The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, March 28, 2011

Fascinating Banking Day article on too-big-to-fail

Enclosed below is some outstanding journalism from Banking Day on the thorny subject of 'too-big-to-fail'. In short, the global regulatory body, the Financial Stability Board, is debating, as I have discussed many times in these pages, which specific institutions should be deemed 'globally systematically important' and will, as a consequence, be forced to take on additional 'self-insurance' against failure by holding higher levels of internal capital. When this was first broached publicly, Australia's four majors were reported to be excluded from the list of 20-30 global insto's even though they would rank in such a list if it was based on the purest measure of size, market capitalisation. At the time, the logic went that because Australia's major banks were all domestically focused, and did not have significant international linkages, they did not need to be included in the list. Of course, this begs the question of what happens if this state of affairs were to change (and, as I have discussed here before, the RBA Governor has already acknowledged that Australia has a number of too-big-to-fail banks). It now transpires that the majors could be included in a broader, and more graduated, list of systematically important institutions. It would seem that the French and the Germans, who have national banks that fall into the original cohort, want to level the competitive playing field, so to speak (ie, they don't want only their banks slugged with higher capital charges). When all is said and done, many might argue that the more capital these institutions hold, the better. Read on below.

SIFI struggle embraces Big Four
28 March 2011 7:22am

Global financial regulators are considering creating several classes of systemically important financial institutions (SIFIs) in a rule change that could impose higher capital requirements on Australia’s Big Four banks.

On Friday, German business newspaper Handelsblatt reported that officials were considering creating “two to five” levels of systemic importance. One or more of these levels could include Australia’s Big Four.

The reported proposal for multiple levels of SIFI is part of a complex behind-the-scenes global regulatory battle over how SIFIs will be defined and regulated.

Under Financial Stability Board rules agreed last November, tougher rules are to be imposed on a small group of SIFIs. In late 2010, this group was being referred to as “G-SIFIs” – that is, “globally systemically important financial institutions”.

It was expected to contain only global giants such as UBS, Citi, Credit Suisse, Deutsche Bank and BNP Paribas, which are a major presence in many key global markets. These giants could be required to hold equity equal to three percentage points above the basic 10.5 per cent capital-to-assets ratio required under Basel III.

Large domestic players such as the Chinese and Australasian banks were not in this group because their businesses were mainly concentrated in their home markets. They were referred to as “local SIFIs”.

But, since November, a debate has emerged over whether, and how, to impose tougher rules on a wider group of SIFIs that could include some “local SIFIs”.

Last week, Australian officials confirmed they were concerned that at its widest this group could include Australia’s Big Four.

Reports now suggest that depending on the outcome of this debate the Big Four could be required to hold capital equal to an additional one per cent of assets under the SIFI rules.

The debate is believed to be taking place within the GHOs, the group of central bank Governors and Heads of Supervision that governs global prudential regulator the Basel Committee.

Recent reports suggest France and Germany are leading attempts to widen the list of SIFIs affected by the rules; this would reduce the impact on their own national champions. But US Federal Reserve supervision chief Pat Parkinson also wants a “gradated” approach to the SIFI issue, he told the Financial Times this month.

Handelsblatt reported earlier this month that the group of SIFIs affected by the tougher capital requirements could now be as large as 30.

Banking Day believes the debate is also looking at whether further groups of SIFIs should be hit with tougher capital requirements and other loss-absorbency measures soon after the initial group of “global SIFIs”. The size of the additional capital requirement and other loss-absorbency measures for various groups of SIFIs also appears to be under discussion.

Australia’s regulators have consistently said that Australia’s Big Four banks are already close to complying with the basic Basel III capital requirements.

But an additional one per cent equity requirement would give the Big Four a more substantial capital-raising task over the next few years.

As reported in Banking Day, Treasury’s Jim Murphy said last week that the list of SIFIs should be restricted to a small group of global institutions. The Reserve Bank of Australia’s Malcolm Edey made the same argument, saying SIFIs “should be defined by their global importance, not their relative importance within their own national systems”.

European Central Bank president Jean-Claude Trichet reflected the difficulty of the situation when he told a Frankfurt conference last week that “the issue of systemically important financial institutions requires further reflection”.

Handelsblatt’s report on Friday also said regulators were looking at imposing a four per cent capital requirement on institutions with a very high level of systemic importance – a level of importance that no existing institution has attained.

FSB chairman Mario Draghi told G20 leaders in November that the full list of SIFIs affected by the new requirements would be drafted by mid-2011