Friday 29th August 2014
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South Africa’s central bank has disagreed with a ratings decision by Moody’s to downgrade Capitec Bank Limited (Capitec) by two notches, and place it on review for a further downgrade. The central bank says it respects the independent opinion of rating agencies but that it does not “agree with the rationale given in taking this step”. Two reasons are given for the rating action: a lower likelihood of sovereign systemic support based on decisions recently taken in relation to African Bank Limited (African Bank), and heightened concerns regarding the risk inherent in Capitec’s consumer lending focus. “With regard to the first point, it is important to reiterate that the approach taken by the SARB to any resolution to address systemic risk will always be based on the circumstances and merits of the particular prevailing situation. Decisions will also be informed, as was the case with African Bank, by principles contained in the Key Attributes for Effective Resolution Regimes proposed by the Financial Stability Board (FSB), which have the objective that a bank should be able to fail without affecting the system,” notes the central bank in an official statement. “This is in keeping with evolving international best practice. In the case of African Bank bond holders and wholesale depositors are taking a 10% haircut, which is generally regarded as being very positive given that the trades following the announcement of African Bank's results were taking place at around 40% of par. Therefore in fact substantial support was provided, not reduced. Moreover, all retail depositors were kept whole and are able to access their accounts fully,” it adds - According to the Hong Kong Monetary Authority (HKMA) credit card receivables increased by 2.1% in the second quarter to HKD112, after a reduction of 6.7% in the previous quarter. The total number of credit card accounts edged up by 0.7% to around 16.8m.The rollover amount, which reflects the amount of borrowing by customers using their credit cards, increased by 2.9% during the quarter to HKD19.2bn. The rollover ratio also rose marginally from 17.0% to 17.1% in the same period. The charge-off amount increased to HKD569mduring the quarter from HKD528m in the previous quarter. Correspondingly, the quarterly charge-off ratio rose to 0.51% from 0.46% in the previous quarter. The amount of rescheduled receivables transferred outside the surveyed institutions’ credit card portfolios reduced to HKD94m from HK$109m in the previous quarter. The delinquent amount increased to HKD249m at end-June from HKD239m at end-March. However, the delinquency ratio remained the same at 0.22% because of an increase in total card receivables. The combined delinquent and rescheduled ratio (after taking into account the transfer of rescheduled receivables mentioned above) edged up to 0.29% from 0.28% during the same period - Harkand has been awarded a contract to support Apache with inspection, repair and maintenance work (IRM) as well as light construction (LC) across their assets in the North Sea, following completion of a competitive tender exercise. The award includes the provision of vessels, ROV and diving services for a three-year period, plus two one-year options. The firm will also support offshore marine construction contractor EMAS AMC who have been awarded a separate contract for pipe lay and heavy construction as part of the same tender process. Harkand Europe managing director, David Kerr, said: “This contract is an important step in strengthening our close working relationship and growing our North Sea business with Apache.

The Knotty Question of Regulation

Tuesday, 01 July 2008
The Knotty Question of Regulation First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports. http://www.ftseglobalmarkets.com/
First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports.
On the weekend of March 14th , the New York Federal Reserve gave its blessing (in the form of a $30bn no-risk financing agreement) to JP Morgan Chase & Co to acquire the remains of the 84-year-old Bear Stearns for a mere $2 per share, later sweetened to $10. The takeover bid was officially approved by shareholders in late May. Speaking shortly after the crisis was resolved, US Treasury Secretary Henry Paulson noted that the Bear Stearns episode “raises significant policy considerations that need to be addressed.” The collapse, said Paulson at the time, underscores the rapidly changing role of non-bank financial institutions as well as the interconnectedness among all financial establishments. These changes “require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability,” he added.

Just as last summer’s illiquidity-fueled downdraft prompted calls for universal limits on leveraging, the Bear Stearns experience has critics taking aim at current regulatory standards. These they argue are in need of a substantial overhaul. An important question arising from this development is: how best to carry out these measures? Another is: if those measure are a good idea, why have they not been addressed sooner?

