyUPwpqsms1puoonQ/s320/M000.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956239373422450" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiagkMZt2OY0Ax1e5Ei1DU1AagVlKBCBddXjBqJCi3W1Kp26Y1APPtcICViGN2JcFaSnyjJ8cN1XaWFIiLzhCEQdTd_6rZl0eMqMt70GJ9RyURwNAf5Bejv2tC8uUJARnqBpMAcQYXiQc0/s1600/M0000.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 276px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiagkMZt2OY0Ax1e5Ei1DU1AagVlKBCBddXjBqJCi3W1Kp26Y1APPtcICViGN2JcFaSnyjJ8cN1XaWFIiLzhCEQdTd_6rZl0eMqMt70GJ9RyURwNAf5Bejv2tC8uUJARnqBpMAcQYXiQc0/s320/M0000.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956161764314930" /></a>Moody’s used MILAN to determine the MILAN Credit Enhancement (CE), and, in order to derive the ratings of the Notes, Moody’s used a cash flow model, MARCO, which included "key structural elements". MILAN was a risk scoring model, which is not ideal; each loan compared and scored against a country-specific benchmark loan, then, based on certain assumptions (mainly loan to value ratios that are especially relevant in the US, but much less so elsewhere). The credit enhancement necessary to agree with the benchmark loan can be determined, then tagged to a specific rating level (somewhat circular). No mention is made in the Moody's literature I have seen of credit cycle or economic cycle or macro-economics at all!<br />Overriding accuracy issues for the ratings agencies was also competitive ones of how to win ratings of big issues when the issuers could shop around for who would produce milder or harsher ratings! The question remains unanswered as to whether the ratings models of Fitch and S&P were a lot better than Moody’s or not? <br />Several internal emails have come to light that show this. For example, a July, 2004 S&P email: "<span style="font-style:italic;">We are meeting with your group this week <span style="font-weight:bold;">to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals</span></span>. . . ." [emphasis in original] A March, 2005 S&P email chain shows that agency was slow to roll out ratings model changes because the updated model produced harsher results. Parts of the chain: "<span style="font-style:italic;">When we first reviewed [model] 6.0 results **a year ago** we saw the sub-prime and Alt-A numbers going up and that was a major point of contention which led to all the model tweaking we've done since. Version 6.0 could've been released months ago and resources assigned elsewhere if we didn't have to massage the sub-prime and Alt-A numbers to preserve market share.</span>" <br />Emails at Moody's include in May, 2007: "<span style="font-style:italic;">Thanks again for your help (and Mark's) in getting Morgan Stanley up-to-speed with your new methodology. As we discussed last Friday, please find below a list of transactions with which Morgan Stanley is significantly engaged already. . . . We appreciate your willingness to grandfather these transactions [with regards to] Moody's old methodology</span>." And also in August, 2007 Moody's email: "<span style="font-style:italic;">[E]ach of our current deals is in crisis mode. This is compounded by the fact that we have introduced new criteria for ABS [asset-backed securities] CDOs. Our changes are a response to the fact that we are already putting deals closed in the spring on watch for downgrade. This is unacceptable and we cannot rate the new deals in the same away [sic] we have done before. . . . bankers are under enormous pressure to turn their warehouses into CDO notes.</span>"<br />Such emails show considerable overlap between quality of models and competition for the business to the extent that could be deemed evidence of compromising fiduciary duty to investors etc.<br />See DailyFinance: http://www.dailyfinance.com/story/investing/more-hot-emails-put-new-heat-on-the-credit-rating-agencies/19452156/?icid=sphere_copyright<br />Moody's had several points in its modeling where results could be massaged. There was comparison of the specific loan, property and borrower characteristics underlying each loan with those of the benchmark loan. This, if fully true, must have involved massive computing, which I sense may not have been fully deployed.<br />This then leads to adjustments to necessary credit enhancements of each loan, which are then compared to the minimum credit enhancement determined for a country. Again, we may wonder at the resilience of the benchmark concept?<br />Once each loan was scored, the portfolio was compared with the country benchmark RMBS in terms of regional, borrower and loan concentrations. This led to additional adjustments on the credit enhancement and ultimately produced the MILAN Credit Enhancement for the portfolio, relating to a specific rating level. <br />All steps are analysed and discussed by a rating committee. After, and if, further quantitative and qualitative adjustments to the MILAN CE by the rating committee (resulting in the adjusted MILAN CE), then, given a lognormal loss distribution, MARCO is used as a cash flow model for how different features in the transaction impact the final ratings of the Notes (each of the tranches of the securitised bond issued by the SIV). <br />The model calculates the loss and the average life of the Notes resulting from each portfolio loss scenario of the lognormal curve. The model will then weight each loss and average life on the Notes with the corresponding probability of the loss scenario. <br />The result is the expected loss and the weighted average life for each tranche in the capital structure. With these two inputs, the ratings can be derived from Moody’s Idealised Expected Loss Table. <br />That sounds simple actually, simply a way of getting the securities to comply with a standard ratings table. That is, until it is discovered in January 2007 that the models did not actually respond to different default or expected loss rates and that loss rates, presumably for the benchmark loans, had not been updated for several years before 2007!<br />Former Moody’s Executive Brian Clarkson described the approach as “<span style="font-style:italic;">you start with a rating and build a deal around a rating”</span>. <br />While it certainly does exist, rating shopping appears to be a more significant issue in single-issuer debt ratings than in structured ratings. Given that single issuers exist prior to their rating and it is more difficult to change their existing businesses, balance sheets, income statements or structures in anticipation of review, rating shopping is a justified concern. <br />In structured securities, the SIV corporation (trust) does not exist prior to the rating, the structure to be achieved in order to garner a desired rating is defined by the rating agencies. As a result rating shopping is less a concern than is the pre-rating back and forth negotiations and substitution of underlying collateral which allows issuers to work with the rating agency until they create the structure that achieves the desired rating.<br />Working backwards and using feedback adjustments to get to a desired ratings is one thing, but operating models that are indifferent to default rates is another. Moody's modelers in January 2007 fixed these latter calamitously major bugs in the models and then found that the bonds or notes when reprocessed dropped by up to 17 risk grades! This they reported upstairs to a shocked board, who must have seen instantly that their company was now at major risk, and perhaps they might have also seen that the whole banking market was also at major risk. <br />The modelers were told to unfix the fixes and sit on this until it was decided how to handle this; how to tell the world? That thought-leadership process took 6 months, during which time other mind-focusing events occurred such as Bear Stearns securitisation collateral seized and sold at fire-sale prices by Citicorp's back office, triggering Bear's eventual collapse and US Treasury assisted fire-sale to JP Morgan Chase, and then UBS and Citicorp's own structured products exposures were subject to large writedown losses! <br />Yet, Moody's did not publicly mea culpa or publicly revamp its model until mid-year.<br />It made an announcement of a new model in June 2007. The news was not considered of fundamental importance to any but perhaps a few.<br />Then, from June 2007, using a newly fixed model. Moody's regraded securitization issues, mainly RMBS (of which Moody’s had graded more than half of all issues, or $4.7 trillions), that when cranked through the valuation model (a process like Chinese water torture on the interbank credit markets) with day after day, week after week, bank-issued (via SIVs) asset backed bonds and SIV notes (tranches) being severely downgraded that forced banks and eventually other investors to announce major writedown losses! For example on just one perhaps typical day, Moody's Credit Research Announcement 10 JUL 2007 "Moody's downgrades 399 subprime RMBS issued in 2006; 32 additional securities placed on review for possible downgrade". $ billions of RMBS were being downgraded every day.<br />Confidence in banks’ securities progressively collapsed and the Credit Crunch wreaked havoc on banks’ share values as well as on their ability to finance their funding gaps.<br />An SEC investigation followed the FT’s exclusive, EU authorities too, not least DG McCreevy when head of Ecofin, were extremely angry at the damage caused and considered suing the ratings agencies in court. Reforming credit ratings agencies became an important part of the G20 agenda. In various parts of the world including Europe various measures were considered and are being introduced to reduce reliance of the US credit ratings agencies. But, this is very difficult to do! <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAL43Xg6eOb8KnZ8Ome5u0AAIKmO0H643SwFyLDHFX-0JxgCghhQjSGvjdkowvxHJjseusueVE7-AMgzTAQ-_pb3WJvAO3_DEcH0NJdS61x8JKem2Gch_dwitAbWZFyRtVCysDy0h7bS8/s1600/market+share2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 219px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAL43Xg6eOb8KnZ8Ome5u0AAIKmO0H643SwFyLDHFX-0JxgCghhQjSGvjdkowvxHJjseusueVE7-AMgzTAQ-_pb3WJvAO3_DEcH0NJdS61x8JKem2Gch_dwitAbWZFyRtVCysDy0h7bS8/s320/market+share2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956431077722130" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgporZm-kjSK5z9nG5NSJR-Nt-UPTzTHUmNFn3MCu7DnMibDgZwdouYTMwUYpjpail7TMKJOSqCbhmhaXl86K9MPlVjJsTh6UoLNZoZqnEpxER7NAk8GqqTqlnMTSN8a3fOhJckFTR_tPQ/s1600/Market+share.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 202px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgporZm-kjSK5z9nG5NSJR-Nt-UPTzTHUmNFn3MCu7DnMibDgZwdouYTMwUYpjpail7TMKJOSqCbhmhaXl86K9MPlVjJsTh6UoLNZoZqnEpxER7NAk8GqqTqlnMTSN8a3fOhJckFTR_tPQ/s320/Market+share.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5511956375538793922" /></a>It was obvious that when the ratings were re-run by Moody’s through new models in the second half of 2007, every week more downgrades, that coincided with full onset of the Credit Crunch. <br />It is reasonable to ask therefore if the securitization issues been properly, accurately, assessed, could the worst of the Credit crunch have been avoided? That is a big question, a big issue!<br />Similar criticisms of the ratings agencies followed in the wake of the Enron scandal but SEC legal action was not followed through with and was dropped. Enron's rating remained at investment grade until four days before the company collapsed. Similar failures were repeated in the cases of Bear Stearns and Lehman Brothers, and other firms. The ratings agencies failed in the case of Enron to notice that financial trusts linked to Enron made financial commitments largely based on Enron’s share price!<br />There were regulatory reforms in the US credit rating industry, the Credit Rating Agency Reform Act of 2006, and that put them in the context of the Sarbanes–Oxley Act of 2002. The SEC committed to improve the quality and integrity of the credit rating industry, but instead of focusing on detail resorted to broad reforms such as increasing competition between credit rating agencies including through new market entrants. That the SEC has in the case of Moody’s dropped further investigation on a technicality may have something to do with its own culpability. The SEC has been equipped with enforcement measures, which include the suspension and revocation of NRSRO status, and that may be used, for example, when a credit rating agency does not comply with procedures regarding the prevention of the misuse of material non-public information, conflicts of interest, and other abusive practices. Credit rating agencies are subject to (onsite) examination by SEC and extensive documentation retention and management programmes. It will be a long time before new competition can have a desired effect of improving the quality and integrity of the global US credit rating firms (the big three). <br />Arguably, the credit rating agencies are more powerful than the regulators in determining the creditworthiness of banks and their bonds. They also have a major responsibility and impact influence on sovereign ratings of governments. Given the influence of credit rating agencies in the capital markets and their regulatory responsibility as private-sector watchdogs, increased oversight of the credit rating industry is most laudable, but also most intimidating for regulators however backed by governments to undertake. Credit rating agencies currently remain prominently in the spotlight of national, federal, and international securities regulators, but appear let off the hook by the SEC, but only on a technicality. They remain subject to possible other agencies including private class actions slowly moving through the courts such as by CALPERS http://online.wsj.com/public/resources/documents/calpers.pdf<br />Three years on, on Tuesday, 31 August 2010, the SEC released this: “The Securities and Exchange Commission today issued a report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.”