As regards the welter of regulatory reforms that are afoot in the world of financial capital and liquidity, little press ink has been spilled on the new Solvency II regime. Solvency II will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurers with a view to reducing the likelihood of an insurer failing. Dull stuff, you may think.
In its current draft, however, it threatens to toss a grenade in an abstruse but highly lucrative niche of FIG funding - German registered bonds.
German insurance companies are a key buyer of bonds that are constituted in registered form, as opposed to bearer bonds. Bearer bonds are technically transferable through delivery of the bond itself. In practice, such bonds are locked in a vault with a custodian and interests in the bearer bond are transferred electronically through Euroclear and Clearstream. Registered bonds, in contrast, are constituted so that ownership is transferred through entries on a central register. In practice, therefore, little distinguishes the bearer bonds from registered bonds, although certain legal and tax consequences spin on the difference.
By virtue of a local accounting idiosyncracy, German insurance companies enjoy an economic advantage by investing in registered bonds. Under German GAAP, the bonds may be accounted for at amortised cost - whereas bearer bonds are normally marked-to-market, putting volatility into the profit and loss statement.
The loss of this accounting perq would be significant. There are over 500 insurance and pension funds in Germany with about eur540bn to invest in fixed income, of which eur300bn is invested in registered notes. It's a big industry.
So although the grenade is sitting on the draft statute books ticking away, it's unlikely that you'll see it detonate over the pink pages any time soon. That kind of financial clout at the heart of the EU is a powerful lobby. Expect the Solvency II threat to fizzle out before it becomes a mainstream newstory. But if it doesn't.....you read it here first.
Friday, 19 March 2010
Monday, 15 March 2010
In defence of bankers - big bankers
The Fleet Street commentariat is foaming at the jaw lambasting and lampooning all things banking. Even the venerable Financial Times regularly features critical comment deriding this blogger's chosen profession. I might not be doing God's work, I think, as I read this invective. But I am doing something useful. Let me recapitulate - for it is no time to capitulate.
Depositors rely on banks to park their cash and provide a return. On the faith that not every depositor requires its funds at the same time - which in normal market conditions is the case - banks use depositors' cash to help consumers and businesses invest. They provide international payment systems facilitating 730 million payments a day. They provide services to individuals and companies to manage financial risk. They help governments finance their expenditure. And so on. These are important fiscal services with real societal value. The fulcrum of this business model is confidence. Where risk is properly managed, confidence is maintained and banks are able to provide these services to promote economic growth and the prosperity of nations.
2008 saw a catastrophic rupture of this business model. Almost half of the increase in economic value contributed by banks in the UK (wages and gross profits) from 2001 to 2007 was blown in short measure through the extraordinary fiscal measures taken by the Bank of England in the last two years (source: Financial Times Monday 15 March, pace John Cassidy). This was not, however, some grand scheme cooked up by the soi disant masters of the universe to steal taxpayers' coin for a generation to come. And it was not the work of the average common-or-garden banker fresh out of school with the opportunity of social mobility ahead of him or her. There was a great deal of ingenuity invested in circumventing prudential governance, but it was - in my experience at least - done with rigorous intellectual effort (within the white-swan logic that informed it) and honesty; not as a dubious scam to enrichen the incumbents. There were sharp practices, and there were extraordinary errors of judgement. Politicians, clergy and multi-millionaire footballers are all human alike. But it is the politics of envy to tar banks - and bankers - with one dark brush. Banks are ultimate meritocracies, places where nought but commitment and ability determine success. The best banks - Goldman Sachs and Barclays - rely on enfranchising the best qualities in their people, in a co-operative team oriented endeavour to manage risk but maximise returns. The work they do is valuable work that confers real social benefit. Mistakes were made. But let us not throw the baby out with the bathwater and over-regulate the City - and its talent pool - out of existence; or out of the country, at any rate.
