On Thursday evening, the Market Monitoring Group (MMG) of the Institute of International Finance the big banks trade association identified the key risks that it believes beset the financial system.
This is a body chaired by Jacques de Larosière, former managing director of the IMF and former governor of the Banque de France, and by David Dodge, former governor of the Bank of Canada. Its members include senior representatives of leading US, European and emerging market financial institutions.
MMG suggests that rather than making things better, regulators are making them worse. You can tell these luminaries are aggravated because their key concerns demand bold type:
As night follows day, a plea for accounting leniency follows a market collapse. The MMG claims regulators stress tests are stirring up fear and exacerbating the downward spiral.
Euromoney just hopes the monitoring group never has to resort to underlined and upper case as well as bold, because surely then the end will be at hand.
Mervyn King was also busy on Thursday presenting the Bank of Englands financial stability report. Perhaps the Bank should now call it the instability report. The BoE's governor sees what the banks see:
And what does the Bank of England expect banks to do in these circumstances? Raise capital, of course. The Bank of England is serious too. You can tell because it also uses bold:
The Bank of England ties itself up in knots. Banks under UK regulators jurisdiction arent under-capitalized, it stresses. That might imply that regulators have somehow failed. Its just that the banks need bigger capital buffers. And rather than adjust capital ratios by selling assets, the Bank of England wants banks themselves to increase levels of capital. It leaves the minor details of who in their right mind might provide this capital to banks for others to wrestle with.
John-Paul Crutchley, banks analyst at UBS, reminds us that this is no way to get out of the mess:
But the regulators did come up with one useful clarification that doesnt seem to have been picked up on: that this might be the time for banks to run down their liquidity buffers, not build them up. Hector Sants, at the FSA, was at pains to make all of this clear:
We'll simply have to take Sants word for this because every banker Euromoney speaks to complains about being forced to build buffers of government bonds that have turned out, for the most part, to be high risk and illiquid as well as low yielding, so reducing the earnings with which they might have bolstered capital while introducing potential losses that will eat into it.
Sants suggests that banks and the media yes, we thought we would not turn out to be entirely blameless have got confused about the liquidity buffer:
So, there we have it. None of this is the regulators fault.
- Euromoney Skew Blog