“It would have been very easy to leave at that point, but I had a fundamental belief in this business, I could see our teams delivering every day, and the reaction they were getting from clients. I have always liked the collaborative culture – bankers want to do the best for their clients, that is what motivates us,” says Ms Rose.

The process of rebuilding RBS since 2008 is in many ways as remarkable as the empire-building that went before, and Ms Rose has been at the centre of it, joining the RBS global banking management committee in 2009. At the start of 2012, that overhaul led to the combination of treasury, transaction banking and trade finance activities with the markets division to form Markets & International Banking – M&IB, inevitably dubbed “Men in Black” by the RBS rank- and-file. Ms Rose was appointed the head of Europe, Middle East, and Africa for M&IB.

This marks the culmination of a vast transformation that has seen RBS reduce its balance sheet by well over USD1000bn since 2008 and make major strategic decisions on which it delivered ahead of schedule. Ms Rose says it was “remarkable being part of one of the largest ever corporate restructurings”, and believes that the bank is now close to achieving the right shape and size – but management thinking must remain agile.

“Can we take a breath? No, because this industry is very dynamic and is going through some fundamental challenges and a changing regulatory and capital environment. But I do sometimes pause to think about how much we have already done in the past few years,” she says.

Tough Times

Some of the new market challenges fed into particularly painful decisions at the end of 2011, when the investment bank chose to exit cash equities, equity capital markets, corporate finance and mergers and acquisitions business lines through sales or closures.

“While these were very good businesses in their own right, they were relatively small in terms of the amount of revenue they contributed to our overall business. The new core matches very neatly with the expectations of the clients that we work with, it is the bulk of what they look to us to do,” says Ms Rose.

That new core is a global franchise consisting of debt capital markets (DCM) and financing, risk management (including derivatives capabilities), and transaction banking and cash management services, all delivered across the bank’s 38 countries of operation. At the moment, the plan is to maintain that geographical footprint.

It will be interesting to see how the new structure affects the role of the RBS financial institutions group (FIG), as banks face increasing regulatory complexity across their entire balance sheet, including equity, debt and the management of risk-weighted assets. Ms Rose believes the disposal of the bank’s equities capabilities has not altered the relationship with FIG clients, and that RBS retains the right expertise to maintain its involvement in key client transactions.

A Head Start

In some ways, the planned post-crisis restructuring has given RBS a head start over some of its competitors. Those that came through the first wave of the crisis in better shape are only now beginning the rethink that RBS has just completed.

Ms Rose says the uncertainty among staff about strategic changes can now be replaced with a clearer message, which improves morale and has even allowed some significant new hires. While warning against any complacency as regulatory changes raise capital requirements, she adds that the bank is in a strong position thanks to strict measures since 2008 focusing on control of capital deployment and reduced wholesale funding dependence.

“In 2008, we had to make clear choices about which countries we could stay in and which clients we could support – that was difficult. But for those core clients who we decided to support globally, we were able to continue providing capital, and they stuck with us during this period. It is not a good thing for the industry that banks are in a stressed situation, but at least we face it with a balance sheet that has already been restructured,” she says.

Overall, she says there is still overcapacity in the market and intense competition. But RBS can meet that competition knowing that its remaining business lines are all central to its strategy. She also feels the pressure of transformation at RBS has encouraged a mentality that helps its bankers to innovate and adapt well to fast-changing conditions in the market.

“The European market is still continuing to develop. We have seen a real shift from the loan market to the bond market, it has become a more capital-markets driven business. Clients will always look at different ways to raise liquidity and finance their business, that is positive and we will explore and develop new routes. We are here to provide access to capital markets especially if banks have constrained liquidity,” says Ms Rose.

Spotting Opportunities

Beyond its UK home market, the M&IB network now spreads across western Europe, a few countries in emerging Europe and the Middle East, South Africa, North America, and a wide range of Asian markets. Ms Rose regards the UK as “absolutely critical, and our commitment to the UK economy and businesses is fundamental to our structure”, with consistently top or top five positions across DCM and foreign exchange (FX). But the international presence also remains essential for the business model.

“As regulatory pressures grow and market dynamics change, trade finance, supply chain finance, FX and cash management will be increasingly important to global clients, so our network is critical. We are focused on making sure that our network is efficient, we do not seek to compete with local banks in local markets for small or mid-sized clients, but we must be an international bank for our international clients,” says Ms Rose.

