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Author Topic: Rip-off Britain
Ginger Yellow
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quote:
Unless I'm much mistaken all these people are bankers, presumably with what is deemed the relevant qualifications and experience.
Not really. They're regulators. Some of them used to be bankers, but by no means all or even a majority.
quote:


[quote]Either these measures have always been in place (for sure we can anticipate a certain amount of progression over time) in which case there can't be any significant cost to the banks, or previous measures were hopelessly inadequate and Basle II is an attempt to rectify things in which case my previous post is accurate, or the regulators are forcing unnecessary and expensive measures on the banks which isn't easy to believe, or something about banking has changed so fundamentally that more extensive systems are required.

Previous globally recognised regulatory requirements were hopelessly inadequate. The idea was to establish a uniform minimum to ensure the stability of the global banking system. Given how long these things take to agree and implement, they presumably thought it best to start with a simple system. They started work on Basel II in 1997 and it's only just being phased in from next year, and that doesn't include the US.

The problem is that even for banks which had more sophisticated risk modelling/management systems, they aren't necessarily aligned with the new requirements. They use different inputs or definitions or don't output in the right formats etc. So even the most sophisticated banks have to invest to be able to meet regulatory requirements. In some ways its easier for the less sophisticated banks, because they can use the so-called Supervisory Formula Approach in which most of the inputs are provided by national regulators. In theory however this reduces the potential for risk adjusted capital reductions.

Now you can argue that "the regulators are forcing unnecessary and expensive measures on the banks". Certainly that's the position of the US and many of its banks. I'm not sure why you think this is hard to believe. Nor is it necessarily true, because the statement that "something about banking has changed so fundamentally that more extensive systems are required" is also arguable. Derivatives, particularly credit derivatives, hardly existed 20 years ago when the original accords were implemented. Now they vastly outweigh the volume of conventional credit assets. Furthermore banks have become far more international in their reach, increasing the need for a sophisticated global system.

quote:
In terms of footing the bill, in the first alternative there really aren't any large costs, in the second the banks should pay for their own cock-ups, in the third they've got a good case for passing the costs on to the relevant customers but no-one else, and in the fourth presumably they're the people who brought in these changes so they're the people who should pay for it.
1) There are. To give you a rough idea of the difference, the original Basel accords are 30 pages long whereas Basel II is 284 pages long. I haven't seen any recent figures, but in 2004 a couple of surveys were done in which banks predicted they'd spend an average of around $20m on compliance. Larger banks thought they would spend an average of $50m while for the largest the figure could reach as high as $500m. I suspect those numbers are underestimates, given the developments of the last couple of years and the fact that in 2004 people had scarcely begun to look at the operational risk and transparency pillars of Basel II. In the long run these costs should be recouped in lower capital requirements for the more sophisticated banks, but a) that's not true for every bank and b) you know as well as I do that businesses don't operate like that unless they're forced to.

2) It's not their cock-up, except in so far as banking regulation is necessary because banks cock up.

3) But everyone is a relevant customer. The accords cover pretty much the entire range of activities undertaken by banks, and trying to figure out how much they spent on implementing Basel II for each customer segment would be extraordinarily complex, if not impossible.

4) No they're not. The regulators are.

[ 02.04.2007, 13:33: Message edited by: Ginger Yellow ]

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Muukalainen
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Thanks again GY, having read that I have to admit feeling a certain amount of understanding towards the banks whereas previously there was unbridled cynicism.

I found it hard to believe that regulators would force unnecessary and expensive measures on the banks for two reasons: (a) it doesn't serve any useful purpose, and (b) I imagined, wrongly as it turns out, that the Bank for International Settlement's Committee on Banking Supervision and various national regulators would necessarily work very closely with the banks to ensure that the regulations were relevant, practical, understood by everyone involved and implementable in a realistic time frame and without extravagant cost.

I'm not arguing there won't be some cost for all banks -- it's obvious to me that it's exceedingly likely that there will be -- but my position was (prior to your last post) that irrespective of what regulations were previously in force, then conforming to a generally agreed minimum standard should not have involved a large cost or effort to the banks because they would already have had something similar in use.

