LAST WEEK I dined with the treasurer of a London-based bank. His outfit isn’t quite in the Barclays or Royal Bank of Scotland league but, as we know from experience, the skill-set commanded by the folks in the smaller institutions is often greater and more real than that of those perched at the top of the behemoths.
The treasurer has done the big-bank thing in spades, but is happy to bat along in an environment that can be entered without a steel back-plate. The West End offices are walking distance from home and dinner can be bought on the stroll back to the house, which now takes place before the shops are closed. Ever heard of a lifestyle decision?
Alas, one of the features of working in a smaller company is that more of the strings converge at my chum’s desk than they ever did in his big shops. Hence, some of the senseless regulation which has been implemented in an effort to clamp down on abuse (perpetrated by some of the big guys) becomes more apparent.
So it happens that the banks’ liquidity reserve – we are looking at a very significant proportion of deposits which have to be held at no or next-to-no return – must be held in central bank deposits or government bonds. The rules, however, also insist that bonds held in the liquidity reserve are traded at least once a year in order to prove their liquidity.
In this case, the UK government determines through its agencies that banks have to hold Gilts but then also that they have to trade them annually in order to prove that they are liquid. I’m not quite sure what this proves other than that Gilts are the most liquid instruments in the UK markets. And?
There is, however, a real problem. The idea of holding Gilts in reserve is that they are not supposed to be traded. Buy them at par, hold them on the book at par and watch them redeem at par. The moment they are traded, they need to be marked to market. This can, especially in the current environment where rates are on the rise, lead to unintended losses which have to be realised for no other reason than to demonstrate to the government that its own debt is liquid. The purpose of this exercise escapes me.
Credit is increasingly being provided by vehicles that are not regulated by central banks
WE TALKED A lot, not only about the cost of funding but also of the cost of simply doing business.
All of us remember the disaster wrought upon an unsuspecting world by madcap securitisation of loopy assets, but my memory goes back a little further. I remember discussing with a senior Bank of England figure the pros and cons of asset-backed bonds. The bugbear of the 1980s and 1990s was risk concentration, but securitisation in the form of ABS, MBS, RMBS, CLOs and ultimately CDOs (squared, cubed – and with cap and bells on) served to counter risk concentration and, hence, in the thinking of the Bank, the system’s ability to absorb losses.
In the event, the actual losses were contained – other than in the sub-prime sectors – but the crisis was driven by the fact that nobody, least of all the central banks, knew where the risk really was. It was like standing in a tunnel without a lamp looking for a black cat … which isn’t there. The panic was, we know, the result of the opaqueness which securitisation brings – not by the quality of the credit. Interbank lending collapsed under the rule of “If in doubt, get out”.
Although the authorities are trying to make a virtue out of a vice, the onerous rules and regulations imposed on banks are pushing more and more lending into the bonds markets, the ABS markets and to non-bank lenders. In other words, credit is increasingly being provided by vehicles – I am intentionally bypassing the term “institutions” – that are not regulated by central banks. It looks like nothing more sophisticated or clever than pushing the air from one side of the balloon to the other.
PLEASE DON’T GET me wrong. I am not dismissing the intentions of the regulators as unworthy, but the overkill is eye-watering. Squeezing risk out of the banks does not make it go away, it just removes it from central bank oversight and hence into the same grey and unknown areas that led to the running for cover in 2008.
One would have thought that the objective should be to bring lending back into the banks where it is visible and gaugeable, and not to ship it out to unregulated private pools of funding. When the money is lost, it is lost, irrespective of whether the citizen loses it through his deposit in a collapsed bank, his depleted pension fund or directly through his tax money used in bail-outs.
The authorities have spent seven years trying to come to grips with the aftermath of the crisis. In doing so, they have most probably done as much damage as good. I guess it will take them at least another seven years to put most of it right again. Until then, all we can do is hope and pray that we don’t get hit by another major crisis.