US Federal Reserve Bank chairman Ben Bernanke vigorously defends the Bear bailout, noting that “recent events have demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets”. Detractors offer a much less sanguine assessment. One notable hand-wringer is former St. Louis Fed president William Poole, who thinks that, “It is appalling where we are right now … we’ve become a backstop [sic] for the entire financial system.”

Indeed, by all accounts the Fed checkbook may be in for more plundering in the coming weeks and months. In May, Congress put in an emergency call, imploring the Fed to swap Treasury notes for bonds backed by student loans. And with the peak of the credit crisis still months (or perhaps even years off according to some experts) the Fed may have to contend with many more foundering companies arriving in the dead of night, cap in hand. Was the Fed correct in intervening on Bear’s behalf? John Halsey, a former senior managing director at Bear Stearns, says that, given the circumstances, the Fed had to take action. Had Bear failed, says Halsey, “Our financial system would have failed as well. The dollar, already weakened, would have plummeted, and it would have hastened the inevitability of the dollar’s demise as the world’s reserve currency. Stocks would have dropped, markets would have crashed and stopped trading. In effect, Bear shareholders were sacrificed for the good of the system. That said, I do not think it will have much effect on decision making or risk taking.”

The Fed’s willingness to get behind one near disaster after another fails to address some key underlying issues: namely lack of transparency, as well as the enormous complexity of modern financial products, that has rendered normal pricing metrics obsolete. JPMorgan’s valuation gyration over Bear Stearns’ share price is the latest evidence that all is not right. “Free markets can only function in a system where a company’s creditworthiness can be assessed independent of a letter grade supplied by a rating agency,” remarks Jacki Zehner, founding partner of Circle Financial Group, a New York-based private wealth management operation. In reality, says Zehner, this is simply no longer the case. “Before one can declare that this financial crisis is over, the markets have to be able to make this kind of assessment. Unfortunately, we are not there yet.”

Though the Fed may have had little choice but to step in on Bear’s behalf given the magnitude of the counterparty risk, other companies in a similar predicament but with a slower bleed rate may not be as fortunate. Says Erik Sirri, director of the Securities and Exchange Commission’s (SEC’s) trading and markets division, “I think when one of these firms gets into trouble rapidly, liquidity support is needed.” Should that unraveling occur more slowly, however, “that liquidity support may not be needed.”

“Others will fail, though it is not clear what will happen when they do,” says Zehner. “I believe the Fed can and will prevent any sort of systemic collapse which they may have witnessed had they not come to the rescue of Bear. But there will be more problems. Exactly how and where is a difficult bet indeed.”

In the aftermath of Bear, slower client activity, below-normal principal and proprietary trading results and losses from the tightening of structured credit liabilities are just a few of the factors weighing on the investment-banking industry, notes analyst William F Tanona in a recent research paper. Some have been more generous than others. In contrast to Oppenheimer & Co. analyst Meredith Whitney’s assessment of Citigroup’s “antiquated and disparate systems and technology,” Ladenburg Thalmann’s financial institutions analyst Richard Bove sees a much brighter future for the bank. Bove notes that Citi’s turnaround potential is “so significant, it could carry the stock to multiples of its current price.”

While the longer-term picture may be positive--particularly given the prospect of further Fed interventions nonetheless, US banks are in all likelihood looking at a prolonged period of belt tightening and super-scrutiny. “It is truly amazing to see how slow analysts have been in bringing down earnings estimates for the investment banks,” says Halsey. “Of course, at some point soon the bulls will probably be able to point to some very favourable year-over-year comparisons. But the fact remains that the entire sector is going to have to learn to live with much less leverage--and that many of their biggest earning sectors will never recover.”

Is reform needed?

It was the late economist Hyman Minsky who suggested over 20 years ago that “in a world of businessmen and financial intermediaries who aggressively seek profit, innovators will always outpace regulators.” While it may be impossible to prevent changes in the structure of portfolios from occurring, said Minsky, “if the authorities constrain banks and are aware of the activities of fringe banks and other financial institutions, they are in a better position to attenuate the disruptive expansionary tendencies of our economy.”