Consider a multinational pharmaceutical. It borrows from a bank. It also taps capital markets for diverse funding (capital markets remained open when loan markets shut down). It raises debt and equity in multiple global locations. It manufactures and sells, buys raw materials and trades cross border. Its purpose is to produce medicine that benefits human kind. Only a bank can provide the fiscal services to meet the needs just articulated. And only an integrated global bank can do so effectively.
Banks enable consumers to buy homes and other assets, and small businessess that require debt to grow. Banks provide services to enable pension funds to meet their pension liabilities. Banks can assume risk and distribute it more widely. Only global banks can provide liquidity to large sovereign nations. Asian, European and Middle Eastern buyers of sovereign debt require banks to intermediate their capital to invest in, for example, US and European sovereign debt. Without this facility, the cost of borrowing rises and higher taxes or lower public spending ensues. Followed by lower economic growth.
So let's not hang the bankers out to dry. It may seem obtuse, but England would be poorer yet without its financial capital. Those outside the rareified universe of investment banking will beg to differ. Whether we let them win the argument remains to be seen.
Depositors rely on banks to park their cash and provide a return. On the faith that not every depositor requires its funds at the same time - which in normal market conditions is the case - banks use depositors' cash to help consumers and businesses invest. They provide international payment systems facilitating 730 million payments a day. They provide services to individuals and companies to manage financial risk. They help governments finance their expenditure. And so on. These are important fiscal services with real societal value. The fulcrum of this business model is confidence. Where risk is properly managed, confidence is maintained and banks are able to provide these services to promote economic growth and the prosperity of nations.
2008 saw a catastrophic rupture of this business model. Almost half of the increase in economic value contributed by banks in the UK (wages and gross profits) from 2001 to 2007 was blown in short measure through the extraordinary fiscal measures taken by the Bank of England in the last two years (source: Financial Times Monday 15 March, pace John Cassidy). This was not, however, some grand scheme cooked up by the soi disant masters of the universe to steal taxpayers' coin for a generation to come. And it was not the work of the average common-or-garden banker fresh out of school with the opportunity of social mobility ahead of him or her. There was a great deal of ingenuity invested in circumventing prudential governance, but it was - in my experience at least - done with rigorous intellectual effort (within the white-swan logic that informed it) and honesty; not as a dubious scam to enrichen the incumbents. There were sharp practices, and there were extraordinary errors of judgement. Politicians, clergy and multi-millionaire footballers are all human alike. But it is the politics of envy to tar banks - and bankers - with one dark brush. Banks are ultimate meritocracies, places where nought but commitment and ability determine success. The best banks - Goldman Sachs and Barclays - rely on enfranchising the best qualities in their people, in a co-operative team oriented endeavour to manage risk but maximise returns. The work they do is valuable work that confers real social benefit. Mistakes were made. But let us not throw the baby out with the bathwater and over-regulate the City - and its talent pool - out of existence; or out of the country, at any rate.
Consider a multinational pharmaceutical. It borrows from a bank. It also taps capital markets for diverse funding (capital markets remained open when loan markets shut down). It raises debt and equity in multiple global locations. It manufactures and sells, buys raw materials and trades cross border. Its purpose is to produce medicine that benefits human kind. Only a bank can provide the fiscal services to meet the needs just articulated. And only an integrated global bank can do so effectively.
Banks enable consumers to buy homes and other assets, and small businessess that require debt to grow. Banks provide services to enable pension funds to meet their pension liabilities. Banks can assume risk and distribute it more widely. Only global banks can provide liquidity to large sovereign nations. Asian, European and Middle Eastern buyers of sovereign debt require banks to intermediate their capital to invest in, for example, US and European sovereign debt. Without this facility, the cost of borrowing rises and higher taxes or lower public spending ensues. Followed by lower economic growth.
So let's not hang the bankers out to dry. It may seem obtuse, but England would be poorer yet without its financial capital. Those outside the rareified universe of investment banking will beg to differ. Whether we let them win the argument remains to be seen.
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