<br />The FT commented that the SEC’s Report of Investigation stems from an Enforcement Division inquiry into whether Moody’s Investors Service, Inc. (MIS) — the credit rating business segment of Moody’s Corporation — violated the registration provisions or the antifraud provisions of the federal securities laws. The Report says that “because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the Commission declined to pursue a fraud enforcement action in this matter…”<br />So, Moody’s has escaped prosecution for “fraud” because the relevant American legislation was defective – a shortcoming, the SEC notes has been expressly addressed in the newly-minted Dodd-Frank Wall Street Reform and Consumer Protection Act.<br />You can read the report at http://www.sec.gov/litigation/investreport/34-62802.htm<br />On May 20, 2008, the Financial Times published on its Web site an article that disclosed the coding error, citing internal Moody’s documents that showed the error had been discovered by MIS over a year earlier, and alleged that MIS had incorrectly awarded Aaa credit ratings to CPDO notes because of the error. <br />When Moody’s was contacted by reporters gathering information for the story, the company began an internal investigation into the coding error and the CPDO rating committee conduct. On July 1, 2008, a year and a half after the coding error had been discovered, and over a year after the European rating committee had declined to downgrade the credit ratings, Moody’s issued a press release discussing the investigation results and stating that “some committee members considered factors inappropriate to the rating process when reviewing CPDO ratings following the discovery of the model error.” Thereafter, MIS took personnel action with respect to management of the CPDO group and members of the committee, including termination of the Group Managing Director and two Team Managing Directors…<br />…Further, we conclude that, in early 2007, members of the European rating committee believed they could violate MIS’s procedures without detection, and in fact the conduct did not come to light until the Financial Times contacted MIS about the error in the CPDO model and an investigation ensued…<br />Note that today Moody's re-ratings actions based on improving or continued deterioration of subprime securitisations, or in conjunction with distressed or improving house price and rising or falling unemployment, will run each individual pool of mortgage loans through a number of stress scenarios to assess the rating implications of updated loss expectations. The scenarios include 96 different combinations within six loss levels, four timing curves and four prepayment curves.<br />For much more on all of this, I wrote about it in October 2008<br />http://bankingeconomics.blogspot.com/2008/10/risk-rating-smoking-gun.html<br />Also see:<br />http://newsroom-magazine.com/2010/governance/financial-crisis-governance/moodys-internal-corruption-detailed/<br />http://www.fcic.gov/reports/pdfs/2010-0602-Credit-Ratings.pdfUnknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-8523313090140425152010-08-24T06:58:00.000-07:002011-11-15T10:43:32.661-08:00CEO Letter to my Rain-makers<span style="font-style:italic;"><span style="font-weight:bold;">Dear Rain-makers, friends & colleagues</span></span>,<br />You have been asking how exactly our 2009 bonuses will be structured and paid? As some of you will know 2008 bonuses were the same as in 2004, and all paid in cash! <br />2004 (28 April) was also when the USA's SEC relaxed leverage ratios on investment banks; following which we all in the UK followed suit, mainly by upping our % bonus pool to profit ratio by a fifth. <br />FSA's Financial Stability Report in 2009 found that if Britain's troubled banks had retained 20% of remuneration bonuses & shareholder dividends (£75bn or $120bn) instead of paying these out based on short termism (so-called) that actually exceeded what was needed subsequently (in 2008 and 2009) in government and central bank supplied capital support (in preference share equity) to the same excessive bonus-paying banks. This I will show is a false correlation, what some culture experts might call a "post-modern relativism", usefully summed up by the following cartoon that I urge all non-bankers to take to heart as we bankers do.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIWwkZolqaGUwCkrMIuzOkxIMoyeIinKEHoE0ffBsrqTZcOYgH23t3Mt1IMe-bthdsZ2xi-sCmrwh_Y289tVZwOWCyJzMIDgQCdHn7S_334q5aX03x94t2_wH5S6lLWiXZJuPlj5caxJk/s1600/relativism.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 254px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIWwkZolqaGUwCkrMIuzOkxIMoyeIinKEHoE0ffBsrqTZcOYgH23t3Mt1IMe-bthdsZ2xi-sCmrwh_Y289tVZwOWCyJzMIDgQCdHn7S_334q5aX03x94t2_wH5S6lLWiXZJuPlj5caxJk/s320/relativism.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5509262758856556514" /></a>The years from 2004 on were also those when bonus pools exceeded profits, which only appears absurd at first sight, but not when we look at the matter more profoundly. This is for the excellent reason that our human capital is our most valuable asset, and what else is to be done when everyone else (other banks, especially US ones) do this, pay over the odds. All banks are in firm agreement about the deservedly high return necessarily payable to human capital compared to the return to passive shareholders or that old saw of "internally generated capital build-up", which we know would have just gone up in flames with nominal losses - far better to be retained by our staff and productively invested, I should think?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg765njMH2w-I3H9r3F3tEoLfrnReC1Aj-PM2KGkabS4j5kcwt-ZZz6S1eQb-5E3XUwFMabcCNMsZi-7qhxDuQU8HXnyPIGpV9Wz5p2BFwPOPDQfxHIVDadpBiRwYaqCtnx8zuJl-UmifM/s1600/bonus+profits.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 251px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg765njMH2w-I3H9r3F3tEoLfrnReC1Aj-PM2KGkabS4j5kcwt-ZZz6S1eQb-5E3XUwFMabcCNMsZi-7qhxDuQU8HXnyPIGpV9Wz5p2BFwPOPDQfxHIVDadpBiRwYaqCtnx8zuJl-UmifM/s320/bonus+profits.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509252592223972514" /></a>The equation of bonus pool to government funding support is false, because we would have simply used the retained profit to narrow our funding gap by 8% or less (and depending on whether our share cap would have fallen further on lower dividends) and that £75bn (in the case of UK banks) is dwarfed by the £500bn in asset swaps to shrink our funding gaps by getting all that off balance sheet via SIVs in return for Bank of England treasuries and deposit balances. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieSEBt-dQ0oIdP2EKOpvpiXQTkv6MfX9SjP_69R-ihLO4vYmUmmLsmp2DW4GiocmCPM2Bd8ifHXQMD1kKAw9g_ksuSP6_aMG3yeApeYeT3xQZxk0i6BpJE-Xd9fJyG5wf-LbKvyqFjhuE/s1600/sec-commissioners+april+28+2004.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 215px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieSEBt-dQ0oIdP2EKOpvpiXQTkv6MfX9SjP_69R-ihLO4vYmUmmLsmp2DW4GiocmCPM2Bd8ifHXQMD1kKAw9g_ksuSP6_aMG3yeApeYeT3xQZxk0i6BpJE-Xd9fJyG5wf-LbKvyqFjhuE/s320/sec-commissioners+april+28+2004.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509019395060251538" /></a> What choice did the SEC have (Paul Atkins, Cynthia Glassman, William H. Donaldson, Harvey J. Goldschmid and Roel C. Campos, SEC commissioners, pictured above, along with Christopher Cox, SEC Chairman, and Annette L. Nazareth, SEC dir. market regs.) when faced by a joint motion for relaxation of reserve ratio (leverage) requirements by Goldman Sachs, Lehman Brothers, Merrill-Lynch, Bear Stearns and Morgan-Stanley. SEC did not have models capable of predicting any outcomes of that decision; they therefore should not be blamed for the severe embarrassments that all of the above banks faced as a result of their over-leveraged trading books and unsustainable bonus pool growth.<br />The plain fact is that high bonuses are market-dictated with the weight of an immemorial tradition, socialised via top-dollar real estate prices. We are not "banksters"; we pay our taxes eventually. Furthermore, it is quite clear that leverage variance is simply what we need to do to maintain stable return on equity ratios and why bonuses are genuinely just that, bonuses! Who should begrudge anyone for legitimately striking it rich? There should be no limit to opportunity. What right has government to restrict incomes in any selected profession; that would be an attack on basic human rights or free market rights?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij1Gqtp4jVzGPvHjkCPowFLhT8_s0YjUiohNPRvkv_ZTVi5zt6pVMK8YIex6mTxEg-vZmyamKYQYRdu6aXnNeySow5De8HbT185fJUtxjCRma8Qd6dxAluuq4ILz03jcc6p3-pzD_qcy4/s1600/bankleverage-as-return-on-equity.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 318px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEij1Gqtp4jVzGPvHjkCPowFLhT8_s0YjUiohNPRvkv_ZTVi5zt6pVMK8YIex6mTxEg-vZmyamKYQYRdu6aXnNeySow5De8HbT185fJUtxjCRma8Qd6dxAluuq4ILz03jcc6p3-pzD_qcy4/s320/bankleverage-as-return-on-equity.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5509256649564654930" /></a>Some bankers have sabre-rattled that severe cuts to bonuses will entice us to move our headquarters to Paris or Frankfurt or Hong Kong, who are offering us low tax inducements to move there. But, we don't go along with that shallow selfishness; where else will we find a central bank with the creative flexibility of the Bank of England, with the deep treasury pockets in money market operations to see us through stressful turbulent times? <br />US media comment has reported London bankers saying they would crash their own country’s economy by departing for foreign parts unknown if that's what it takes to defend bonuses. We have no part in that and know of no reputable British banks who think that is a realistic option.<br />Some calculations of government support to "bail out" us banks have supposed this to be a cost to all citizens. That is a false premiss. Governments have merely stepped in to fill a gap that opened up when the private sector failed to maintain inter-bank liquidity (funding gap financing). The bail-outs are not net costs but have valuable assets that will profitably reward taxpayers and the economies eventually. In my view therefore all of the supposed loss in wealth per citizen as shown in the graphic below will be restored and added to by at least half as much again over the medium term. Hence our bonuses need not be attacked, surely?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr_jUnsbCKTNINHb9DQ96-yGoPVkPNmKF81NOsaX-Ijqupdr4t29Cp7ptFPmkUyBl3NqxZDyHIL7uQy_jEUBxuu-6dNlRi2f3IsAYoFccLdvO7N0HTsHZUHiEXxWI3pBh8caXwBAJ-Bfg/s1600/NetWorthPerCitizen.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 241px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr_jUnsbCKTNINHb9DQ96-yGoPVkPNmKF81NOsaX-Ijqupdr4t29Cp7ptFPmkUyBl3NqxZDyHIL7uQy_jEUBxuu-6dNlRi2f3IsAYoFccLdvO7N0HTsHZUHiEXxWI3pBh8caXwBAJ-Bfg/s320/NetWorthPerCitizen.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509258358285578962" /></a>It is altogether fair, however, that because of recent experience, shareholders and others ask why we pay bonuses in cash (out of profit or loss) and not as shares (or share options)? Apart from conflicts of fiduciary responsibility to alternative investment customers, and the net interest differentials between stock-shorting and interest bearing assets like cash (note that we never countenance any insider dealing type arbitrage or shareholder dilutions or trading to peddle our own share value upwards against a falling market), <span style="font-style:italic;">nein, n'immer, keineswegs, kommt nie im Frage, non, pas de tout, au contraire!</span> <br />We paid bonuses as cash and not in shares or prefs for good prudential reasons, to safeguard against the temptation to create false markets in our stock, when annual bonuses can be 10-20% of capital or even 10-20% of capitalisation! <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfdgT2A3rPkn_h30RL-y3GxTT87m1mBSl-kA-RJfks9L4OEETf37IPpN31YGY33uGy9oX-_ucSBUpRJ2PqsD0eiAq6xkFEtVOhEwhtgUg4RrAODyDESQyi77PvPT_qDFJe2SKO_tKU4Xk/s1600/bonuses-NYC.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 244px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfdgT2A3rPkn_h30RL-y3GxTT87m1mBSl-kA-RJfks9L4OEETf37IPpN31YGY33uGy9oX-_ucSBUpRJ2PqsD0eiAq6xkFEtVOhEwhtgUg4RrAODyDESQyi77PvPT_qDFJe2SKO_tKU4Xk/s320/bonuses-NYC.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5508976435812139634" /></a>When US investment banks' leverage restraints were loosened, US commercial banks and UK banks immediately ratcheted up their leverage ratios. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGx_zOLdXAkQIbVixrn_97tpYGCz4hFgGIKMyGMk0D0lei9tDSlnD7v68XqjP0iMCKWTTxMiW0iyqOwRwteC_jTHZAfpPFhDXMWmA_e7iqkGoKrXN5i3-OiAO_VY6sFNrtQ4qxO1q-K7M/s1600/BankingSectorLeverage.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 313px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGx_zOLdXAkQIbVixrn_97tpYGCz4hFgGIKMyGMk0D0lei9tDSlnD7v68XqjP0iMCKWTTxMiW0iyqOwRwteC_jTHZAfpPFhDXMWmA_e7iqkGoKrXN5i3-OiAO_VY6sFNrtQ4qxO1q-K7M/s320/BankingSectorLeverage.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509240561702987474" /></a>These were years when risk management was considered anti-enterprise, anti-profit, anti-growth. We banks all used higher leverage to increase our own-portfolio trading rather than use the leverage to increase customer lending, which was facilitated by selling off parts of loan-books via securitised bonds. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgns1MXzYCKEApf1srkylHzD5h0-oov_TtHPBS533dbxfWY3XMPxi2yYRZ4mDwk23OEz1QJT34UXHaLWnFQwrGhmxvv1YVfkxYKK7Iw1w452mI98yg2cv94tSyLhMdpU1bpNCeOqC1pG4I/s1600/leverage-trading.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 292px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgns1MXzYCKEApf1srkylHzD5h0-oov_TtHPBS533dbxfWY3XMPxi2yYRZ4mDwk23OEz1QJT34UXHaLWnFQwrGhmxvv1YVfkxYKK7Iw1w452mI98yg2cv94tSyLhMdpU1bpNCeOqC1pG4I/s320/leverage-trading.