Friday, March 08, 2013

ECOBATE 2013 - 1 Goodhart & Werner

It's pleasing when your local event has a global media spotlight shone on it on the day. In the UK's dark early hours on 6th March this happened for the ECOBATE 2013 conference through a letter published in the Financial Times by conference originator Prof Richard Werner. Dr Werner had written commenting on Paul Tucker's suggestion that negative interest rates might be charged on some bank reserves at the BoE and the FT published it on the day. His letter was a tutorial on three types of money in our monetary infrastructure.  For good measure he also threw in a reference to the 'Quantitative Easing'  term which he had coined in the 1990s in Japan, giving it his originally intended meaning. Added to all that, also in the FT, an op-ed article by Martin Wolf  acknowledged Werner's old argument that central banks should borrow directly from commercial banks as a means of reviving an economy. 

Day dawned on Winchester's Guildhall (UK) and inside at ECOBATE the lessons of history featured strongly. As Prof Charles Goodhart said in his Conference Keynote speech, 'where you are going depends on where you have come from'. He sketched two historically different world banking models. Firstly, the Anglo-Saxon banks started as a) diverse local retail banks which handled the smaller end of lending, and b) merchant banks which were gatekeepers to large capital markets. The second was  the Continental (Japanese) one was based on, c) a universal model of banking without much capital market access, but with d) post office, co-op and sparkassen retail banks.  He thought that the Vickers 'ring fence' proposals to separate banking business are not likely to succeed  on the continent and will be watered down. He thinks the UK is on its own on this, which will make it difficult for UK banks to compete.  

He told us it was wishful thinking to expect banks to bear the burdens of their failures. 'Banks' are an abstract entity and it is always some sub-set of households or another that takes the pain. He was doubtful about success from attempts to 'separate those dreadful gambles  and make retail banks safer'. And how can you separate a hedging transaction by a small farmer to cover his future crop from large scale speculation in that crop? These are interchangeable, intertwined actions. The interconnectedness of investment banks means that liquidation of them would be horrific. One customer transaction such as selling foreign exchange has a knock-on effect through different banks across maybe 10 deals as each tries to cover itself -the 'hot potato' effect of avoiding contagion. If we think it possible to make retail banks safer: 'wait 10 -15 years'.  He has observed 4 crashes in his lifetime and is 'inking in' another housing-based financial crisis for 2028.  Very few in 2007 foresaw the crisis. The Professor quoted the FED's Bernanke: 'never stronger banks'. Credit default swaps (a type of banking insurance) were priced at their lowest-ever levels in 2007. 

Would earlier intervention help? Auditors have never shut a bank; running out of cash shuts banks.  Much higher equity is needed for banks, but managers and owners will only raise equity if desperate. Unless massive deleveraging happens, stagnation will continue - banks cannot be made to lend.  He spoke of equity ratios, liquidity ratios and 'ladders of sanctions' and penalties, on managers: 'Choose your multiple choose your sum'.   

He agreed with a questioner about the effects of the next generation being in charge with no experience of the last crisis. The study of history is vital. He wondered if a new departure in regulation might include a ' comply or explain' aspect. He described Credit Rating Agencies using as a guide 15 years of stable property prices, as a 'monumental misreading of probabilities'.  Charles Goodhart is always thoroughly good value - but you may have to run hard to keep up the pace and sheer coverage. 

And so on to the Gothic revival style King Charles Hall and an excellent lunch and more good value from Vanilla Catering & Events of Southampton.  More on ECOBATE 2013 anon.
posted by Charles Bazlinton


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