Turkey looks to diversify infrastructure debt

Turkey looks to diversify infrastructure debt

Banks not be able to shoulder the debt burden

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Innovations in Wealth Management Technology Awards 2014

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Time to row back on bank regulation?

By piling up the burden on banks, regulators have started a shrinking of the banking industry that they can no longer control and that markets are accelerating. This threatens the real economy, and market participants want to delay and review of the new rules. Regulators are divided. Some want to pause, most want to press on, but they are all united in their desire for one thing: not to take any blame.


"I had a discussion with a very senior regulator recently who told me: ‘Look, I know we’ve gone too far too fast on some of this and that we’ve made some errors, but I’m afraid I don’t know how to stop this process’. Now that’s quite scary."

That’s quite an understatement from a senior banker, who spoke to Euromoney but asked not to be identified. But it speaks to a new crisis facing the global financial markets: the relationship between banks and their regulators is increasingly strained. And that is in large part because the regulators simply can’t agree with each other.

The banker continues: "Remember that regulators and supervisors do not speak with one voice and nor do they all share the same attitude. Some are still in the mood to be very tough on regulating the banks and to proceed as quickly as possible. Others are growing increasingly afraid that the much talked about unintended consequences may be upon us. It is hard to say right now which group is going to win that battle of opinion."

It’s a vital battle at a critical point. The uncertainty is killing not just banks, particularly in Europe, but their fragile economies as well.

At Davos in late January, Michel Barnier, European commissioner for internal market and services and a driving force behind the re-regulation of the European banking and financial system, struck a conciliatory note over one of the key remaining steps to be taken: establishing resolution mechanisms for failing banks that would see bank bondholders taking losses rather than being protected by taxpayers.

This has been a key call in the reform agenda across countries worst hit by the banking system crisis of 2007-09. Never again should taxpayers pick up the bill for saving failing banks.

While it is eminently sensible that bondholders should take their lumps for providing credit to poorly run and excessively risky banks, the public consultation over the proposed European framework for managing bank crises appeared to contribute to a destabilization of the bank funding market last year.

Bondholders, mistrustful of the procedure for being bailed in at the whim of a regulator and fearful at a time when all banks were sitting on potentially life-threatening exposures on the very sovereign bonds these same regulators had required them to accumulate in their liquidity buffers, rebelled. They simply stopped buying bank debt. The banking system trembled. Starved of market funding, banks quickly began to de-lever, selling assets and not renewing positions that had been funded in the wholesale markets.

As the New Year dawned, only the European Central Bank’s provision of unlimited three-year liquidity against a wide range of dubious collateral prevented the banking system in Europe collapsing.

Now, as markets grappled with the protracted negotiations over a second Greek bailout that does little to restore that country’s finances to sustainability and took fright at potential contagion to other sovereign bond markets threatening more European banks, Barnier conceded the time was not right to press ahead with the bail-in legislation amid such uncertainty. The outline was ready, but implementation would be delayed at least while the Greek crisis played out.

At the same time, it became clear that regulators were re-examining the definitions of liquid and secure instruments that banks must hold in their liquidity buffers, so potentially allowing a reduction in their concentrated exposure to sovereign debtors with possibly unsustainable finances. Instead, other instruments might be allowed in liquidity buffers, including – whisper it – asset-backed securities which, away from sub-prime mortgages, have performed well.

Huw Van Steenis, banks analyst at Morgan Stanley

Huw Van Steenis, Morgan Stanley

Huw Van Steenis, banks analyst at Morgan Stanley, returned from Davos hopeful that even if bank regulators are showing no appetite for forbearance on higher capital requirements, they might soften their demands on banks elsewhere.

He notes: "If there will be a long-term rethink it will be about liquidity ratios, where assessment of what should be in the liquidity buffers is likely to be widened. The eurozone sovereign crisis has caught regulators off guard and we think covered bonds will be included. We also think the haircuts on corporate deposits in the net stable funding ratio, which we see as poorly calibrated, may also get reviewed."

At the start of February, the ECB confirmed a renewed tightening of bank lending conditions in December 2011 and January 2012 in a survey completed after the first three-year Long-Term Refinancing Operation. With banks blaming higher costs of funding, reduced access to market liquidity and balance sheet constraints as well as the continuing euro area sovereign debt crisis and poor macroeconomic outlook, it seemed a turning point might be approaching.

For a moment, it appeared that banking regulators might be ready to pause, reflect on the substantial progress they have already made in forcing banks to increase capital and reduce risk, and consider if pressing ahead with re-regulation of the banks now might risk becoming far too pro-cyclical a policy amid a renewed economic downturn characterized by fiscal austerity, bank deleveraging and an interminable sovereign debt crisis.

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