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509239599465468370" /></a>Kneejerk regulatory responses, so-called Basel III and CRD III, following the credit crunch experience, by making us increase our regulatory capital reserves and economic capital buffers to include liquidity risk and counter-party risk reserves - these are forcing us to shrink our own portfolio trading somewhat faster than we were doing anyway (to shrink our funding gaps and to focus better on only the most profitable net interest income sources). <br />Less capital for own trading when markets are volatile and there are rich pickings for clever arbitrageurs has hit our bonus pool. But I take comfort in the poor performance of hedge funds including macro-funds. Our fee income is up in part from stricter credit conditions, but mainly from restructuring customers' debts. This revenue stream is declining, but it looks like M&A and MBO activity is surging again. All in all, with net interest income stabilised, there is modest optimism about our return on human capital, our bonus pool growth, which we calculate based on a weighted peer-group algorithm that includes Goldman-Sachs and JP Morgan-Chase. What is now to change is how we are paid our bonuses and over what period of time. We are moving towards less cash and a medium term roll-over, what some of our sovereign debt traders are dubbing Euro-billions roll-over, an ugly expression I do not want to hear again!<br />Bankers are the elite of the business world. Our remuneration levels track the art market and have recently overtaken it. As someone with a collection of superior quality to that of Mr & Mrs Dick Fuld, I take this as a benchmark of our uniquely valuable creativity. Our bonuses are justified rewards for superior creative human capital and should not be relativised to the bottom line of mere profits or any other mundane comparator. I agree with Rene Magritte's comment on relativism.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwL30cyEWcCeoTEVaDKHeSK5M8K3omOArrUO_idYcNQqjggj24K8KleMoIVfzu5TgB5hGJs8aW0ugurw1O1ZlxhlMMU9c0Fq7OhNBA-sdB3Xco87xgX5Jyfgw7oNL4uiZhf8I2RWa8bFw/s1600/art-relativism.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 249px; height: 180px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwL30cyEWcCeoTEVaDKHeSK5M8K3omOArrUO_idYcNQqjggj24K8KleMoIVfzu5TgB5hGJs8aW0ugurw1O1ZlxhlMMU9c0Fq7OhNBA-sdB3Xco87xgX5Jyfgw7oNL4uiZhf8I2RWa8bFw/s320/art-relativism.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5509266637236859250" /></a>Talking of which, new European Union rules require that only part of bankers bonuses are paid in cash, provisional retention of another part, and some other part that may even need to be cancelled should risk performance outcomes warrant that? <br />We senior bankers know that our bonuses are a deserved return to 'human capital'. That return was depressed for decades. It directly correlates to the relative superiority of our education skill levels that only in recent years rebounded strongly to regain at last the same relative remuneration and skill in our human capital of the 1920s.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQQWTnXpXCDjo2n7ERiBJBf1ABONsBS44Cpc_nlkKBTpwUfojUVHnjihBbjdv6DgQIkTZP9U7Scfo2x5xcBOvRDBSJm0Op_UN8nQN-AAUYAvHIiIbRoFZ64xNV9KN6YEZxHw2SgEglX4U/s1600/bank+bonus+humancap.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 233px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQQWTnXpXCDjo2n7ERiBJBf1ABONsBS44Cpc_nlkKBTpwUfojUVHnjihBbjdv6DgQIkTZP9U7Scfo2x5xcBOvRDBSJm0Op_UN8nQN-AAUYAvHIiIbRoFZ64xNV9KN6YEZxHw2SgEglX4U/s320/bank+bonus+humancap.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5508981205391878626" /></a>Human capital is an asset, as we remind everyone, "the creativity of our staff is our most important, most valuable of all our asses!" Its market value is well attested by how the financial return on human capital investment (total remuneration divided by base salary) that has demonstrably held up well as all other asset classes fell (in mark-to-market terms).<br />Notwithstanding evidence we presented to demonstrate persistent skill-supply shortage, and using peer-group comparators to disprove the notion that experienced bankers are worth any less today than a few years ago, regulators insist on a more risk-diverse bonus calculation or less-cash only, structure, that offers some sensible tax efficiencies for all - effectively a system for lending by and borrowing from our remuneration bonus pools over time that will deliver yet higher return, what I call pleasure not lost, merely postponed. I wish to make it clear that while we took bonuses proportionate to profits as per our US competitors, it is not sensible to make sudden changes when profits become temporary losses; this is a longer term game.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTkt9oItYJA0_iBYd3NC0XDt1VclnDyIfKQsW_0-q3bH1hY4HeWEeA0PoZqWoYdxf2SyMHYTV7g4-R6yjhG1Onw4xZnU7Bv2DQzdLIljz5kl1cRNZ9WXlz1D7iLjwd2pPCCkDVnMTdSqA/s1600/folbre2+(1).jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 251px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTkt9oItYJA0_iBYd3NC0XDt1VclnDyIfKQsW_0-q3bH1hY4HeWEeA0PoZqWoYdxf2SyMHYTV7g4-R6yjhG1Onw4xZnU7Bv2DQzdLIljz5kl1cRNZ9WXlz1D7iLjwd2pPCCkDVnMTdSqA/s320/folbre2+(1).jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509020034043223362" /></a>Following discussion with regulators, however, some adjustments are now required. Therefore, according to new guidance, the present value of the average bonus of $1 million per rain-maker in our bank (better than others and 20 times average wage) may be under $800,000, with 40-60% postponed payment payable over 3-5 years. Half of the bonus paid will not be in cash. <br />This means that you can only get at most 30% of due reward in immediate cash. <br />For those of us with bonuses of several $millions, deferred consideration is over 60%. A maximum of 20% ($200,000 from $ 1 million bonus) will be cash-credited to you immediately. You want to know how much you will get later, soon. Your deferred bonus of $600,000, half of which can be paid in cash, half in securities. This may be discounted for risk of poor performance and prudentially postponed. But, starting from a low point in credit cycle performance, actual payment has a tremendous upside potential. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYsQQkxdhJOfjTij1BnKSs74ZF4E5e8Tf2ZGa4TW7BxWx4FgCgmLCje8Yhcxwx2SndLFwl6Rp8d1nHqifO0kplT7Pbqznu3jP5tYvhdS0XcAZUo5MQNWddyimTAdKolewzctvPTe1o0Bw/s1600/profitsbanks.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 170px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYsQQkxdhJOfjTij1BnKSs74ZF4E5e8Tf2ZGa4TW7BxWx4FgCgmLCje8Yhcxwx2SndLFwl6Rp8d1nHqifO0kplT7Pbqznu3jP5tYvhdS0XcAZUo5MQNWddyimTAdKolewzctvPTe1o0Bw/s320/profitsbanks.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5508998675865009026" /></a>The superiority of human capital skills & education value among bankers in banks is fully proved by banks profitability and the speed of our recovery from the credit crunch recession, by how we skillfully helped government to help the wider economy by saving the banks painlessly through asset swaps and deposit guarantees for which help we are more than happy to buy government bond issues. We are over-subscribing to new issues and doing our best to squeeze out pension and insurance funds at the long end. <br />On the matter of deficits and national debts, far be it for me to point out to those who resent government deficits that they should note the obvious correlation of balancing budgets with imminent triggering the next recession, and double-dip will not help anyone, not even if the Euro Area appears to be gagging for one?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1N2CvVO4ulWRNuMjXusIlu5w8xUKgOsP_UtTkVOAq53wJvCZ8roPUPnf85VsWFQ0dJMaoOXxvyqcGBD5ugmlWGdvYtQC-Banhj-NMNyfXJ1_0Ucov0YhZbuuHvIdssIWP8RoI1C0mIWY/s1600/fiscal+balances+-+IMF.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 249px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1N2CvVO4ulWRNuMjXusIlu5w8xUKgOsP_UtTkVOAq53wJvCZ8roPUPnf85VsWFQ0dJMaoOXxvyqcGBD5ugmlWGdvYtQC-Banhj-NMNyfXJ1_0Ucov0YhZbuuHvIdssIWP8RoI1C0mIWY/s320/fiscal+balances+-+IMF.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509021058796698466" /></a>Saving and rewarding the undoubted values of banks, including remuneration of bankers, is not for everyone, involves a steep learning curve and an inflexion point only after about ten years of hard graft at the front end of financial services i.e. our bankers take years before they earn their bonuses, often also after years of paying high college and MBA school fees, which they have to repay and earn a good financial return on, let's not forget that basic fact of financial life!<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBoVdKLooqquvn7hz34Pd3AfhEzBiP7r34wHu0yhYGq-iJIMNWx6DP1VeW2ASbUOhBBi4nG0bGb5V84daBgWQSrxzFWOE9Soue-7p4zYmqI00IeZB6rOaAK-dYv5ugCnePXO-gk3Z7Qog/s1600/Trader-vs-Banker-Salary.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 182px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBoVdKLooqquvn7hz34Pd3AfhEzBiP7r34wHu0yhYGq-iJIMNWx6DP1VeW2ASbUOhBBi4nG0bGb5V84daBgWQSrxzFWOE9Soue-7p4zYmqI00IeZB6rOaAK-dYv5ugCnePXO-gk3Z7Qog/s320/Trader-vs-Banker-Salary.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5508999415609007250" /></a>Regardless of your initial background in say natural sciences, mathematics or some secular philosophy like MBA study, whether you have any formal qualifications in banking, you must have at least 5-10 years valid experience well-earned (keeping your job and getting promoted) before bonus hikes kick in, and that is both only prudential and fair. The Gordon Gekko banker image is Hollywood fiction.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpCEV2ZDQHedq-2iek-VTUrQynbaZ8EFOWd3E54X6rCc8_j4tgv0BixH9el52In234j04UUwqF6-s-DnRbiZa-FIv1NidImsillhG8fGDl9UW-oWCK5cSry9BNa5iR57G5upINcnRzFWE/s1600/gekko.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 192px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpCEV2ZDQHedq-2iek-VTUrQynbaZ8EFOWd3E54X6rCc8_j4tgv0BixH9el52In234j04UUwqF6-s-DnRbiZa-FIv1NidImsillhG8fGDl9UW-oWCK5cSry9BNa5iR57G5upINcnRzFWE/s320/gekko.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509000859658109330" /></a>Compare this fiction with the very real Jamie Dimon, a great survivor, great leader, a pugilist and realist bar none among top bankers like myself.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXQvs5M1x4TxpHkY3surcX6IruXxCQnR4aodQO-hqpnso_Nef9OJW1I2znLegorhlVCKnEFwAijORvtrItOqcoEdWpBOGmMpbd0irdpX9Ucjj-jDpdsBC3fi1oFSrY6kke93LW-ooscnI/s1600/jamie_dimon_03.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 220px; height: 300px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXQvs5M1x4TxpHkY3surcX6IruXxCQnR4aodQO-hqpnso_Nef9OJW1I2znLegorhlVCKnEFwAijORvtrItOqcoEdWpBOGmMpbd0irdpX9Ucjj-jDpdsBC3fi1oFSrY6kke93LW-ooscnI/s320/jamie_dimon_03.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509001278285128562" /></a><span style="font-weight:bold;">YOUR 2009 BONUS</span>:<br />Assuming 5% risk of withdrawal of bonus each year and discount rate of 4% over the present value of money over five years, your bonus cash element falls in NPV from $300,000 to $213,000. That part ($200,000) paid in securities e.g. convertible bonds and in shares ($300,000) the risk of loss is outplayed by upside potential of say 0.75 of book value to 1.25 of book, which could and should be worth a conservatively forecast gain of $250,000, subject to say a % discount risk factor (net $140,000 upside or 28% return on your bonus investment over say 2-3 years, plus perhaps half of that again in annual bonus increases and a rolling additional 14% annual investment gain, say). <br />The risk factors of say two times 5% plus a hair-cut of 7% and the risk of claw-back given double-dip recession risk hitting our net interest income will modify and postpone tax payable, giving you more capital to play with in the interim than otherwise. Your $million bonuses could and should double every 5 years. That is great news! Other calculations and forecasts are possible, but it will be roughly on the above basis that our rain-makers can obtain personal loans at our lowest internal rate at up to 85% against bonus pool funds. <br />I for one have no fear of a possible return for a prolonged period such as in those post-WW2 decades when bankers and stockbrokers were considered boring bureaucratic desk-johnny, servile customer service-minded, paper-pushers. We will remain the kings of the global financial jungle - have no fear about that!<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj21V8_ulHO67ltQ1kjwWBZxIgQEOuRSpuZ0QmUFVvgvEq01WchqBKpEH89aInEM_6MwtdbcuA_yCzDhs3TiAPEmirlwhMjEeNC6jfeRmfFNeMX4TdtHAOht4iH3hZAiT0uUeBBWJ3ow4/s1600/bankerwage.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 233px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj21V8_ulHO67ltQ1kjwWBZxIgQEOuRSpuZ0QmUFVvgvEq01WchqBKpEH89aInEM_6MwtdbcuA_yCzDhs3TiAPEmirlwhMjEeNC6jfeRmfFNeMX4TdtHAOht4iH3hZAiT0uUeBBWJ3ow4/s320/bankerwage.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5508992712934279186" /></a>It is only sensible given our enterprising capital and securities markets skills that we "my word is my bond" bankers are firmly to be counted among the net wealthy, prepared to put our money where our mouth is.<br />Some analysts quip that in recession and recovery periods our output (wages & profits) and unemployment estimates tend to be over-optimistic. This hypothesis I promise to disprove in the case of banks and bankers, our income, our jobs.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrcbx-kQuGaoIB_E_KlXSEjoYI6iCHm7SHPkVaqEeFPBjALZTPSe2DDZWBB5Y2wxBbt5i98aR0fRM4aWZBg9L-hZvRLqZKmtQ4ffmMtFk-xff5gw3Yh_28Ijgic6RiGtcRELLdUmO3BHk/s1600/squaredforecasts.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 173px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrcbx-kQuGaoIB_E_KlXSEjoYI6iCHm7SHPkVaqEeFPBjALZTPSe2DDZWBB5Y2wxBbt5i98aR0fRM4aWZBg9L-hZvRLqZKmtQ4ffmMtFk-xff5gw3Yh_28Ijgic6RiGtcRELLdUmO3BHk/s320/squaredforecasts.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5508993796399102642" /></a>In the past great artists and musicians, like today's football stars, were rewarded as a premium quality human capital. "Back in the day" as our American cousins like to say, the great days, uniquely talented individuals would coalesce into groups and teams, and from that tight economic unit create service product of high value for wide distribution. That is the quality and nature of today's creative bankers, a high-value, highly prized industry, however commoditised, reproducible, repackageable, rebrandable, along with the recycling capital that pump-primes it. Where other industries automate and replace human capital with synthetics, we computerise but never forget the human capital and its necessary rewards at the heart of banking.