david phillips global financial stability
End taxpayer “subsidies” for systemically significant “too big to fail” banks

Resolving Macro-Prudential Matters Without Taxpayer Subsidy

And so the US Federal Reserve brings to an end its $3.7 trillion QE experiment which ostensibly was introduced to kick start the economy, though this programme combined with a zero interest rate policy (two “subsidies”) has also enabled misallocated capital to continue propping up zombie companies. We must now look forward to the Brisbane G20 summit later in November to see what is proposed on capital buffers to mitigate future systemic risks still posed by the “Too Big to Fail” banks.

Interestingly, Bank of England Governor, Mark Carney, recently hinted at the IMF’s Annual Meeting that these big banks will in future have to survive or fall without a third “subsidy” in the form of taxpayer bail-outs. And following on from Mr Carney’s comments at the IMF, the Financial Policy Committee (FPC) at the Bank has announced its intention to impose stricter standards on leverage ratios (- effective financial reserve buffer a bank has to hold in the event of a downturn in asset markets) than those required by the Basel Committee, a global regulator.

Today the Basel-based Financial Stability Board, chaired by Mark Carney, has set out proposals on how adequately to manage the ongoing issue of the “Too Big to Fail” banks. Key among the ideas put forward is a new global standard on Total Loss-Absorbing Capacity (TLAC).

This is significant as an over-leveraged banking system was one of the main causes of the global financial crisis in 2008-9. The Bank’s FPC wants a leverage ratio (buffer) of 4-5% compared to Basel Committee’s call for 3% minimum. Even a 5% level is too low, as this would mean a fall in bond and mortgage backed securities (which make up a significant part of asset side of the “Too Big to Fail” (TBTF) Banks’ balance sheets) of just 5% would effectively render these systemically significant institutions insolvent. And as we are already at the zero lower bound for interest rates (and with QE ended), falls in bond markets are now far more likely than further rises.

While many in banking circles are complaining that even 4-5% leverage ratio raises the cost of mortgages, the need to avoid another systemic collapse is a far greater one. But this just shows that despite the recent Banking Act and introduction of macro-prudential measures overseen by the Prudential Regulatory Authority (PRA), the system is still vulnerable to contagion from TBTF bank failure.

Towards Fair and Effective Markets

As well as the need to enhance the stability of the banking system by addressing adequate bank equity and setting the right leverage ratios, over recent years we have seen a catalogue of unacceptable bad practices including rigging of key global benchmarks like LIBOR.

In a recent speech at the LSE, Bank of England Deputy Governor Minouche Shafik set out her thinking on the need for fair and effective markets in Fixed Income, Currency (Forex) and Commodities (FICC), and inviting contributions to the consultation from all sections of society.

Ms Shafik shared how her early years’ family experience after the Nasser nationalisations in Egypt had shaped her view of the state and the market; and it is clear that the Deputy Governor believes “well functioning markets are the key to prosperity, but they must operate in ways that are fair and effective…” This means the end user should be able to transfer risk in a transparent, fair and open market based on competitive prices, and with proper price discovery.

So unsurprisingly Ms Shafik is leading the Fair and Effective Markets Review along with Martin Wheatley, CEO of the Financial Conduct Authority (FCA). The FICC markets are huge, measured in the $ trillions – OTC derivatives and global bonds markets – and as they profoundly influence the cost of money through the design and use of ever more exotic, and little understood derivatives, this review is not before time if public trust is to be regained following the many cases of gross misconduct.

While there are many cases of manipulation and rigging in thinly traded markets, there is also the issue of structure and whether new benchmarks may be needed. Essentially, the review considers 6 categories, in two sections, looking at a) Structure and b) Conduct.

In terms of structure there is a need to consider how some of these markets are so concentrated, for example, in forex more than 60% of the market is taken by just 6 firms. Some markets are so thinly traded they are open to manipulation, yet could more standards harm the functioning of these micro-market structures? And then there is the need to look at the design and governance of existing benchmarks, and if the comply with the relevant international body (IOSCO).

On matters of conduct, the review looks at standards of market practice and observes that norms will guide expectations so enforcement is all the more critical, while there is a need for further education. On penalties there is a possibility of looking again at whistleblowing and publishing penalties for breaking guidelines. We are left to consider whether any possible proposals made in the review will require further primary legislation in the next Parliament?

Europe Important for UK Business Success

With the Cameron’s Tories in disarray over Europe as they try to fend off the growing threat from the right by isolationist UKIP, their paralysis is inflicting serious damage on the prospects for UK business and especially our SME sector which looks to Europe for growing markets. With the CBI urging political leaders not to damage UK prospects with negative rhetoric, Roger Casale from New Europeans sets out the case for positive engagement in Europe.

Schengen Would Boost UK Business Prospects

By opting out of the Schengen area the UK is missing out on significant openings in world trade, with the Chinese apparently foregoing potential opportunities here because of a range of visa transactional obstacles. As our share of global trade continues to decline, Clark Barrett asks if Britain can afford to continue to miss out by holding on to this backward looking “splendid isolation”.

Get Fans’ Voice into Football Club Boardroom

Labour has proposed plans to give football fans a stronger voice in the running of their clubs. Among the benefits of having seats on the board would be a stronger say in sponsorship deals and the naming of grounds and possible name changes to the club. The successful German Bundesliga has adopted an inclusive approach and Peter Ashurst thinks our football clubs could emulate this co-operative approach.

Protect Community Assets from Inappropriate Development

Football, rugby or cricket grounds form an important focal point in our local communities, shaping our identities and providing an asset which connects us across the generations. Rachel Burgin suggests new legislation to protect valuable community assets from being stripped down for property development.





Editorial: Towards a More Stable Global Financial System
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