London Financial Centre

'The international competitiveness of Britain's banking industry is being destroyed' (Tim Congdon, The Times, 15 Oct 2008)

UK Banking competitiveness under threat

'The international competitiveness of Britain's banking industry is being destroyed' (Tim Congdon, The Times, 15 Oct 2008)

Lessons from the Credit Crunch

It is too early to fully understand how it could happen that the World's Financial System got close to a global meltdown during the past 12 months. Some blame greedy bankers, others lay the blame squarely at the foot of the (US) consumers. Institutional Investors also appear entangled as they allowed managements too much leeway and even egged them on to pursue ever-more risky expansion plans. However, we tend to think that regulators - and their paymasters the politicians - may have to take a large part of the blame.
Unfortunately they are the party that is the least likely to bear the full cost of their mistakes. Shareholders have to suffer from dramatically shrunken share prices, scores of bankers have lost their jobs, or are about to in the near future. Bureaucrats are happily engaged in the blame game and are joined by academics and media people who often are also less than objective in their judgement.

Impact of taking the King's Shilling

It is too early to assess the impact of the various bank rescue packages on the future structure of the banking and securities industry. The obvious inconsistencies, however, will put a serious spanner in the works for all those firms that will take the King's Shilling. While we are not condoning the excesses of the financial service industry we think that the way the regulators handled the developing crisis since the summer of 2007 was disgraceful and added fuel to the fire instead of containing it.

Inept Regulators

Every Age has his prophet, but 'Houdini' misses the key point: the Credit Crunch is a bush-fire where inept regulators allowed a bank-run to develop.

Iceland gets $2 Bio bailout from IMF

But who bails out homeowners pushed out of their homes?

Mortgage Reform - one aspect overlooked by George Soros

While I agree with most points that Soros makes today (Wall Street Journal, 10 Oct 2008) I think that he should have focused more on one important aspect: there have to be limits on the amount mortgage providers are allowed to lend against property. In previous times it was just inconceivable that anyone - let alone 24 year olds barely out of school - was able to borrow more than a conservative amount (60-70%) against the value of a property. In addition there were strict limits on the multiple of income and this income was also much more carefully documented. These lending policies would be simple to monitor by senior bank management and regulators alike - no need to rocket scientists or highly paid risk managers! It would also be appropriate if similar regulations would be applied to commercial property lending where (near) 100% mortgages were also available to persuasive property 'tycoons' during the height of the asset bubble.

Short Selling - Argument against

Several Hedge Funds and their industry representative today make thinly-veiled threats that they might consider to move their business away from London if the ban on short-selling the shares of financial service companies is not lifted soon. We had quite a lively reaction from a number of readers and business partners. They argue that this may mean that national regulators would let themselves be pushed into a 'race to the bottom' in terms of regulatory standards. The consequence might then be that international regulations will be introduced to avoid this. In addition, one correspondent pointed out that the argument about the pros and cons of short selling could only be resolved by a detailed forensic analysis of all the transactions involving the shares of banks during the past 14 months. This would have to include equity and credit derivatives and all related off-balance sheet instruments.

Maturity Mismatch - obvious starting point for reform

Regulators are running around like head-less chicken, applying completely arbitrary principles when deciding on an ad-hoc basis what to do in each individual problem case and therefore just fanning the flames of the credit bushfire.
A key feature of the ongoing banking crisis is the fact that institutions that may well have balance sheets that in the long run would turn out to be more than viable are facing the equivalent of a 'run on the bank'. Is Hypo Real Estate, to pick just one example, really ready for the knackers yard or is the fact that it cannot roll over short-term financing nothing but a short-term liquidity problem?
Whichever way this sorry saga ends one simple lesson must be learned: it is just not enough to force banks to finance themselves if possible with more genuine retail deposits but they must be made to finance their assets with liabilities that are matching by maturity. Only small deviations from this principle should be allowed. Monitoring this should be a relatively simple task for regulators and therefore eminently practicable. It just is lunacy to finance long-term mortgage lending with funds raised in the Inter-Bank market on an overnight basis.

Inept Regulators allow bank run

Every Age has his prophet, but 'Houdini' misses the key point: the Credit Crunch is a bush-fire where inept regulators allowed a bank-run to develop.