<br />Those Cassandras who call for a return to boring traditional fraction transaction banking do not appreciate the importance of human capital, or our humanitarian understanding of what is truly important, human capital, why we defend $20-30 billions in quarterly bonuses. Just look at the skills required to be a modern banker:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiONaz4QhnNDi2rc7jOjYECCODhEv14tESfmX5xK-yjAK3kTheJUeRB4G5LnpCrF2DiTsrEZGXvNgiBnyIrJQAuVDPPT86Kh6Ntqa9Z-K7EF8SvpGH3TmfUUBDa-1POlq-SGFJzbhNCU7o/s1600/the_bank_job02.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 256px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiONaz4QhnNDi2rc7jOjYECCODhEv14tESfmX5xK-yjAK3kTheJUeRB4G5LnpCrF2DiTsrEZGXvNgiBnyIrJQAuVDPPT86Kh6Ntqa9Z-K7EF8SvpGH3TmfUUBDa-1POlq-SGFJzbhNCU7o/s320/the_bank_job02.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509289524942260226" /></a>"<span style="font-style:italic;">Our bank canvassed human resources professionals to bring you the following list of CV qualities when seeking or holding down a job at my bank. Qualities include:<br />1. Dealing experience (ability to grab capital allocations to leverage your bets) in both cash & derivatives markets. Some great skills were required in recent years of markets' undoubted liquidity shortage (double-default in insurance & near zero liquidity in the secondary markets for structured products) problems. Also, we needed skills to navigate how stock markets became shredded by alternative channels, but could hedge those problems as derivatives grew exponentially even if ultimately into a spaghetti mess and reinsurance "snake-eyes". Our rain-makers are syndicators, structured financiers, M&A, mezzanine and MBO specialists, an undoubted skill-set in recent years of MBO dearth and private equity competitive problems, but any booked deals will do for us that show double digit margins. It's experience that counts, especially if you look like understanding the basic intracies of structured products.<br />2. Be prepared, well groomed, for the interview process for our wealth and private equity divisions where the bar is loaded and set high. We test candidates on anything from financial modelling to verbal proficiency (dealing room and institutional sales jive talk), NPV reasoning and mental math, our smoke 'n mirrors hothouse personality that never forgets the bottom line of how to slice 'n dice the deal and the market. You must demonstrate business judgement of a shark (distressed debt hunting) and the vulture (finding hidden unrealised asset value), and able to think like a day-trade CFD investor.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlY2d22UUkNLkj5-BJJQO0-eIxxxYyPJdXN-Wx7S7Gt6nffvMsvpNV70JhaWokJyd5VwqL9smE2QERjnOF52psh2xOJF1YiDIYdvRtLxkbVXd0rqniKaBoXWi_gaB4A5aX-4pPMFMtb4Q/s1600/The_Bank_Job_orig.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 215px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlY2d22UUkNLkj5-BJJQO0-eIxxxYyPJdXN-Wx7S7Gt6nffvMsvpNV70JhaWokJyd5VwqL9smE2QERjnOF52psh2xOJF1YiDIYdvRtLxkbVXd0rqniKaBoXWi_gaB4A5aX-4pPMFMtb4Q/s320/The_Bank_Job_orig.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509289786459384018" /></a>3. Speak one or more foreign (European or Asian) languages. In some cases recruiters say speaking Chinese, French, Japanese, German or Spanish is a prerequisite in primary credit markets, less so in asset management. Our candidates are frequently asked what their third, let alone second language is; first language: MBA English.<br />4. Show operational and IT experience. Be a team player capable of scoring individual goals. Restructuring or distressed debt experience is popular as we grapple with senior tranche triggers and other portfolio problems. The challenge is to marry deal-making with industry or operational process so that you know your cog and mechanism for how to take biggest bites our of the food chain and our internal 'deal carousel'. It is easy to find dealers, but few who combine that with operational experience to book most nominal profit. <br />We have moral values to define our bank by. :<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1o_ZegXBe_WQEoz6a0iwoob05FiPgPGcpEJIht-qbGE_-EVC3CnV2PABDHiQKXnD_KS6cA-etXRtEruUxwVB0TTOM7SUvydLZLP5RXl6_edPEOVConrKHvSX2oYoMjUMovUPeFqC_nmk/s1600/values.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 122px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1o_ZegXBe_WQEoz6a0iwoob05FiPgPGcpEJIht-qbGE_-EVC3CnV2PABDHiQKXnD_KS6cA-etXRtEruUxwVB0TTOM7SUvydLZLP5RXl6_edPEOVConrKHvSX2oYoMjUMovUPeFqC_nmk/s320/values.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509017327140215714" /></a>Our strapline "Money: if you'll take it, we'll make it!"<br />5. Have the right sector expertise - property and other collateral management, and fixed income (but forget small firms, retail distribution or trade manufacturing unless we post you to Germany or China). Strong sectors where we want hands-in-the-till experience are chemicals, pharma, oil, gas, institutional funds, and healthcare.<br />We reject Main Street's opprobrium of individual banker's success as unfair in the UK as anywhere:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYgSvDEUfVrldq8XnrBefY7SEfnVGB_pHQ-8-6L0eeqLQ6cwFk3ABA0mmBIavjPuKasr262ycF65A7Z1AGhMOKtmwCC6RwTAQbZtChXKfyEZzGBCfXs2LNlT8W0sAAn0fHWQLkLqNUnp4/s1600/bankers+bonuses+uk.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 91px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYgSvDEUfVrldq8XnrBefY7SEfnVGB_pHQ-8-6L0eeqLQ6cwFk3ABA0mmBIavjPuKasr262ycF65A7Z1AGhMOKtmwCC6RwTAQbZtChXKfyEZzGBCfXs2LNlT8W0sAAn0fHWQLkLqNUnp4/s320/bankers+bonuses+uk.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509017578477427634" /></a>Other quality advice:<br />1. Don't embellish; cut to the chase, to the bone. A common pitfall is candidates listing deals in their CV they didn't control or had only cursory involvement in. We note when you umm and aah if asked to discuss deal-makers versus deal-breakers, or risk-accounted ins and outs of the deal, or when we ask you for an investor's perspective. If you're too into long term fundamentals you're not worth human capital investment by us.<br />2. If a trained accountant or actuary or economist, downplay that; classic capital & securities skills have ago changed. We used to look for corporate and treasury finance backgrounds - not any more; today we use deal-closers, salesmen who can talk upside and downside simultaneously polished on whatever side gets us the best upfront margins.<br />3. Referencing Goldman Sachs won't help - smells of failure in staff turnover stakes; no one leaves GS unless they're crackpots. We need candidates who were highly rated, notn simply having worked someplace unless with a financial regulator or central bank. <br />4. Don't assume working with large clients qualifies you. Private equity needs people with a broad portfolio of company board-level executive experiences at both large and small entrepreneurial outfits generating double digit returns i.e. an above average bonus history.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoYARsQB-Od3Pz1Ws7g06N9Z2Bq-6Dqpc_lVTbt-FkFjI9w21XlWTV1RuPqadpG3UKAfSDKCp5NpkwTsmCSXfs0HvP5NQ-aQlZz0dVohJIWm-Bsnz3ASpzjjhvuGA-stpv24O7Qg5ad6E/s1600/bonus+boom.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 270px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoYARsQB-Od3Pz1Ws7g06N9Z2Bq-6Dqpc_lVTbt-FkFjI9w21XlWTV1RuPqadpG3UKAfSDKCp5NpkwTsmCSXfs0HvP5NQ-aQlZz0dVohJIWm-Bsnz3ASpzjjhvuGA-stpv24O7Qg5ad6E/s320/bonus+boom.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509012244891076962" /></a>5. Don't come across as young or naïve, or over 50 (early retirees). Candidates must demonstrate street-fighting skills in algorithmic analysis and monte-carlo research and more and more MBA maths mature. You may not be leading a presentation by a management team, but you will be a basket points or goal scorer.</span>"<br />You must talk the talk while instructing others how to walk the walk.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUwngj33urAXVdwFIhG3LDcIbg1pVa2lUN0USv4-Sy3UKJ4PFwn3D3sZZdEHoQaLJAcbDdOD_8CLn60k1m44V9UCSA5-TBfVL4iEK4i5Y3lRL4usc7YkcqiIDQ2qyUb47wlKcNiryw-rY/s1600/Business_Model_Environment.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 266px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUwngj33urAXVdwFIhG3LDcIbg1pVa2lUN0USv4-Sy3UKJ4PFwn3D3sZZdEHoQaLJAcbDdOD_8CLn60k1m44V9UCSA5-TBfVL4iEK4i5Y3lRL4usc7YkcqiIDQ2qyUb47wlKcNiryw-rY/s320/Business_Model_Environment.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509286999054420114" /></a>The credit crunch and ensuing crisis exposed flaws in banks' business models to survive a whole credit cycle, but these were merely the flaws in our great society. <br />So, let's not hear more about the foolish risks of the financial sector or the devastation to the economy, or fiscal deficits. Too little has been appreciated about the wider societal moral deficit that is hardest to correct. We operate on a morality of profits, not deficits. We judge ourselves by peer review, to do better than our competitors have done in the last decade and the next and or last quarter and next quarter.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbZlGz3hLK4Cp_tYc-yOc3OVhbMxgJD94rjioSLoW5EaROsZae7ydcn12Wgo1dnhCpXwY1m6XjZ4kJzgnl691ctckpyayg32dPB9l-LbzPGH4LKcWydYfECvhoM_0_kgICMuWT2zN0yPQ/s1600/compensation0.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 182px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbZlGz3hLK4Cp_tYc-yOc3OVhbMxgJD94rjioSLoW5EaROsZae7ydcn12Wgo1dnhCpXwY1m6XjZ4kJzgnl691ctckpyayg32dPB9l-LbzPGH4LKcWydYfECvhoM_0_kgICMuWT2zN0yPQ/s320/compensation0.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509015517043283906" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_-B5MM-t2QU_9GwKzlyqEg0FXVr8OrIDQDlNG-U-hljpwOozeqGLYM84QT4YbPOxTKcN9kTdeSOGdwhy-J2BXM7vzFop0tL0KKVPUslM011q4dVNmExkBIIC39rSHFpkj-r_c0kKvZYo/s1600/compensation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 182px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_-B5MM-t2QU_9GwKzlyqEg0FXVr8OrIDQDlNG-U-hljpwOozeqGLYM84QT4YbPOxTKcN9kTdeSOGdwhy-J2BXM7vzFop0tL0KKVPUslM011q4dVNmExkBIIC39rSHFpkj-r_c0kKvZYo/s320/compensation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509015159271882034" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9FUzbTJE4lMjFGDHlpnNvB0G3C4SprkmflN7NVS1j09fXMCH23nv0M3ztUT7LFoePtpgxETgeV2r0syoA9yYQwWygxVlq9QOTTvJ1LOAQhppNN19v40p5huBbba9-HqNBoDJ9EZomKdc/s1600/compensation2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 182px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9FUzbTJE4lMjFGDHlpnNvB0G3C4SprkmflN7NVS1j09fXMCH23nv0M3ztUT7LFoePtpgxETgeV2r0syoA9yYQwWygxVlq9QOTTvJ1LOAQhppNN19v40p5huBbba9-HqNBoDJ9EZomKdc/s320/compensation2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5509015257462295842" /></a>One of the lessons of this crisis is a need for collective action, which is only the role for government. When markets blindly shape our economy and society, doing their level best, we rely on government to pick up dropped balls, run and pass back to us to cross the line. We take care to shape events to what we want going forward; questions of blinkered targets and purblindness we leave to others, to good and sensible government.<br />best regards to all my staff,<br />Your CEO<br />see note attachedUnknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-32143535988218612662010-08-11T03:39:00.000-07:002011-11-15T10:43:32.661-08:00REGULATORS GET TOUGH BUT WILL THEY CAP BANKS' PROFITEERING?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6Okv-JVCVC2Ng-ajxxcYyVz7tUL2w335Fubrvqg69Zq1KiWB00C9UwV91s4K4EocuQooxJ6pYW3-6mhJTC4FGYK5DjwxRFldc4fosO0_5znPqEOg-eCch-0Z2WIH7DgyS1VOi4jUcdMk/s1600/lion+on+kill3.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 222px; height: 250px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6Okv-JVCVC2Ng-ajxxcYyVz7tUL2w335Fubrvqg69Zq1KiWB00C9UwV91s4K4EocuQooxJ6pYW3-6mhJTC4FGYK5DjwxRFldc4fosO0_5znPqEOg-eCch-0Z2WIH7DgyS1VOi4jUcdMk/s320/lion+on+kill3.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504154262261570482" /></a>If, in our western capitalistic economies, we think of profit-hunting (a concept beloved of some fund managers) as akin to lions hunting, then non-financial industry is like the female lions who do the chasing while banks are like male lions who lie and wait but get first servings and second helpings if they want. <br />Bank lending is as essential to businesses growth as male lions are to the reproductive role of females, but the latter do nearly all the work while the former get to take what they want whenever by virtue of seniority, droit de signor. <br />This is the kind of analogy we are used to if discussing governments taxing of the 'real economy', but it is today undoubted by most people that banks, generally speaking, enjoy similar powerful privileges but, unlike government, without political democratic checks and balances, or a marketplace to be relied on to assert limits - a problem perceived when banks' profits appear too large a share of all corporate profits.<br />The question is whether, as banks seek to reproduce again the high net returns they enjoyed in the immediate pre-credit crunch years, the problem of banks was not taking excessive risks but imposing excessive risks on their customers by taking too much of the whole of an economy's profits? <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFWg3pou5Ngw7cE3Ap-YVTjvNVs9tVF1nsgQQaN2eJGi82yN7eD8bLQ0KxMUGINZh2vUyR2HFRFTxCys85-eyKkwRrVNvsOMfwze7-eeaJnekrKnGqlG2xKNqUUAG7-0fB2lCYdCHLR_E/s1600/lion+on+kill2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 166px; height: 250px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFWg3pou5Ngw7cE3Ap-YVTjvNVs9tVF1nsgQQaN2eJGi82yN7eD8bLQ0KxMUGINZh2vUyR2HFRFTxCys85-eyKkwRrVNvsOMfwze7-eeaJnekrKnGqlG2xKNqUUAG7-0fB2lCYdCHLR_E/s320/lion+on+kill2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504154327583338882" /></a>It has become as if established fact that banks led us into the credit crunch because they took excessive risks? What would that mean in our analogy - the male lions ate too much of the kill leaving too little for others, or decided they could do the hunting themselves and decided to care less about the rest of the pride, or perhaps they sat forever by the water-holes charging too high an attrition rate for access to the liquidity?