Andrew Smithers on Banking Equity Ratios, Competition and Pay

We heartily recommend Andrew Smither's latest comments on the failure of banking regulation. Smithers argues that higher capital ratios would limit public subsidy to banks and pose no threat to lending volumes - if anything, banks would lend more than under the ill-considered Basel III capital ratios that come into effect in 2018.

Raiffeisen buys 70 pct of Polbank - valuation more realistic than pre-crunch

News that the Austrian Raiffeisen International buys a 70 pct stake in the aptly named Polbank in Poland confirms that the market for banking assets in the emerging markets is still decoupled from the market valuations in many developed markets. The price paid to the former holder of the stake, the Greek Eurobank EFG, represents around 12.7 pct of Polbanks balance sheet of Euro 5.5 billion (per Sept 2010). This is a much less aggressive valuation than those seen applied to banks in Eastern Europe a few years ago but still puts a lot of hope into the possibilities of reaping economies of scale from merging the business with Raiffeisen's existing network in Poland.

Tax burden in UK becomes problematic

A simple calculation in the sports section of a British newspaper came to the conclusion that a football player who would move to England on a total compensation of Euro 3 million would take home only around half that amount after the deduction of all taxes. In Switzerland his take-home pay would be nearly 2.4 million. Obviously this also has clear implications for Britain's standing as a global financial centre. With discrepancies as large as this the decline in London's relative attractiveness - especially for foreign professionals - becomes evident.

Smaller players will win market share in Investment Banking

We agree with Chris Whalen, MD of Institutional Risk Analytics, when he predicts that smaller firms will gain market share in investment banking and fill in the gaps left by the demise of several large firms during the Credit Crunch. Regulation will also to a certain extent clip the wings of the dominant firms and force them to reduce their activities in certain business segments.

Regulation runs amok

A 'Discussion Paper' published by the Swiss regulator FINMA on the subject of regulating the marketing of financial products to private clients runs to 132 pages. It is a classic example to the regulatory overkill that threatens the financial service sector, increases costs for the end-investor and - due to its complexity - will hardly achieve its stated goal, the provision of better and cheaper financial products to the retail investor. More and more prescriptive regulation means that ultimately behind each productive worker there will have to be a 'Commissar' (Compliance Officer) and an army of lawyers and assorted busybodies. No action will be taken before they get the Okay from the compliance department. And of course, the compliance department will have to be supervised in turn and so on ad infinitum. Final destination is an economic system that is close to the Stalinism of the old Soviet Union.

Morgan Stanley may try to offload Hedge Fund stake - a warning

Rumors about Morgan Stanley's efforts to offload its stake in the hedge fund firm Frontpoint should be seen as a warning for potential investors in hedge fund businesses. Often these firms are dependent on one or a small handful of managers. If any troublesome news hits the business the value of the firm may evaporate very quickly. Potential acquisitions in the field should only be undertaken in an extremely cautious way and structured so that it is not just a win-win proposition for the selling insiders.

Who is Steven Maijoor?

The regulatory vampire squid that is being created by an EU officialdom that is several stages removed from any democratic control is likely to nominate a professor with only the scantiest first-hand experience in the financial markets to be the head of the European Securities and Markets Authority. Bureaucracies such as the one created to 'regulate' the financial system in the EU have as their primary aim the expansion of their own powers and the creation of jobs for those working for them. If the EU and its member governments would really have wanted to improve the functioning of the financial system they would have had ample time to design a better legal framework during the past two years. Are we on an inevitable path towards a situation where there will be more regulators and compliance officers working in finance than wealth-producing professionals? In that case, we should have a good look at the banking and insurance system as it was during the good old days of the Soviet Union in order to prepare ourselves.

Credit Suisse Compensation Plan - Incentive or Disincentive?

While the new compensation structure that has just been announced may at first sight appear to be a step in the right direction it raises a number of questions: relying on the return on equity may be an incentive to increase leverage (and risk) in order to achieve a superior ROE. Making payouts over a number of years could lead to employees just marking time in order to cash in the awards. Depressed share prices and/or a low return on equity may punish hard-working employees that have no influence over either of these two yardsticks. At the same time top management is free to award itself levels of compensation that are high enough to shelter them from the negative fall-out from these two factors, thus creating an unhealthy 'them and us' atmosphere that is not conducive of good team-work.
One unintended effect of complicated and onerous compensation structures dreamt up by the big investment banks may well be that smaller competitors will become a more attractive employer. Younger employees in particular will not be able to spend these 'awards' to support a young and growing family when you need cash for housing, education and other pressing needs.

Open letter to members of the UK Treasury Select Committee

With reference to today's hearing I would like to point out that compensation for Bankers cannot be seen in isolation. Pay for staff in other sectors of the financial services industry - especially in the so-called 'Private' Equity business as well as in Hedge Funds - exerts a strong influence on pay levels in (investment) banking and the securities business. In addition, the problem of spiralling compensation for (top) executives in general industry and business is far from being resolved and also influences the general atmosphere with respect to control (or lack of control) of senior executive pay.

Central Clearing: Solution or Problem?

Pushing more business onto central clearing systems is not the ultimate solution in the search for a more stable financial system. The question remains the same: Would the system be able to deal with a (near instantaneous) change of 20 or 30 pct of asset prices? Only then could one be reasonably sure that a market panic could not topple the financial system. But that would require a substantial increase in margin rates and a corresponding reduction in the amount of leverage available to all market participants.