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Ginger Yellow
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There was a very extensive consultation process but you have to bear in mind that a) the BIS's primary "customers" are the national regulators, not the banks, and b) there's an additional layer of complexity in that in Europe Basel II is being implented through the EU's Capital Requirements Directive. So you had a lot of people pulling in different directions, with thh BIS trying to please a wide variety of constituencies while promoting convergence at the same time. While banks lobbied to make the new system cheaper and more streamlined, after a while many decided that it was going to happen anyway and it would be best to get the damn thing up and running so they can take advantage of the capital relief. The US is an exception on that front - while it's unlikely that America will completely ignore Basel 2, it's likely that they'll adopt a simplified version that doesn't afford the same potential for capital relief.
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ursus arctos
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It will be interesting to see if the sub-prime meltdown has any effect on the US response. While the (mostly) non-bank finance companies that have specialised in "easy credit" are obvious causes for concern; it hasn't been easy to tell what leading US banks' exposure is.

I also think that are definitely markets in which retail customers are being asked to bear a disproportional burden when it comes to increased costs, especially as a result of the fact that increased competition in the corporate sector has made recovering costs from much larger customers ever more difficult.

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Ginger Yellow
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quote:
While the (mostly) non-bank finance companies that have specialised in "easy credit" are obvious causes for concern; it hasn't been easy to tell what leading US banks' exposure is.

The short answer is they're up to their eyeballs in it. Even though the main subprime lenders are "non-bank", they're often owned by investment banks to ensure a steady flow of assets to securitise. Indeed most of the subprime lenders in the UK are owned by US investment banks. To give an idea, HSBC, which in the UK at least is a fairly conservative lender, recently posted a $10.6bn bad debt write-off. I dread to think what the figures are like at Bear Stearns or Merrill Lynch.

There's no doubt that retail customers get stiffed (especially in the States, although not having prepayment penalties is a nice bonus), and that loan pricing to corporates bears little relation to real risks at the moment. Basel II should in theory go some way to rectifying that by aligning the cost to the bank of a loan with its credit risk. Mortgages suddenly become a whole lot cheaper than highly leveraged corporate loans.

[ 02.04.2007, 15:06: Message edited by: Ginger Yellow ]

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ursus arctos
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I would add Lehman to your list; Merrill is likely to be better off given the relatively massive size of their investment banking and brokerage activities.
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Ginger Yellow
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Yeah, Lehman are huge in UK subprime, but Iwasn't sure about the US.
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ursus arctos
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"Subprime" is really a wonderful euphemism, isn't it?

It reminds me of California olive grading, where "Extra Large" is the smallest size (they go up at least to "Gargantuan").

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Oadlad
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I'm reluctant to sidetrack a genuine issue but who said you work longer than my generation? You're having a larf. I started in 1953 on 8 till 6.15 and eight till noon on Saturdays. We rejoiced when Saturdays became part of the weekend. Forty hour week? What was that? And we paid thirty four bloody per cent income tax.
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Ginger Yellow
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""Subprime" is really a wonderful euphemism, isn't it?"

It's marginally more honest than the common term in the UK - "non-conforming". The best euphemism, however, is "near prime".

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Tubby Isaacs
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Have we mentioned the 9 charge to get into St Paul's Cathedral or Westminster Abbey yet?

Astonishing. I don't want to blame the church too much. I expect the New Labour money to make museum entry was taken away from historic buildings.

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The Batebe of Toro Foundation
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Yeah, that astonished me at St. Paul's.

Only a fiver with student ID, mind, but still...

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The Batebe of Toro Foundation
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Yeah, that astonished me at St. Paul's.

Only a fiver with student ID, mind, but still...

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Tubby Isaacs
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Free to me as a member of City of London Guide Lecturers Association. Or will be if the bloke responsible for membership is ever contactable.
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Malcolm X
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So you have to pay 9 to get into a church.
I don't think Jesus would be impressed with that.

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