Speaking at a conference held in Minsky’s honour, Paul McCulley, managing director of fixed-income specialist PIMCO, said that recent events demonstrate how little attention has been paid to Minsky’s words over the last two decades. While initiatives such as Basel I and most recently Basel II may be a step in the right direction, “neither of those arrangements fundamentally addresses the explosive growth of the shadow banking system,” thinks McCulley, referencing the radically leveraged, off-balance sheet vehicles that were so successful in helping institutions sidestep imposed limitations.

To make matters worse, regulators have consistently turned a blind eye to the goings-on within the investment-banking sector, even as the crisis in liquidity was growing more palpable. Their inaction prior to last summer’s meltdown left the banking system vulnerable to the catastrophic run on liquidity that set the stage for innumerable hedge-fund collapses, and ultimately the fall of Bear Stearns, say observers.

In an effort to deflect further criticism, the SEC has wasted little time getting on the case, and has already made clear its intentions to increase the transparency of liquidity and capital positions held by the likes of Morgan Stanley, Lehman Brothers and Merrill Lynch through its consolidated supervised entities (CSE) program. SEC chairman Christopher Cox said the commission wants the changes to take affect prior to the implementation of the new internationally accepted standards for capital and liquidity as set forth in Basel II. Cox has admitted that insufficient regulatory standards in all likelihood helped foster the conditions that led to the Bear crisis. “It’s difficult for anyone to say the system worked or that the regulatory gap that exists in statute lacks any consequence,” said Cox.

Halsey, however, calls the commission’s sudden interest “laughable.” “Where were they when these problems were developing?” he asks. As it relates to the current real estate crisis, “the SEC, banking regulators and especially the Fed were absolutely facilitators to the mess. Alan Greenspan’s legacy has been destroyed.”

To begin to remedy the situation, all institutions that are given access to the Fed’s discount window “must at the same time have pari passu regulatory oversight,” argues McCulley. While banks will undoubtedly balk at such an arrangement, they may have little choice but to play ball. After all, offers McCulley, “if you have access to the Fed’s discount window, the Fed should (and will, I strongly believe) have the power to supervise and regulate your business.” Such increased oversight could take the form of raising core capital requirements, while increasing risk and liquidity management, he adds.

Although regulators appear anxious to expand their legal authority over the investment banking sector, it’s up to lawmakers to ensure that it happens. Speaking before a Senate panel in May, former Clinton administration SEC chairman Arthur Levitt said that “Congress must face these conflicts of interest issues head on, or at least empower the SEC with the proper oversight and disciplinary powers that will enable them to do the job.” As for the near-term direction of the investment banking sector as a whole, Halsey believes that a fundamental shift has already occurred, one that favours the likes of JPMorgan over Goldman Sachs and Morgan Stanley. While product innovation will once again take place and attract new talent and capital, “it will take years for that to happen. In the meantime, the likes of CDOs, CDSs and all mortgage-related trading will deliver a fraction of the profits that stoked Wall Street for so long.” Accordingly, Halsey sees the prospect for a significant brain drain from the various institutions as return on capital founders. “Bright, hungry guys will continue to leave to pursue innovation and profits at hedge funds. That will hurt banks and investment banks alike.”

Can increased regulation be truly effective so long as institutions are allowed to stay one step ahead through the creation of the kind of product embellishments that helped precipitate the crisis in the first place? Absolutely not, says Halsey. Wall Street can afford to hire the best and the brightest and spend more on financial innovation than regulatory bodies can budget for, says Halsey, and as a result, no individual or group can effectively anticipate innovation. Hence, the need for broad, highly flexible guidelines that can compensate for these future product developments.

“As a young guy at Bear, I remember thinking how creative the people who structured collateralised mortgage obligations (CMOs) must have been to come up the concept of interest only strips (IOs) and principal only strips (POs),” recalls Halsey. “By the time they had become commonplace, we were already onto trading inverse floaters. It quickly became apparent that if you could imagine a cash flow of any kind--backed by any kind of credit; then you could create a bond that mimicked such a cash flow. In short, the possibilities of creating new products with unknowable risks when applied to the financial system are endless.”

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