Source: Financial Times-online version Date: January 24, 2013 3:10 pm
Rule book casts shadow over banking recovery By Patrick Jenkins and Tom Braithwaite in Davos Davos 2013 is shaping up to be the year when the forum’s bank participants try to fade into the background and finally put the financial crisis behind them. Public panels include only two or three devoted to financial services. At the more productive private meetings around the fringes, bankers say discussion is more upbeat than it has been since the global crisis began half a decade ago. Improving eurozone sentiment and a slowly brightening mood among banks’ corporate clients is heartening for bankers. All the same, no one can let go of the topic that has most vexed them for years – ever-increasing regulation. On the core eurozone discussion, the tone is cautious optimism. “The system is slowly coming back to life,” said one investment bank boss, pointing to steady signs of eurozone recovery, most recently evident in this week’s Spanish sovereign debt auction. “There’s definitely a change of tone,” added the board member of a US bank. “Our clients are definitely more upbeat.” Around that average sentiment there is a wide spread of views, stretching from complacent to doom-laden. “It’s hard to see what could go wrong,” said one investment bank boss, a stark contrast with the warning from Axel Weber, chairman of UBS and the former president of Germany’s Bundesbank, who warned that patchwork fixes by central banks were just disguising problems that would return. “We’re living a better life now at the expense of future generations,” Mr Weber said. As at recent Davos forums, there has been a focus on the regulatory agenda with bankers this year bemoaning the breakdown in an international regulatory framework. Mr Weber said: “You need a global standard. But this is not happening.” He warned that without a harmonised rule book the dangers in the global banking system would increase, contrasting the “Alpine” capital requirements in Switzerland with the diverse structural reforms under way in the US, the UK and potentially in the EU. Worse still was the failure of policy makers to look across the financial services industry and join up the thinking on how banks and insurers should be regulated, critics said. One chief executive of a large US financial group said the regulatory situation was “really horrific”. “If you take a nice business like the insurance business: here’s an industry that went through the crisis and had almost no problems. They’ve put in a whole new regulatory regime to make sure they can’t make money. It’s astonishing.” Another bank boss said privately he was “extremely worried” about the inability of European insurance companies to finance banks, under the prospective Solvency II rules.
Tidjane Thiam, chief executive of UK insurer Prudential, said: “There is a lack of joined-up thinking. The insurance industry is [traditionally] the biggest investor in the banking industry but Solvency II says we can’t invest in banks.” There were also signs of friction between investors and companies – particularly financial groups. Paul Singer, head of Elliott Capital Management, slammed banks for “completely opaque” disclosures that made it impossible to know whether they were “risky or sound”. For their part, corporate and bank executives are worried about a rise in shareholder activism and the focus on quarterly earnings. One participant said the “tyranny” of such frequent disclosures should be ended with a ban. Most pernicious of all among the regulatory initiatives, several bankers said, was the ongoing – and arguably worsening – sense of uncertainty over what regulators and politicians have in mind next, particularly in Europe. One top executive complained about the vacuum left by UK Prime Minister David Cameron with his promise that by 2017 he would hold a referendum on Britain’s EU membership. “You’ve already got unease over European Banking Union, the Liikanen proposals [to ringfence EU banks], the UK’s Vickers reforms. And now this. How do you plan when your financial systems are in flux for the next six years?” On the Basel III global rule book, one key area remains up for debate – that of the so-called net stable funding ratio, a new proposed measure of banks’ financing solidity. The NSFR would force banks to match the duration of their funding and lending more closely, potentially constraining profit margins. There appears to be a growing conviction among banks that their lobbying against the NSFR may see it ditched altogether, or at least radically modified. “It flies in the face of what banking is, which is transforming the maturity of money,” said one bank boss. But even on this, there are dissenters. Another bank chief argues that the measure, though probably painful, is vital. Properly policed, it could have prevented many of the 2007 and 2008 bank collapses from Northern Rock to Lehman Brothers, he argued. Despite the sunnier tone at Davos 2013, bank delegates seem to be asking what Davos’s raison d’être is. In the boom years, it was the excitement of global growth that brought everyone together. In the heat of the crisis, Davos was the perfect place for policy makers and bankers to forge the recovery plan. “Now the crisis has passed, people don’t have so much to talk about any more,” said one senior European banker. “It’s peaked,” said one Wall Street heavyweight, simply. Lloyd Blankfein, the Goldman Sachs chief who is back for the first time in five years, appears to be in a minority. His opposite numbers at HSBC, UniCredit and Royal Bank of Scotland chose to stay away.