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A couple of presentations I have sat through over the last couple of weeks have caused me to do a little bit of reflecting on where the banking industry has come over the last few years – and where it is likely to head.

Let’s start with what will not change. In the short to medium term at least, I cannot see the “4 pillars” structure changing. The big four banks – NAB, CBA, ANZ and WBC – will all still be there and I very much doubt they will be taken over by a foreign bank. This is partly because they are reasonably well rated on the ASX, but mainly because the foreign banks know the reaction would not be, shall we say, entirely favourable. Internationally, the Aussie banks are quite small, so size would not be a problem if they did come into play. Citibank, for example, could swallow the NAB without really noticing the effect on the balance sheet.  I just cannot see it happening. Read the rest of this entry »

Today’s Bobsguide carries an interesting piece from Sungard on pillar 2 implementation progress[*]. This piece, though, carries the results of a survey by Sungard on pillar 2 readiness – and it accords with my own experience on this. Read the rest of this entry »

This is one survey that should make the consultants working in the Basel II space happy. The Financial Stability Institute (no, I hadn’t heard of them either – but they are part of the BIS) have released a paper giving the results of asking regulators around the world whether they will be implementing the Basel II accord.

Of the 98 that responded (of 115 countries asked), 95 said they would be implementing, with most to do so before 2015. Read the rest of this entry »

In what should be my last post on the US implementation until the final determination of what the heck they are doing is made, I thought a quick look around the (so-called) Basel IA framework is might be useful – and show why several banks want to use this approach rather than the advanced approach of the Basel II framework.

Firstly, as stated in another post, Basel IA is not a BCBS output, and should not, therefore, be called “Basel” in any case – you cannot blame the BCBS for it. What it is, on the other hand, is an attempt by the big 4 US regulators to get a more risk sensitive framework for US banks without requiring them to adopt even the simplest of the Basel II methodologies. The end result, as contained within the relevant ANPR is an attempt to create some middle ground between Basel I and Basel II standardised – improve the risk sensitivity of the credit risk calculations without doing anything substantive on the operational risk side or the other risks. Read the rest of this entry »

Just in case this blog would be thought of as an APRA “love-in” I thought a quick piece on where APRA are not doing well (compared to where we would hope they would be, rather than other regulators) on their Basel II implementation would be in order. There are several areas where APRA are not doing well. Most are in the practical application of their various standards that relate to Basel II in Australia. There are also several areas where the guidance is lacking, even though it would be a critical input to the whole compliance framework. Read the rest of this entry »

First of all: an apology. There seems to be a lot of posts recently on the US implementation of Basel II (or Basel IA or Basel I). This is largely because in Australia we have a few things going well – the regulator is progressing well on implementation, the banks know what the rules are and either are very busy putting them in to practice or have done so and are now refining then and the market is well informed.

This is not the case in the US. Even the basic rules are not yet clear, as a speech by Ben Bernanke has made clear. The US has consistently proposed (to the combined, at best, polite comment and, at worst, outright derision of fellow regulators) that Basel II needed another layer of conservatism – a layer that is not risk sensitive.

Bernanke’s speech has now thrown that, as well as whether their “Basel IA” rules up in the air. Essentially, he is saying that the US regulators will now review whether those additional rules make sense (note to the Fed, they do not) and therefore whether they should drop them.

The so called “Basel IA” rules are also under re-consideration for at least the smallest banks. Apparently, they may be too complex for the very smallest to implement, so they should be allowed to remain under Basel I.

The “Basel IA” (I use inverted commas as they are a US formulation, not a Basel Committee formulation) are essentially dumbed-down Basel II standardised rules. In Australia, even the smallest ADI is using Basel II (the standardised approach). I cannot see why an Australian ADI can do it and a US one cannot.

Maybe we are getting some sense from the US regulators, at long last – but it comes too late and is going to introduce more uncertainty into the US implementation. The sooner they can get this sorted oout, the better. About 3 years ago would have been right.

[UPDATE]Looks like Sheila Bair at the FDIC is fighting back – at the ABA convention in Phoenix yesterday she is reported to have said that the leverage ratio “would ensure a minimum cushion of capital for safety-and-soundness throughout the global banking system”.
Looks like we are in for a nice little stoush. Arguments in bank regulation – always good fun. Lets see who wins.[/UPDATE]

[UPDATE 2]Ben Bernanke fights back! This just gets better. On the linked speech, look at the 6th and 7th paragraph on the section on bank capital (the section is on page 2, with those paras on page 3). Bernanke’s focus is on what is “…likely to add to implementation costs and home-host issues…” rather than Bair’s emphasis on “…safety-and-soundness…”.

I would like to be a fly on the wall when they next meet.[/UPDATE2]

An important reminder this morning from finextra on some of the risks of outsourcing. Reporters from Channel 4 in the UK were able to buy confidential customer data in India from middlemen. In this intance it was from a mobile phone company’s call centre, but the previous one was from HSBC’s call centre.

Of course, there is no reason to suspect that this has not happened at company owned call centres before, nor that it could not happen when you are insourcing your call centre. The incentives to do it, however,  are increased when workers are being paid less and the legal system is known to be weaker. If you are going to outsource, just have very good security in place and be mindful of the operational risks – they are increased. There are no free lunches.

This is a headline I never thought would be seen. In fact, this is the first time the prize has been awarded to anyone for commercial activites. The part that commerce in general and banks in particular play in maintaining peace is often missed. That said, Professor Muhammad Yunus is not your normal banker – explicitly requiring that there be no recourse to the debtor on default, for example, would cause a normal Western banker to look at possible exit strategies.

There is little doubt that this innovative way of banking has proved very successful and is a useful model for many countries. To add to the current chorus: congratulations.

It is good to see the UK regulator (the FSA) actually understands the importance of making capital relate to the risk profile of the institution. The comments yesterday from John Tiner, the FSA Chief Executive, on the US suggestion of a capital floor, otherwise known as the “leverage ratio” are spot on.

“…there have been suggestions that a US-style leverage ratio be incorporated into the Basel 2 framework, in effect creating a capital floor for banks which is not risk based and this idea worries me for that reason.”

This was clearly a response to Shiela Bair’s (Chairman, US Federal Deposit Insurance Corporation) comments of 5 October where she said she had “…raised with my colleagues the issue of international supplemental capital measures, such as a leverage ratio…”. As far as discussions between regulators go, Tiner’s response could not have been a bigger raspberry – and a more correct one.

The move by SWIFT to allow full (or nearly full) corporate access to the network is an interesting one. The current access is really just a quick way of working with your own bank. The SCORE methodology will, in time, allow these corporates to behave in a very similar way to the banks on the network. If the qualification criteria are as broad as mooted, most listed Australian companies will be able to join.

Of course, most won’t. The costs will be high, both in equipment and training (you would not want an untrained person sending SWIFT messages) and the benefits, unless you are regularly sending large amounts around will be questionable – particularly given the risks. Still, the very fact it is more open should increase its utilisation and therefore, hopefully, reduce the costs still further. Expect, though, that the initial phase of reductions will be through the rebate process rather than the listed prices.

Any price reduction in transferring funds around the planet will be welcome.

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