<br />There can be little question but that lions (banks) were kings of the economic jungle pre-crunch. Now post-crunch the elephants (government regulators) have stepped in to reassert authority and dictate to the male lions new rules of behaviour, and maybe listen to the complaints of herbivores unable to risk drinking at the watering holes.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-yhJgQqq_Bf737QQ974SaCYclVEUwDMuX95Z19ITmkRDQKekf-2cq06yFmEzzl2kTkyUMVsz-EYk6YODhv_0DJfh5fOc68typnxVakLV6CLklVqG2e4zorPA_1Y5JrNrRRQNCYkoWlXQ/s1600/lons+and+elephant.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 190px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-yhJgQqq_Bf737QQ974SaCYclVEUwDMuX95Z19ITmkRDQKekf-2cq06yFmEzzl2kTkyUMVsz-EYk6YODhv_0DJfh5fOc68typnxVakLV6CLklVqG2e4zorPA_1Y5JrNrRRQNCYkoWlXQ/s320/lons+and+elephant.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504158079286161298" /></a>One of the biggest stories of the Credit Crunch has been the two-way exchange of ideas between UK and USA elephants, the respective central banks and other financial authorities. The US Federal Reserve following the Frank-Dodd Bill has special responsibility for supervisory regulation of the biggest banks and non-bank financial institutions - those that have been branded "too big to fail" or "too big to bail" and "to big to feel". <br />The Fed's FDIC board approved creation of two new divisions under the regulatory overhaul: The Office of Complex Financial Institutions to oversee bank-holding companies with more than $100bn in assets and non-bank firms deemed systemically important by the new Financial Stability Oversight Council. The OCFI will be responsible for liquidating failed bank- holding companies and non-bank firms. The FDIC is also establishing a Division of Depositor and Consumer Protection to enforce rules of the new Bureau of Consumer Financial Protection. The rest of the FDIC will be responsible for policing several thousand small banks with less than $10bn in assets. <br />The Bank of England will have similar responsibility in the UK, but also a lot more, covering all banks and systemic risk, but not yet planned to cover all major (systemically important) financial institutions.<br />The basis for the Fed's supervision should be the Basel II Capital Accord, and to take its template from the FSA's Prudential Sourcebook, which inevitably in spirit it appears to, but actually not in all fundamentals. <br />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. <br />US regulation currently is oriented to Sarbanes-Oxley, and its legal system to questions of insider trading, saying one thing in public and the opposite in private, for example. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFlYq5VC_OrN37HOQ66Xzl3gAjd514SG9n4JxgnpItMMWbmdH6BoTPbONSG8CVlWhu9ctfeFWDCW0Pg9UehiR-7PrCys2UWuJ7AZhqt43KtAvVrkuEsxme6uaddC5bQy8m4dTi7CKBqLU/s1600/US+banks+insider+loans.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 158px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFlYq5VC_OrN37HOQ66Xzl3gAjd514SG9n4JxgnpItMMWbmdH6BoTPbONSG8CVlWhu9ctfeFWDCW0Pg9UehiR-7PrCys2UWuJ7AZhqt43KtAvVrkuEsxme6uaddC5bQy8m4dTi7CKBqLU/s320/US+banks+insider+loans.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504173973091836578" /></a>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 all in the property industry know well - the type of matters that brought down Anglo-Irish Bank and fatally threatened many others?<br />Governance is important including all codes of practise and moral issues, but these are only a part of the much bigger technical risk landscape. Sarbox is not wholly fit for purpose.<br />Where the FSA's main, and very comprehensive, guidance to risk management, calculation and reporting, for financial firms is a thousand pages, the Fed's is two thousand pages, mostly of ethical imperatives, and each page far more densely worded, and, astonishingly, almost totally without graphics, charts or equations, except a few daft ones like this one that suddenly pops up but only after 230 pages into the supervision manual:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisrFSQhU1A0BJ7fsDYvw204FWmYlwXVaUcAyplN3I1MrRxK6n7KFF3_WoEK54YtUoqYYx9DM7QtyOKx33q2X2uVmEuegB6WU3jPIXHAbnwi_LAaXJTPW8znKoSKo3GFBYC_YtjGrRzREw/s1600/not+FDIC.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 140px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisrFSQhU1A0BJ7fsDYvw204FWmYlwXVaUcAyplN3I1MrRxK6n7KFF3_WoEK54YtUoqYYx9DM7QtyOKx33q2X2uVmEuegB6WU3jPIXHAbnwi_LAaXJTPW8znKoSKo3GFBYC_YtjGrRzREw/s320/not+FDIC.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504163769640305106" /></a>After the Credit Crunch it became axiomatic to blame regulations as well as regulators for being dilatory. But, much of this criticism originated first in the USA, and some in UK because of N.Rock, because risk regulation there was more governance oriented post-Enron with Sarbanes-Oxley (Sarbox) that is not nearly as comprehensive or systematic in risk accounting and risk analysis as well as in governance and risk culture as the Basel II Accord. For example, this checklist graphic for supervisors, which comes up after over 500 pages of Sarbox style requirements: <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilpeEgPLz7kqiuRa3VAhhLM9GbB_EHB_65-JU9IAthQ_2_uutnxvjCqp0dAmUq2YElAVVCbPsWeZX57ksJXAia7zlyHJP2dklVjtOBIXzRhhDSdjGMbZfwCvNOI89yfb7Q0HmMTho9fc0/s1600/composite+risk.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 266px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilpeEgPLz7kqiuRa3VAhhLM9GbB_EHB_65-JU9IAthQ_2_uutnxvjCqp0dAmUq2YElAVVCbPsWeZX57ksJXAia7zlyHJP2dklVjtOBIXzRhhDSdjGMbZfwCvNOI89yfb7Q0HmMTho9fc0/s320/composite+risk.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504163853421749730" /></a>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: "<span style="font-style:italic;">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</span>." <br />If this defines a bank then a lot of trading companies who insist on advance payments (deposits) and who then offer 'trade credit' also qualify. If such a starting point question is needed, which I doubt, it should be, "is this business properly and fully registered in all its parts as a regulated bank; if not why not?" e.g. should AIG and GE Capital be classified in large part if not wholly as banks? GE capital with over $500bn assets has 100m financial customers and owns banks, but is not 'a bank'. AIG is more than an insurer and behaves like a bank but is not one, yet has over $800bn financial assets and in the last 3 years booked $62bn gross in realised losses and $39bn unrealised losses (that summed to almost the same in net losses). <br />Further on this: AIG is regulated by the Fed, but GE Capital is not. GE capital is shrinking its assets from $650bn to $400bn after credit crunch losses of about $10bn only for which it had to rely on funding support from its parent GE and on US government guarantees to stay technically solvent. <span style="font-weight:bold;">GE Capital Loss Provisions</span><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ7lC_Cmmn5EhlKgN6_A0Zihb4uDohRC_J9MOUs2VAGHvcc0m2vI2l23BwyUxszljtbdBFRWUfkD6ysw0Fnbs5UM6c2uodtpNixyAJzUdZTjKaDzamq1eHStft5MFs0TIP5tEuyAfSJzM/s1600/ge-capital-300x261.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 300px; height: 261px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ7lC_Cmmn5EhlKgN6_A0Zihb4uDohRC_J9MOUs2VAGHvcc0m2vI2l23BwyUxszljtbdBFRWUfkD6ysw0Fnbs5UM6c2uodtpNixyAJzUdZTjKaDzamq1eHStft5MFs0TIP5tEuyAfSJzM/s320/ge-capital-300x261.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504169638601512402" /></a>GE Capital wrote many $billions of mortgages including tens of billions in UK, but is now a tiny fraction of that volume, cutting back far more than regular banks. But, despite losing its AAA rating, GE Capital is supremely sound because of its massive industrial parent, as part of a grouping that is expected to benefit from $100bn in engineering contracts alone from the Obama fiscal stimulus package to boost US recovery. <br />Looked at in context, GE is better risk-diversified than banks with too little exposure to industry, manufacturing and trade. If GE Capital was a bank it would be be among the top 10 of the USA's biggest.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj94bXW5ouG5PNYVMzR-5ZAIhruZdP2yjoXvq09Gw6HkSpp_RiGSg230Quj8vZf-wcBiVdTeF_uaPfr3VKSKTyblJ6ffR43VuQH3SBsPbIvpNKzATnq1SAiPBzXI4T_n98p1wXRNl_RXBg/s1600/US+biggest+banks.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 118px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj94bXW5ouG5PNYVMzR-5ZAIhruZdP2yjoXvq09Gw6HkSpp_RiGSg230Quj8vZf-wcBiVdTeF_uaPfr3VKSKTyblJ6ffR43VuQH3SBsPbIvpNKzATnq1SAiPBzXI4T_n98p1wXRNl_RXBg/s320/US+biggest+banks.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504173025982119170" /></a>The Fed is now acting tougher than before, not least over stress-tests of the banks, following the rather weakly and narrowly defined European example this year that followed after the similarly vapid tests of US banks last year. It was perhaps fair enough to let the banks etc. get away with mickey-mouse quality scenarios and stress-tests given the urgency required and inexperience of all involved. last year the urgent question was halfway through the budget year what might the banks need before the end of the budget year. The results were:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivNiZavKrmev_ZbvCKfpSEpnT_0xyZNEIFmdrKo3xGqTFExpQY1X1Q62isGkzC2cKcAs1-Ww6jEK707oN_4SkV_FMsRvgoZh_dpz4H3RM-8pkXYMt1SMf3veMwR-RVzZfBAz9ezypmuCk/s1600/US+2009+stress+test+results.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 244px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivNiZavKrmev_ZbvCKfpSEpnT_0xyZNEIFmdrKo3xGqTFExpQY1X1Q62isGkzC2cKcAs1-Ww6jEK707oN_4SkV_FMsRvgoZh_dpz4H3RM-8pkXYMt1SMf3veMwR-RVzZfBAz9ezypmuCk/s320/US+2009+stress+test+results.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504173360548048306" /></a>The get-tougher stance is similar to the more intrusive approach adopted by the UK’s Financial Services Authority from last year following The Turner Review and earlier knuckle-wrapping over Northern Rock and by implication other cases.<br />There is an abiding problem for regulators, which is budget and skilled manpower retention, especially when any with risk-audit experience inside regulators are prime recruits for banks who pay more for the privilege - a doubtful one in my opinion since 'regulators' and 'bankers' are still on the same steep learning curves.<br />There is, especially in the wake of Credit Crunch, a large dollop of mutual mistrust and fear between regulator and regulated. One result can be that a bank offers up a best effort account of itself and its risk accounting only to be told the result is not enough or not acceptable, when of course ultimately banks' reports are never entirely perfect. <br />But the banker might ask why a report is unnacceptable, only to be told to read the manuals again or that the regulator does not have to explain himself? Regulators, perhaps out of depth themselves, sometimes resort desperately to asking more questions instead of providing answers or solutions to a bank's apparent difficulty. If risk reporting and analysis is top-down more than bottom-up the regulator can insist it should be more the other way, and if vice versa then vice versa to that too! <br />There are internal (micro-prudential) benefits to becoming sophisticated and ever more realistic in stress testing, and external (macro-prudential) benefits to the whole banking sector, as last year's and this year's stress tests have shown in lowering of credit default spreads. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7bdrW9VakcxG70-ucWK59lG-gVQWx204ASYCy3yeGF8N1LYvb0thS_wnYvZj3kg5ilgbyeK8MqDfPz-HvArTF9Qg3MfWIBX21VtawYZgd-14fja64oF1nDcl2WV19cD6xEz23digAORw/s1600/stres+test+CDS+effects.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 208px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7bdrW9VakcxG70-ucWK59lG-gVQWx204ASYCy3yeGF8N1LYvb0thS_wnYvZj3kg5ilgbyeK8MqDfPz-HvArTF9Qg3MfWIBX21VtawYZgd-14fja64oF1nDcl2WV19cD6xEz23digAORw/s320/stres+test+CDS+effects.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5504284891733868354" /></a>One of the FSA's strongest cards is or was its ARROW reviews where regulators would interrogate senior management individually to determine if they understood the basics of risk management and risk accounting - if not, then it was questionable if the interviewees should sit on any of the bank's boards or risk committees including ALCO and ALM committees. Nowadays similar rigour is applied to the numbers and the less than wholly adequate systems for calculating them. But, it remains that the biggest question is not just where banks are now but where they will be if there is another major downturn shock anytime soon? <br />The EU stress tests of 91 banks didn't show problems as uncovered a year ago by the US tests on 19 of the top banks. The worse-scene scenario for 2009 & 2010 (economy to shrink 3.3% in '09, unemployment at 8.9% and home-prices fall 22%). Based on this, 10 of the banks were required to raise their capital to maintain solvency.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBR5dtM8qeuLczmvN1iQU5nELdfQNk4090dptNrEja-YVtSmnYZAuRKXEMXWFxRKB9nrns91XVs19OzDkKzuTU2ijXh2UM688KZBIxHDtH34LNlcp1H6eWd_B3_9_bqmiZQC0IpwL4EPE/s1600/USA+stress-test-us-banks.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 238px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBR5dtM8qeuLczmvN1iQU5nELdfQNk4090dptNrEja-YVtSmnYZAuRKXEMXWFxRKB9nrns91XVs19OzDkKzuTU2ijXh2UM688KZBIxHDtH34LNlcp1H6eWd_B3_9_bqmiZQC0IpwL4EPE/s320/USA+stress-test-us-banks.