By Rob Starr, Content Manager, Big4.com
WeiserMazars recently co-hosted The Good Bank Debate* at New York University School of Law and Center for Financial Institutions’ Greenberg Lounge as part of The Good Bank Initiative where the firm’s Stephen Brecher is ambassador. The debate was part of an ongoing process exploring the elements that make a socially engaged bank a good business. Brecher spoke to us recently about the current debate and the most recent developments in the larger overall Economist Intelligence Unit research program sponsored by Credit Suisse, Mazars and SAP
with additional support from Capgemini.
Brecher started by supplying an overview of the initiative’s progress highlighting a variety of activities including a successful online dialogue on the Good Bank portion of the Economist website culminating in a live conference in London that was subsequently streamed out. During that same time, the three sponsors of The Good Bank Initiative wrote several complementary articles.
“The streaming conference finished the formal part of the program,” Brecher said. “A white paper was finally released by The Economist September 16th.”
The driver behind all these efforts is a multifaceted approach to improving the global banking industry with the most recent events being a series of debates including the one in New York.
“We covered trust, capital leverage and size, trading restrictions, better regulations and what’s ahead,” he said adding the issue of trust and banks was one of the takeaway issues.
“Obviously there’s a lot of criticism of banks and some of the actions of banks don’t bring about that feeling (of trust) certainly with what happened with all the mortgage loans,” he said adding one area of the debates touched on the fact that compliance is both difficult and expensive. He also said one of the barriers to entry for new banks can be too much detailed regulation.
“There’s no question that banks have increased their compliance staffs,” he said adding while that can lead to increased trust, there are issues attached. Another proposed rule under Dodd-Frank would change the way foreign regulators and their American counterparts work out the details for how foreign banks will operate in the United States.
“That basically moves capital and liquidity from the bank as a whole to the U.S. operations and gives the U.S. regulators primary authority, contrary to the way that non-US banks have been regulated in this country almost forever,” he said.
One of the points made during the debate around trading dealt with the fact that if a bank is securitizing a portfolio and then sells it off, they have zero risk.
“When you’re packaging a portfolio of loans, the question becomes when you’re selling off that package and you know there is poor quality in there, what is your obligation?” Brecher said. One of the panelists subsequently mentioned that banks should be required to keep a certain amount of the loans when they put portfolios on the market.
Panellist Robert Cohen stressed if banks were made to keep a piece of these portfolios, they were going to think a little more carefully about what they sold to other people.
Brecher also points out that while the accompanying white paper had a heavy European influence, the debate highlighted differences of opinion on some matters in North America.
“We had some very interesting discussions on capital, if increasing it to ten percent or thereabouts was essential,” he said. “There were differences of opinion on that.”
One of the conclusions in terms of capital and leverage was that capital should be evaluated in terms of the risk model of the bank, especially when the institution is involved in trading. It was also clear from the debates that leverage had decreased.
Looking toward the future, a couple of key points were agreed on.
“The Chief Risk Officers (CRO) are clearly getting more authority in an institution in evaluating these different factors,” he said also noting that capital buffers are increasing.
“One of the things that was almost unanimous coming out of the panel was that we’ve had financial crises before and we’re going to continue to have them,” he said noting the severity of the next downturn could possibly be worse than the last one. He tied several factors to the question including how fast and when interest rates go up and how the Fed plans to eventually lessen their policy of quantitative easing.
The panel felt any kind of detailed predictions beyond the fact that another crisis will take place was too difficult since many of the usual predictors have been operating in unpredictable ways. Brecher provides the example of the wide expectation that the Fed would lessen their bond buying activity in September that didn’t pan out and how the markets reacted negatively.
“There are unintended consequences to actions,” he said.
Near the end of the event, the concept of institutions considered too big to fail was touched on with one hypothesis being some institutions might be too big to manage their risk.
“The other side is if you don’t have a large bank operating globally, you can’t really serve the multinational companies,” Brecher said.
* Joe Kolman, Managing Editor of the Economist Intelligence Unit was moderator and panelists included Stephen Brecher, Partner at WeiserMazars; Robert Cohen, a Managing Director at Joranel and former Chairman of Korea First Bank, Vice-Chairman of Republic National Bank, and CEO of Credit Lyonnais; Donald Lamson, a Partner at Shearman & Sterling; Geoffrey Parsons Miller, the Stuyvesant P. Comfort Professor of Law and Director of the Center for Financial Institutions at the New York University School of Law; and Mark Olson, Co-Chair, Treliant Risk Advisors.