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Wednesday, 17 September 2008

Banks in retreat?

Banks are being disintermediated out of much of the interbank markets. This began even before the credit crunch. We even see banks providing loans to hedge funds and Private Equity funds to supply liquidity relief to wholesale financing! The over-leveraged seeking help from the masively over-leveraged?
Is Basel II dead and Basel III a non-starter? Will we resort to simple rules like the US Controller of the Currency once proposed in effect " just make all banks keep reserves = 4% of gross assets, and never mind RWA and collateral risk ratings."
And new regulatory rules may well place restrictions on banks' proprietary trading as well as forcing them into significantly increasing their 'own capital' reserves, thereby reducing their capacity to transact and 'write' new business such that the market share of all banks will fall in the wholesale financial markets.
It is not inconceivable that banks may also lose their market share of mortgages and corporate finance. Indeed, they got themselves into the credit crunch by going too far too fast in offloading large slices of their books into off-balance-sheet vehicles and to non-banks (who appear to have less need for deposits to carry these assets, making do with total return funding deals, long term bank loans, guarantees, insurance, derivatives, hedges and tranched loss protection).
Banks were universally mistrusted and hated by their clients and customers even before the credit crunch. They are now the subjects of ridicule and satire. The same may be true for hedge funds and other AI funds, who are also feared and grudgingly admired somewhat like gangsters. But they are far removed from having to win the trust or be pleasant to millions of ordinary customers. This is the privilege of financial firms who enjoy banking style privileges without having to directly serve mass markets or answer to public opinion or to banking regulators.
The heads of GE and AIG used to be easily riled by telling them their businesses should be regulated like banks, or failing this that their main markets needed to be more like exchanges. This idea is politically popular again today, now that the general public is blaming hedge funds for what is happening to beleaguered banks forced into shotgun marriages.
The Alternative Investment community may find itself increasingly heaped with the same bile, vitriol and satire that tars and feathers the banks.
How in a capitalist market-driven society can organisations survive unchanged when they are so unpopular? Answer: they probably can't. Banks and AI funds will both have to do far more to restore their reputations with the general public and this will cost them money, but I suggest it will be money well-spent compared to the costs of not doing so!

1 comment:


With political authorities involved there is more play for the emotions of the general public as well as for the thousands of finance sector employees who feel threatened. That Morgan Stanley, for example, sought to sell nearly half of itself to China's sovereign funds, as Lehman too had done in Korea, will play very badly in the US in respect of pride and belief in the US financial services almost as if these are some kind of Faustian pact, banks selling their US free enterprise souls to foreign governments! Something similar is happening in Scotland over selling Scotland oldest bank to "the Sassenach English" as was also the case in Holland with the break-up sale of ABN AMRO that caused many Dutch Corporate clients to desert it for ING. It is salutory for the banks to learn that national sentiment can be very important still in this globalised world and that they imperil themselves when they reject their home nationality where, after all, are the only governments who will protect them at a time when all banks have had to rediscover the importance of political support!