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5504179796794295682" /></a>Fed regulators have since then increased scrutiny of USA’s largest banks, digging deeper (audit-trailing from lower to higher 'granularity') into 'riskier' activities and pushing firms to conduct more rigorous “stress tests” of their 'risk appetites' and checking the veracity of governance statements.<br />Tighter oversight is justified by the genuine fear of another financial crisis as devastating as the current one - to close regulatory gaps that permit unsustainable risk-taking exemplified by Lehman Brothers, AIG and Bear Stearns, to which may be added WaMu, Wachovia, and Merril Lynch, and factors necessitating government funding loans to JP Morgan, Morgan Stanley, Goldman Sachs, Citigroup and Bank of America. <br />Some experts suggest the stress tests are no more realistic than 30mph head-on car crash tests, adding that sadly the most appropriate and realistic aspect of the exercises are 'dummy variables': <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhx56SCezTxEKMn-goK3yTJ8lgtfClsZP_V9i8Fx_gGpuc-Y7WHjjzySNjHfidiziM9DrxOjQnxhpb-Z6gnW01U-Ft3r-FirnELeoTHL_vjVizNP2qCoUmgdCfyuOW64Wjou0CQ84cIhCg/s1600/car+crash+test+dummies.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 200px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhx56SCezTxEKMn-goK3yTJ8lgtfClsZP_V9i8Fx_gGpuc-Y7WHjjzySNjHfidiziM9DrxOjQnxhpb-Z6gnW01U-Ft3r-FirnELeoTHL_vjVizNP2qCoUmgdCfyuOW64Wjou0CQ84cIhCg/s320/car+crash+test+dummies.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504181390316332914" /></a>So, as we experts have always said, eventually regulation of banks would focus centrally on stress-test scenarios, the very aspect that banks dragged their feet on and ignored, preferring to complete everything and anything else first.<br />The tougher policing focuses on stress tests and this time also on details of banks’ realised and unrealised profits. What that means is that simple discount factors cannot be crudely applied to headline figures.<br />Federal examiners are asking banks for more details on the P/L of each line of business and per asset class, especially securities and capital markets and investment banking, rather than focusing only on group balance sheet totals as before. 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? <br />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. <br />Apparently, 'deeper analysis' we learn has informed the authorities that before the credit crunch rising bank profits were coupled with a hidden increase in risks! <br />Well, gee, knock me over with a feather! <br />Before the turmoil, the finance sector worth perhaps at most 15% of US GDP was generating 45% of all corporate profits in a massively fast-rising segment of GDP i.e. roughly fluctuating at or near to banks' total share of 9%/GDP:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTiSltw0-BUJcg72lftgHvQabL2jQTRB7Hebaz7lKS7FZ-LR_jLwAkCbxLSzyUM61Ny2GiJQ2V7mTvvzhIukU4aHP2zOhrZttpHQRCBrBHJ4jkMn3dsGHfdGGhJVaAmeJD_m8kivc6QQo/s1600/us+corp+profits.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 184px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTiSltw0-BUJcg72lftgHvQabL2jQTRB7Hebaz7lKS7FZ-LR_jLwAkCbxLSzyUM61Ny2GiJQ2V7mTvvzhIukU4aHP2zOhrZttpHQRCBrBHJ4jkMn3dsGHfdGGhJVaAmeJD_m8kivc6QQo/s320/us+corp+profits.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5504149056877950274" /></a>and doing so with decelerating equity prices (falling p/e)and to anyone looking at stock market values could see that, with corporate profits rising higher, securities were over-optimistic about timing of the economic cycle:<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6H_kRNDFA63m8meSzR2OBGF69h7eEJVHeED1O-0njd9agJPoYaQxlutoZA9_XYtISCWLJpG4PPM9J1C-IvlxSyBsyyMv2Djy7U9E97wPK57WPWHqK_fi7jBYCffSu8sm27vUJnyA8pSM/s1600/USA+bear+bul+p-e.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 211px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6H_kRNDFA63m8meSzR2OBGF69h7eEJVHeED1O-0njd9agJPoYaQxlutoZA9_XYtISCWLJpG4PPM9J1C-IvlxSyBsyyMv2Djy7U9E97wPK57WPWHqK_fi7jBYCffSu8sm27vUJnyA8pSM/s320/USA+bear+bul+p-e.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5504150032237110642" /></a> and something was surely hugely amiss in profit-accounting by the financial sector reliant on booking unrealised profits that were unsustainable. The data shows finance sector at up to35% of all US corporate profits pre-crunch, and these profits <span style="font-style:italic;">are after</span> the high staff bonuses of up to half as much again!<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0Jvtzgzn5Ffj1NnQrhLCTXmh3OQqnb63uVuTFJ9A90hAYCPif3_LE5GHUwRyBtTlWBR4xXiNEJSaOcxAgfni27YnNWYVLKQSn4hlHRdwwkVlCmIyzrnzH9EdxTmIjIDigoXL2UkLUNtk/s1600/us+fin+sector+%25+corp+profits.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 243px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0Jvtzgzn5Ffj1NnQrhLCTXmh3OQqnb63uVuTFJ9A90hAYCPif3_LE5GHUwRyBtTlWBR4xXiNEJSaOcxAgfni27YnNWYVLKQSn4hlHRdwwkVlCmIyzrnzH9EdxTmIjIDigoXL2UkLUNtk/s320/us+fin+sector+%25+corp+profits.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5504188076444017762" /></a> From a government's point of view unrealised profits and bonuses are taxable so there is a possible niggling disincentive to question the banks' sagging bottom line even if it looked very like a casual hang loose attitude to risk? <br />Data on finance sector as a whole is imprecise because the sector includes a lot of business services, investment funds, asset management, insurance, accountancy, corporate law, real estate and not just 'financial intermediation' the term for banking. Looking at the broader sector data that has grown very dramatically in the last 1 and 2 decades as a share of GDP and that would explain a lot of the sector's share of corporate profits, but which still seems excessive. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6_ax5kE9F9K6V-hqPJuqxTwDVoA8sau-RV11HLZpKOhDxVybWV_BJiilnSheHm4UK0D6Ft-FCgi5xygkC8dJlyOBpLMKxtfGGkqMqv4zZioaGnpW2x5vBFHb3J7qY1VqZUHz-cJR4GcU/s1600/share+of+fin+sector+gdp.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 189px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6_ax5kE9F9K6V-hqPJuqxTwDVoA8sau-RV11HLZpKOhDxVybWV_BJiilnSheHm4UK0D6Ft-FCgi5xygkC8dJlyOBpLMKxtfGGkqMqv4zZioaGnpW2x5vBFHb3J7qY1VqZUHz-cJR4GcU/s320/share+of+fin+sector+gdp.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504279124365629490" /></a>Perhaps, financial authorities thought corporate profits are merely a counterpart to the yield on Treasuries and naturally banks take the pride-leader's lion's share of that kill? <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXoqtDpnlnfa4d_-E7dsaTJnTloVRcV-zif0Oa9pHG2Flr8j4ylRB_SZqiEXy6smFQdTJ543hT9-mhLgYiL0awqlnn2p1-VFOf-0pZ-TWPAlfHeYRfO54Oqk9PDg812ZcLOJpjjVnnoSE/s1600/US+Corp+profit+10yr+Trate.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 226px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXoqtDpnlnfa4d_-E7dsaTJnTloVRcV-zif0Oa9pHG2Flr8j4ylRB_SZqiEXy6smFQdTJ543hT9-mhLgYiL0awqlnn2p1-VFOf-0pZ-TWPAlfHeYRfO54Oqk9PDg812ZcLOJpjjVnnoSE/s320/US+Corp+profit+10yr+Trate.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5504152195580997378" /></a>Regulators before the credit crunch paid little attention to the increase in the amount of mortgage-backed securities on banks’ books. It is also not the job of auditors to audit banks' risk statements in reported published accounts. Auditors sign off the solvency of a bank for the next twelve months, but that is not based on risk or economic analysis, but only on the current solvency of the balance sheet.<br />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. That is hard in the absence of precise details, models, templates and without knowing who and how or exactly when that will be externally audited.<br />What they are complaining about is that regulators are edemanding more detailed realism, but unable to explain what precisely they mean by that? This is new, relatively unknown territory, poorly understood, where blue-sky thinking is required to be populated by all dark clouds imaginable.<br />None of the stress tests and results show a capacity to reproduce the events of the recent past, of 2006-2009 for example, and that should be the first test of the realism of stress-test forecasting models.<br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7198175954085100867.post-26538321062352600832010-08-03T10:03:00.000-07:002011-11-15T10:43:32.661-08:00CREDIT CRUNCH FUNDING GAP NARROWS LIKE CLOCKWORK?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCpYbKpbolZlxlptPXDZIRXdfHBaLLOKj6Zi9_wqdsnlFQU5QQkGuJiDWlBym5DlnB51iLaLFdvJJTJSAMXgDpUcfPPgrazVgQAg8i3UrC_mrt5JvKDJwJxG-oOXVAvDJlckaKu2VYR9s/s1600/cityofLondon.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 200px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCpYbKpbolZlxlptPXDZIRXdfHBaLLOKj6Zi9_wqdsnlFQU5QQkGuJiDWlBym5DlnB51iLaLFdvJJTJSAMXgDpUcfPPgrazVgQAg8i3UrC_mrt5JvKDJwJxG-oOXVAvDJlckaKu2VYR9s/s320/cityofLondon.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501230729739021890" /></a>This is a dark night of a wintry City of London - the banks' 'dark night of the soul' continues even in Summer months with Barclays profits (mainly from investment bank Bar Cap), almost 'normal' high profit by HSBC, and return-to-profit by LBG with margins also creeping up. <br />But, short and medium term uncertainties continue, especially for banks that are directly as well as indirectly in the power of government to influence. Government may decide to split investment banking from traditional banking? This has yet to be investigated and debated. Perhaps the big banks feel these are arguments they can win, and yet they appear to be risking government anger by not growing small firm lending, which after all is only 1.5% of their balance sheets! LBG, with the biggest market share in UK banking (c.25+%) appears to have it first priority to get its share price above the threshold of 62p, which it has achieved, and then past 73p when government might be tempted to sell so that it might escape state control, for reasons not unlike its change of mind half a year ago over participation in the Bank of England's APS. <br />For the government and the economy the biggest question repeatedly asked is why are banks not lending more to businesses to aid recovery, especially to SME firms? This is deeply vital to its economic forecasts. <br />The UK government's economic strategy depends on the Office for Budget Responsibility's forecast that job creation will repeat the experience post 1991 recession. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglUtUQR8SV3l7jnuDddej6NFyvxsuDnt2e12rZQ_aGUo6tLT9WpLe1fqMgUEiZf7fRdbUffKMOuXT5S6UPTG3WGo1WIPasBFGr5x30lt6MEJu31xIhCBESect8furzGypIrfg9u2vjoh4/s1600/OBR+jobs+growth.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 297px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglUtUQR8SV3l7jnuDddej6NFyvxsuDnt2e12rZQ_aGUo6tLT9WpLe1fqMgUEiZf7fRdbUffKMOuXT5S6UPTG3WGo1WIPasBFGr5x30lt6MEJu31xIhCBESect8furzGypIrfg9u2vjoh4/s320/OBR+jobs+growth.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5501465223452891522" /></a>But are UK banks doing their bit to make this happen? Whether less bank lending results in serious damage to the economy depends upon what bank credit is financing. If financing intra-financial sector activity the impact on aggregate demand may be minimal. Asset prices fell 25% in the credit crunch and after sell-offs, some recovery and shift to fair value accounting are today 10% below pre-crisis peak, but in the property asset class which constitutes banks' biggest collateral exposure may still be 20% off, and that is without a compensating inflation as in past property collapses of the 70s, 80s and 90s causing unexpected complications. <br />If banks grow credit to finance stock-building, consumer spending or purchases of plant and machinery, or covers cash-flow gaps and running losses while businesses expand or cope with a downturn, then the real economic impact will be direct. <br />The banking system is is essential pump-priming in the economy. Depression is associated with a collapse of bank lending and money supply (on assets side not just liabilities side of banks' balance sheets). <br />Even non-monetarists should be watching money supply (disaggregated) and bank lending numbers like a hawk. If bank credit stagnates and or continues to contract, especially in areas where economic growth would be directly boosted, then the government and everyone else can conclude the economy is not being served by its banks. <br />Banks have few friends and admirers; few happy customers. They should be doing all they can to be genuinely seen to be helping economic recovery even if it means postponing restructuring their balance sheets to get back to 'normal' 150-200bp/assets margin profits sooner than later. Are the banks looking back to the last recession recovery period that of the 1990s and seeking to replay their lending recovery of those years? I suspect they may be doing this but drawing negative conclusions. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjEPWFXQcUjrdrd-0KD1szPXJEHdAoz4452gTeBknX-w-0D9VH6S1r8uhrF-Ve0WR4r7w4A4Loex2GGd_DAncC5h9XsEgJdjuKKcAAmjg4Bj0ClUcPgo0l3rP2dMV6y3f80zNMczIylds/s1600/lending+1990s.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 302px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjEPWFXQcUjrdrd-0KD1szPXJEHdAoz4452gTeBknX-w-0D9VH6S1r8uhrF-Ve0WR4r7w4A4Loex2GGd_DAncC5h9XsEgJdjuKKcAAmjg4Bj0ClUcPgo0l3rP2dMV6y3f80zNMczIylds/s320/lending+1990s.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501480220508131026" /></a>The property market in low inflation is not liquid and not providing the lending demand that would boost economic recovery as it did in the 1990s. Banks must therefore this time look more positively at business lending. Part of the government's strategy and forecast is to grow UK trade, not least manufacturing on which the UK still relies for over 40% of its exports but has low bank borrowing and low debt servicing (10% of profits); most of UK industry is under-borrowed.<br />The banks claim they approve 80% of loan applications, by which they really mean 80% of those judged to be higher quality borrowers, which, as BBA spokesperson says, "have good business models" (pots and kettles?) as if banks really knew, but that translates to about 40% of loan demand being satisfied and many of these are merely loan roll-overs, not net increases because loan outstandings are not growing. <br />Banks also all say that businesses are more interested in building savings and lowering their debt. That may have been more true over a year ago, but corporations are raising bond finance and equity while SME firms wholly depend on banks. But this is a function of small firms birth and death rates. Annually a third of a million firms close for various reasons of which under 10% go bust, and a third of a million start up. In recession and low growth periods start-ups fall more than closures rise. The sad fact is that banks are building up the share of deposits in their liabilities and to do so holding down loan approvals (stricter credit risk conditions like higher collateral, even insisting on more liquid collateral!) and thereby shrinking their total loans in real if not absolute terms. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgctG8waD4uQ-lIodoKYFwcCZTJk0NCKuP3gSqJ3cEtGbTZPI-cQIsf-1l4X1WsIkoke-UGZ2G8yQhxERcekwd4HzssOXeejysBIVhqg-_UoheT2hhnk1ZPx6ses63pmdfIeyle73z5pLs/s1600/UK+deposits.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 264px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgctG8waD4uQ-lIodoKYFwcCZTJk0NCKuP3gSqJ3cEtGbTZPI-cQIsf-1l4X1WsIkoke-UGZ2G8yQhxERcekwd4HzssOXeejysBIVhqg-_UoheT2hhnk1ZPx6ses63pmdfIeyle73z5pLs/s320/UK+deposits.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501303738286148754" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBx2Q-L3xhgslEVWT-6isok4ieiAZpELHosX1LPeWcukAWRIR26KhSwuM139mVeRyBsqiQSFZ8mRL8MqcSv_LsjkZtRsTQ_mbDYBfcAMlUMgcN_5ohvJwXtSsANfpa69LWnpeVfXgJLUg/s1600/UK+lending.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 295px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBx2Q-L3xhgslEVWT-6isok4ieiAZpELHosX1LPeWcukAWRIR26KhSwuM139mVeRyBsqiQSFZ8mRL8MqcSv_LsjkZtRsTQ_mbDYBfcAMlUMgcN_5ohvJwXtSsANfpa69LWnpeVfXgJLUg/s320/UK+lending.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501304499626079474" /></a>UK banks lending from UK branches is making zero additional lending in aggregate. Better (positive) lending is available from foreign banks into the UK, but that hardly qualifies as banks playing their part in recovery. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJx-FkTpQFyUjx_iOj5R1K8sZ1TKeRJTTL01DHiUzpPOJgOqQJH1dmYe__8dICNlHCDT5cqHjOXHpwYNPnv7-1iWA1zY-epq08udM_cCxrddsmdRlhpvYxogrnkH7u6mHQrxl7niTAcVU/s1600/UK+lending+to+NFIs.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 308px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJx-FkTpQFyUjx_iOj5R1K8sZ1TKeRJTTL01DHiUzpPOJgOqQJH1dmYe__8dICNlHCDT5cqHjOXHpwYNPnv7-1iWA1zY-epq08udM_cCxrddsmdRlhpvYxogrnkH7u6mHQrxl7niTAcVU/s320/UK+lending+to+NFIs.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501306656549412546" /></a>HSBC's mid-year results may have lifted banks shares by up to 5%, but the components of revenue growth invite questions and there are several overhanging questions that are troubling to the banks:<br />- can government persuade the banks to increase small firm lending? - balance sheet shrinkage - when is it time to stop and to grow new business? - how to cut costs without losing good people and harming valuable business? - will UK Banking Commission recommend splitting off investment from 'trad' banking? - it reports by Sept.'11; can or will government sell any bank shares before then? - from profit what splits to make between Retained profit / Dividends / Bonuses? - is net interest income solid so that dividends & shares can dependably rise? - will corporate bonds and small firm defaults peak later or are we over the hump? - additional regulations to curb risk-taking: are they a real burden; do they work? - sales of banking & other units; are the issues more problematic than their price? - what is the value of branch networks to retail commercial banking? - can banks solve their core systems problems to update and replace them soon? - living wills, how to simplify large banking groups to satisfy the regulators? - are our largest banks beyond management oversight & control by boards? - if so, how and with what systems to assert effective control of 'risk appetite'? - are supervisory regulators going to 'pass' all the banks risk reporting? - where are UK, USA, EU economies & global trade heading - new patterns to finance? - can banks do comprehensive macro-modelling required by Basel II Pillar II? - property holdings of banks from foreclosures - is it now time to sell? - is confidence restored among funding sources to easily finance funding gaps? - back-to-normal? Can banking return to doing business just as before the crisis?<br />Answering such questions is the work of very special consultant experts, who may borrow watches to tell the time and check the wall clocks, but the landscape of time telling for banks has become exceptionally surreal, very Daliesque. Nearly all bankers they are in strange territory doing business in circumstances they have no previous experience of. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis4VB04vGH8S9As3WDlsGCZdtimOUbdc-K_V2F8YNSl2h8Gtlz_ww-twkg_XrE-Lpco1IM96ZvI2dH2FoTTerH9nUAOVCfiryYwvAbeL9prwx-BBgcXvGai2KDauCJvnfY5MR7WLEHUAg/s1600/SuperStock_433-279.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 254px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis4VB04vGH8S9As3WDlsGCZdtimOUbdc-K_V2F8YNSl2h8Gtlz_ww-twkg_XrE-Lpco1IM96ZvI2dH2FoTTerH9nUAOVCfiryYwvAbeL9prwx-BBgcXvGai2KDauCJvnfY5MR7WLEHUAg/s320/SuperStock_433-279.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501292643279093586" /></a>I (and my colleagues at Asymptotix.eu and elsewhere) have ready answers for all of the above and more. I (we) daily get calls from strategy advisers, institutional investors, banks, and sometimes regulators, to discuss such questions at £200 per hour, sometimes, irritatingly, they get advice for 'free'! I (we) often feel like private sector solicitors practising in regulatory law or like proof-of-concept supervisory regulators.<br />In the past two decades, traders and junior managers increasingly drove banking businesses silo-fashion. Banks looked more like conglomerations of specialist units - mortgages - business lending - trading teams per asset class - structured products - domestic - international - retail - investment - all divining their own <span style="font-style:italic;">risk appetite</span> (that ubiquitous term beloved of risk regulation and private client investing that no-one really knows how to define or compute) and they were silo-wise responsible for their own narrowly defined profit/loss.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZgm3_A0CY_4RtJpbz9iritg2DmCNeDaUMbS-NvqMp9o9yrxQkxHo7qDEP1IPAvX81qwdAg2pYRPk8w0nmHu0LkN0qPELgS9qnFwBvNtD4X3CGz8PP5wPd0u2voMFQDTMm_rKvVQA2HzQ/s1600/clock0.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZgm3_A0CY_4RtJpbz9iritg2DmCNeDaUMbS-NvqMp9o9yrxQkxHo7qDEP1IPAvX81qwdAg2pYRPk8w0nmHu0LkN0qPELgS9qnFwBvNtD4X3CGz8PP5wPd0u2voMFQDTMm_rKvVQA2HzQ/s320/clock0.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244094519102162" /></a>Like clock mechanism in which each of the cogs are acting quasi-independently at whatever speeds they can the whole rarely tells the right time (in terms of the underlying economies) and were out of control, but who cared so long as bookable profits resulted, whether realised or not. In a much more fragile environment boards have struggled to reassert control and are discovering just how difficult, even impossible, that is! They, boards and regulators and central banks, would love to be able to understand banks and see them working like clockwork, like a mechanism with a handle that they can jointly operate - <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvfd8oVJhnp8j_yhxdqUBzB4RMYgRGhU0SEfcGH6b3xh8AYpFNo_K8yB9pdefnlETmMz6hTzFm2rSz15LCsrpC4quvRE7A2o97QSeTkgD2LO8E1T5g0ul6gTkeMfOPZTKh05_pOGhZbJw/s1600/clock3.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 305px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvfd8oVJhnp8j_yhxdqUBzB4RMYgRGhU0SEfcGH6b3xh8AYpFNo_K8yB9pdefnlETmMz6hTzFm2rSz15LCsrpC4quvRE7A2o97QSeTkgD2LO8E1T5g0ul6gTkeMfOPZTKh05_pOGhZbJw/s320/clock3.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244314141709746" /></a> - but it's not like that! Banks position and reposition themselves to service whatever business demand comes to them. They also like to believe they find that business with professional skill, creatively and diligently. But, when they really have to compose how and what they do in uncertain times self-confidence goes and the banks look like mechanisms that have lost battery power and need governments to shake or turn the winding spring. To feel like passive victims of events, no longer '<span style="font-style:italic;">masters of the universe</span>' is galling and anxiety-making - they now know that they cannot really justify their bonuses but cannot bear to countenance that!? Many bankers know they do not know banking like a watchmaker knows his mechanisms; they do not see the whole of the back mechanism. This is the culture change that Basel II regulations insisted upon, that bankers should comprehensively know their banks and understand how risks are interconnected and how their business performance relates to risk-taking, to 'risk appetitie'.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQcqfiniq4N1eyxcLO-XVAMdBTFq9dd4hjkyjUDnMoQVXwx2cBf8t7Di0QWV6Ok5vX4PgljTR6jZPZYwewKPJpRVW7jBSiTRqIc9FoNO9WCLyghbKQOVuCdFvbfw_FVC_lEsU7Ca2i8aw/s1600/clock2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 310px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQcqfiniq4N1eyxcLO-XVAMdBTFq9dd4hjkyjUDnMoQVXwx2cBf8t7Di0QWV6Ok5vX4PgljTR6jZPZYwewKPJpRVW7jBSiTRqIc9FoNO9WCLyghbKQOVuCdFvbfw_FVC_lEsU7Ca2i8aw/s320/clock2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244231597190882" /></a> The same questions as banks are asking of themselves, those whose pay-grade and seniority warrants looking at the big picture, which is precious few people in any bank, are also being asked by wholesale funders, institutions and other banks. The gauge is funding gap financing. Which banks can fund themselves more easily and cheaper than others? Share investors are wanting to get back into bank shares but which banks' performance to trust. These questions I get asked regularly, but it is hard work to explain to others the composition of factors in the different shaped mechanisms of different banks. Banks are far less uniform internally than they appear to be outwardly. My answers begin with the risk diversity of each bank depending upon the national economies where they do business, are these export-led i.e. business lending and capital investment biased, credit-boom i.e. property and household lending biased, a mix of these in cross-border terms or in terms of some countries compared to others. Then what are the internal culture, management and systems qualities of each bank - how well-driven from the board-room or how lucky or unlucky are they. Do their mechanisms work well in a coordinated way or not? Have they he ability to model and track their business in its various contexts? Do they know their aggregated and disaggregated risk appetite and risk diversity? <br />These are the essential questions that supervisory regulators ask in risk audits (to the best of their abilities in judging the data they are presented with). But, the fact is that all major banks and most others have severe problems of one sort or another, and then the question is do these problems matter short, medium or long term? <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQdn1gGi-diCbqKj28LRnVmtwsDAAwWAoy5GusJtIrveOYJoiWAAEPeZk3Ur4lPQGQyxqCqiXKwFhbMtANi6rr9JL-zCi-wsVphNhMaqCmCfuut2uHQ53HbrpWdgIzvkBb95loBdI8q-8/s1600/clock1.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQdn1gGi-diCbqKj28LRnVmtwsDAAwWAoy5GusJtIrveOYJoiWAAEPeZk3Ur4lPQGQyxqCqiXKwFhbMtANi6rr9JL-zCi-wsVphNhMaqCmCfuut2uHQ53HbrpWdgIzvkBb95loBdI8q-8/s320/clock1.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244170533095202" /></a>The systemic context is important but that is subsumed within macroeconomic forecasting, and here lies the rub. The performance of economies are very dependant on what banks collectively do, but the banks don't want to see matters that way; they prefer the idea of having no direct responsibility for the behaviour of economies! Banks cannot (refuse to) factor themselves into the confidence and riskiness of clients and customers.<br />When the Credit Crunch struck UK banks had nearly £1 trillion in funding gap (between deposits and loans). That was double their regulatory 'own capital' and 15% ratio to total assets (loans & net trading investments). In general funding gaps are <span style="font-style:italic;">borrowing short to lend long</span>, precisely the liquidity risk in the liabilities side of their balance sheets that is generally derided as classic high risk. In the years 2000/1-2007/8 funding gaps grew almost exponentially. Had recession kicked in two years earlier in 2006 problems of the Credit crunch would have been much less severe. Structured products (securitizing loanbooks) postponed recession by two years. Those banks with the largest funding gap refinancing needs in 2008 were hit worst by the short-sellers when they refused to jump at the hurdles of sharp rises in funding gap price spreads for fear of losing their bonus-laden profits. The results were they risked their banks' solvency.<br />If banks should operate in repeating fashion year-round like clocks, bankers do so like thoroughbred horses in a steeplechase taking bets, but running the course too - <br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkIQnT7XV_UoEit6_Mr0mCnQrH_LctGt2y5Tff03YlbimLBE4twZ6Wi67uvw3m_47I6TzXqQU59f9wHF4xoXuMfUFdnmmE0Ma9shU9iSzMgimbyjjmbKVe9HyAVgEnvTaty-vwa5gQOm4/s1600/horseheads.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 230px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkIQnT7XV_UoEit6_Mr0mCnQrH_LctGt2y5Tff03YlbimLBE4twZ6Wi67uvw3m_47I6TzXqQU59f9wHF4xoXuMfUFdnmmE0Ma9shU9iSzMgimbyjjmbKVe9HyAVgEnvTaty-vwa5gQOm4/s320/horseheads.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501255732929760386" /></a> - where the fences are like funding gap financing, turning over medium term notes and covered bonds and seeing loans recycling back onto balance sheets as deposits. In the Credit Crunch that refinancing got harder, the fences higher, and many horses fell. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhGryV0eXOJ9ICCMXGzU4J8iXoDBs62z6VyIdm0bhW_go1vOgq5ORHD-09lJOB7APxvJi-MiJhDS-bDbd7_d5Q-6BfcFWHnKswd-WMjkiPhX7Dw_nEiXhHVTb1ROe9nFWCGnBLYGlDfdo/s1600/aintree+fallers.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 230px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhGryV0eXOJ9ICCMXGzU4J8iXoDBs62z6VyIdm0bhW_go1vOgq5ORHD-09lJOB7APxvJi-MiJhDS-bDbd7_d5Q-6BfcFWHnKswd-WMjkiPhX7Dw_nEiXhHVTb1ROe9nFWCGnBLYGlDfdo/s320/aintree+fallers.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501255802142510962" /></a> The UK banks' financing fences remain high today. While banks of other major European countries, such as France, Germany and Italy, face major funding issues mainly next year, none have to refinance the same amount as UK banks, which must replace debt securities of twice as much as the average in 2005-07. <br />But, with government's help (Bank of England asset swaps worth £500bn) and their own balance sheet shrinkage (first netting off derivatives, then liquidating other own portfolio trading assets, withdrawing cross-border interbank lending, and letting loans mature with minimal new lending (i.e. shrinking their loan books) and waiting for deposits to rise, UK banks' funding gaps have shrunk from nearly £1tn to less than half of that!<br />LBG and RBS restructured their balance sheets most of all - they had to - including reducing assets (loans & trading book) by more than a third over the short to medium term, 1-3, not 1-5, years. This was largely to better manage their refinancing requirements, reducing wholesale funding and the % of short-term financing within that. The Bank of England (and no doubt UKFI ltd. of HMT) advised all banks to shift their wholesale borrowing to longer term maturities (as the government itself was also doing) and of course thereby getting that borrowing more in line with asset maturities - and worry less about interest rate risk. The banks have to forecast and calculate the 'stickiness' of deposits, more closely align liabilities (mainly deposits) to assets (mainly loans) - in effect get the cogs of the banks on both sides of their balance sheets to move more precisely with each other. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrj-ew1Tiix_VFM3fr852Qkyfr6ugypiQVRAsebjWyNGOS66hOp5yRB0rGVZ0UxrgTg6ztkF-L97gAMJBSRyMeugwZhya7HsWFwMxGdGaY9T1KQZb0kukvHCSxOSeP5LHqKHRdxELYFdM/s1600/clock4.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 233px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrj-ew1Tiix_VFM3fr852Qkyfr6ugypiQVRAsebjWyNGOS66hOp5yRB0rGVZ0UxrgTg6ztkF-L97gAMJBSRyMeugwZhya7HsWFwMxGdGaY9T1KQZb0kukvHCSxOSeP5LHqKHRdxELYFdM/s320/clock4.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244376156654370" /></a> This restructuring forces banks to stop net new lending - but why? The answer is, like government borrowing and budget cuts, the fear is of negative judgement by credit markets, the markets who by recoiling in sudden panic propelled the credit crunch. The banks collectively have to cope with:<br />- cross-border interbank lending rapid shrinkage<br />- closing funding gaps substantially i.e. shrinking customer lending by 20-30%<br />- let 3% annual inflation whittle away at private sector debts<br />- play for time for mortgages to amortise so outstandings and LtV ratios fall<br />- build up capital and prepare for off-balance sheet assets coming back on<br />- work out delinquent loans and not make new ones for fear of higher defaults<br />- prepare for possibility that past pattern of trade and bank lending cannot be repeated again, not in next 5 years or so at least?<br />Internally within individual banks, shrinking balance sheets to realign assets and liabilities appears sensible and prudent, but not when all banks in aggregate are doing the same! Externally, to those on whom banks should be seeking to win back goodwill and confidence, it looks like selfishly putting the banks first and the economy second. If we want our banks to look more like traditional clockwork mechanics, then the rest of the economy will have to shrink too and grow more closely to the lower rate of income growth with much less credit recycling. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3dxtPGZSpRe4Ceq5M3N0TWQx8R7idYQAGrTDW_AaybJVEfz0YUJlzJsx7JUfSsrgVe3U6rmm69LSuGmX_mg2WQRA5DLX1L5fleKnWZZ0LPfDSpnSgIMhmHxhkcIv7F4K1gXKOw1_mI0I/s1600/clock6.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 201px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3dxtPGZSpRe4Ceq5M3N0TWQx8R7idYQAGrTDW_AaybJVEfz0YUJlzJsx7JUfSsrgVe3U6rmm69LSuGmX_mg2WQRA5DLX1L5fleKnWZZ0LPfDSpnSgIMhmHxhkcIv7F4K1gXKOw1_mI0I/s320/clock6.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244499050035122" /></a>Government won't mind that so long as there is at least positive growth in the economy above the rate of inflation and a prospect of tax revenue recovery without higher tax rates. But, its projections depend on employment growth and unemployment falling, on higher exports, lower imports, on banks and other services continuing to generate net foreign earnings to offset the trade deficit, and on the balance of payments not worsening over-much even if the trade deficit balance narrows i.e. a conjuncture of positive factors - but it is many years since we have done anything like that while bank lending has ceased to grow or shrink! In past recessions and recovery periods bank lending did not absolutely shrink! This time is perilously new.<br />Without the high budget deficits of 10%+ of GDP, M2+ could have been contracting at more than 10%. Similarly, without the deficit nominal private sector output could have contracted at a depression rate that in the 1930s for several years was about 15% annually. Government has limits (partly those of Maastricht) to its fiscal stance so that it cannot on its own stop both real and nominal GDP stagnating, and in a world were most countries are seeking more external than internal growth impulse, the prospect of growing at substantial rates is low without substantial growth from capital investment for which bank lending to businesses is a major supply-side driver. The implication from ongoing contraction of bank lending and repair of bank balance sheets is that high government deficits to boost private sector output will continue just to keep nominal GDP from again contracting. Government attempts to recover the economy are made fragile by banks shrinking their loanbooks. For a private, highly leveraged, debt-based economy, there can be little or no private sector growth with bank lending contracting at 5-8% of private GDP. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihL4U8vq1AZr80eIKnJbKUcwx_GMSPtrZ2c04x-z0bW5tHCatUFe8VMMkFXGAjsZoDQ7PikIs6hl0ZOz0uRtFhXf0S8xKcx3qM4BBJjfXGmFV7EPW0albDjZ8thHRb-fWlOLsuhLmYrV8/s1600/banks+refinancing.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 284px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihL4U8vq1AZr80eIKnJbKUcwx_GMSPtrZ2c04x-z0bW5tHCatUFe8VMMkFXGAjsZoDQ7PikIs6hl0ZOz0uRtFhXf0S8xKcx3qM4BBJjfXGmFV7EPW0albDjZ8thHRb-fWlOLsuhLmYrV8/s320/banks+refinancing.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501299146459754050" /></a>UK banks need to refinance £390bn in the next two years, about £200bn in maturing bonds and residential-backed mortgage securities, remaining £190bn in reversing the asset repos (out of SLS & APS which the Bank of England insists will be phased out by the end of 2012) and existing preferred bank shares (£60bn) of Government bank capital funding, and the Credit Guarantee Scheme etc. Much of this is to do with how rapidly and how recently banks, biggest banks especially, grew their balance sheets just before the Credit Crunch hit.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE8CeeSmaQ0l8SAux7aJiYUa66-MFMRSnz3vVuFxsw-TatrDsNbaNfD6jYrU1LZrXMyCn-1e8vetKzCfoVodhr3GJDtze1cV8vyeSzi79WubCMCz5rcL75AG5NgeJ9kyLiXr96C09M31k/s1600/uk+LIABILITIES.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 318px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE8CeeSmaQ0l8SAux7aJiYUa66-MFMRSnz3vVuFxsw-TatrDsNbaNfD6jYrU1LZrXMyCn-1e8vetKzCfoVodhr3GJDtze1cV8vyeSzi79WubCMCz5rcL75AG5NgeJ9kyLiXr96C09M31k/s320/uk+LIABILITIES.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501301258710734226" /></a>Shrinking of balance sheets, and if combined with government retrenchment is undoubtedly a macroeconomic risk that could be worsened if government and regulators try to try to wean banks off Government support too quickly, even if, as some may think, it seems important to government budget balancing and spending cuts for the banks to become fully-privately funded as soon as practical? In my calculated view there is substantial profitable gain that will accrue to taxpayers from government retaining government support for banks longer than first planned. The mechanisms whereby this can happen are not clockwork - many confidence factors play a part including the relative perception of the UK versus other countries. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6g_9L3I1RJ4QLvLEOtPCkGlQAroYBa0d-WmuMR16yJwUEGtt0HHLMevrGmRoBUK_olvkzH6evLm5pR7dqSZDraITm-AbRnm2AwDi5yLZfYVmrQKqrVz-eYkB3CuJg7pVNr1XxNMoMZq8/s1600/clock8.JPG"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6g_9L3I1RJ4QLvLEOtPCkGlQAroYBa0d-WmuMR16yJwUEGtt0HHLMevrGmRoBUK_olvkzH6evLm5pR7dqSZDraITm-AbRnm2AwDi5yLZfYVmrQKqrVz-eYkB3CuJg7pVNr1XxNMoMZq8/s320/clock8.JPG" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244774075336226" /></a>The Bank of England admitted in its Financial Stability Review that replacing funding gap finance as it falls due is a "substantial challenge", and put the total figure on the amount that UK banks need to refinance by the end of 2012 at £750bn to £800bn (half of which I judge therefore to be reverse asset repos of what is pledged at the Bank of England and maybe, conceivably another £150bn elsewhere, plus about £300bn maturing securities paper like Medium Term Notes), working out an average monthly fundraising of more than £25bn. This looks like a precise 12 hour 25bn per hour clock - actually it is not like that, more lumpy, with an average of 2-3 months to get large MTNs away 9fully subscribed). Some banks have rolling MTN programmes in different currencies (£,$,€) of 5, 10 and 20-50bn each. Maybe they could roll up more of their loan books into SPVs with clearly attractive rates and standby liquidity financing with Bank of England support that might also gradually re-absorb some of the assets swapped there sufficient to attract institutional and foreign asset managers - rather than an on-off private or public liquidity funding support, more like the USA's TARF, a mix of both private and public structuring - just a matter of a well-geared beautifully-crafted central bank designed mechanism?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3nI9cOUIMFGYyNQXfWO-OpNcDkbkO3SfTWCSOEffT9I2C2TQ3qOgOerTErWXR4C1EGi-EOO5pKcwhyCQfdL4rKCTHOQdP06xIbJkQj2AjNVou_Ldj_L6GUUL4Ut9M_HH0xWprpg85LdA/s1600/clock5.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 210px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3nI9cOUIMFGYyNQXfWO-OpNcDkbkO3SfTWCSOEffT9I2C2TQ3qOgOerTErWXR4C1EGi-EOO5pKcwhyCQfdL4rKCTHOQdP06xIbJkQj2AjNVou_Ldj_L6GUUL4Ut9M_HH0xWprpg85LdA/s320/clock5.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244433177910562" /></a>The assets swapped at the BoE belong to management holding companies ('Special Purpose Vehicles') and therefore quite how and how much will have to come back on balance sheet and at what cost is unclear? The Bank of England has the option to roll over the assets swaps for a longer period and could step in to expand the APS or create a new one or to use its balance sheet leverage to buy banks' securities, or create its own TARF, any of which I judge to be a profitable business and a good one for taxpayers to be in.<br />If the banks had assurances from the Bank of England about how it can step in as a backstop to ensure completion of refinancing deals, then this might also usefully take the pressure off the brake on bank lending. Our clocks are currently going backwards!<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijTJsPWvnHhOc0mL4uT_GSVeUO_5ojCZdVtj9kf-EBfL-gpGgOd5wxCfZ-DpYTGtAt5i8rrSrgNNMgf6WeyG_d-8OXOourk1sLxBG47eeRM6hWaFFXd9bp1OuMvzbUpEHKtYWA24ocLWw/s1600/clock7.JPG"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijTJsPWvnHhOc0mL4uT_GSVeUO_5ojCZdVtj9kf-EBfL-gpGgOd5wxCfZ-DpYTGtAt5i8rrSrgNNMgf6WeyG_d-8OXOourk1sLxBG47eeRM6hWaFFXd9bp1OuMvzbUpEHKtYWA24ocLWw/s320/clock7.JPG" border="0" alt=""id="BLOGGER_PHOTO_ID_5501244595539168018" /></a>If there is no such set of options and possibilities discussed with the banks, then anxieties remain that the banks' funds raising rate is dangerously high and hence they are currently back-pedalling fast to reduce it. A Bank of England prepared to extend liquidity at this time in a volume equivalent to its £200bn Quantitative Easing would reassure funding sources considerably. But, anyway, the banks have also boosted their liquidity reserves by a similar amount, but only part of these are clear funds that could only temporarily replace shortfall in funding gap financing.<br />Raising money for and by banks may come up against a much tougher backdrop for the banking industry, especially once (and if at al) the EU stabilisation Fund of €750bn starts monetizing its state guarantees to borrow against its bonds (though I judge this will take most of this year to structure contractually) which though conditions (risk spreads) have improved marginally are still far from the easy money of the credit boom years.Unknownnoreply@blogger.com0