Europe is not necessarily the healthiest of home markets at the moment from an economic viewpoint, but Ms Rose says RBS can still find growth opportunities on a client-by-client basis. While the bank does not intend to grow its geographic coverage, she certainly sees the potential for expanding individual clients segments, although it is difficult to identify exactly which ones will present the best near-term opportunities.

“We have strong growth targets where we see opportunities, but we are not trying to pick one segment; our aims are diversified across the network and will be responsive to macroeconomic conditions,” she says.

Return to Normality

There is still at least one more major stage to the transformation of RBS – the return of a bank that is now 83% owned by the UK government to what Ms Rose describes as a “normalised share structure”. While the government shareholding made the bank robust during the crisis, it is very much the intention to reach the goal of returning that investment to the state as soon as possible.

She says the general process of recovery since 2008 has had a far more significant impact on the mindset of RBS bankers than the fact of state ownership. And she emphasises that the bank is run on a commercial basis, with day-to-day decisions set by the management board while the government remains an arm’s-length owner.

“The interests of the RBS executives and those of the government as our major shareholder are absolutely aligned: to build a robust, well-capitalised, well- structured, successful RBS. Had the macroeconomic environment co-operated more, we would be further along in that plan,” she says with a smile, “but in any case, we remain focused on building value for our shareholders.”

Sullivan & Cromwell has since defended a growing number of foreign bank subsidiaries under attack from the rapidly multiplying US regulatory bodies. Last month, another was added to the list, when Standard Chartered faced a broadside from the New York Department for Financial Services (DFS). The DFS was created in 2011, just in case banks did not receive enough attention already from the Department of Justice, the Treasury’s Office for Foreign Assets Control, the Federal Reserve, the Office of the Comptroller of the Currency, the New York Attorney General, and the District Attorney of Manhattan, to name but a few. Standard Chartered had apparently been in touch with most of these bodies regarding its affairs in Iran for more than two years prior to the heavy-handed intervention by DFS superintendent Benjamin Lawsky. The bank’s decision to settle by paying a fine of USD340m does not detract from the cumbersome and inappropriate nature of the process, but could the ultimate victim be New York rather than Standard Chartered?

Vote Winner?

There has been considerable consternation about the affair. Little wonder that Bank of England governor Mervyn King openly criticised the apparent lack of supervisory coordination in the US. But then it is questionable whether coordinated supervision is really the aim of these agencies. Instead, the DFS is the latest in a long line

of bodies to provide a vehicle for political ambition. Demonising foreign banks looks like a cheap and painless vote-winner, especially in an election year.

That, at least, is the sentiment of several UK politicians who alleged a deliberate attempt to undermine London’s status as a financial centre for the benefit of New York. Indeed, the DFS website clearly states that among Mr Lawsky’s key objectives for the DFS are “enhancing New York’s status as the world’s financial centre”, which sounds like a potential conflict of interest for a supposedly neutral regulator.

His choice of target is also contentious. Rigging Libor undoubtedly jeopardised many banking clients, while laundering Mexican drug money is illegal in just about any jurisdiction. But the Iran Sanctions Act is a diplomatic more than a regulatory tool, and one that puts the US out on a limb. No other country has forbidden so many types of activity in Iran, nor identified so many companies as prohibited counterparties. Nor has any other country sought to push its application so vigorously onto foreign-headquartered banks.

And of all banks, Standard Chartered came through the financial crisis with both its reputation and its results relatively intact. Moreover, its client base is almost entirely in Asia, the Middle East and Africa. In short, its New York operations matter mainly because this is where the bank handles its global dollar transaction banking business.

US Under Threat

But the Iran sanctions regime dates from an era when the US was the unchallenged global financial market superpower. Those days are gone. Four of the world’s top 10 banks are Chinese – the same as the number of US banks in the top 10, only much faster growing. China’s financial system is awash with trillions of export- generated dollars. And Hong Kong already has its own global dollar payments platform, the Clearing House Automated Transfer System (Chats). This handled transactions worth USD2300bn in the first half of 2012, a rate that has more than doubled in just three years.

It is still a fraction of the volumes passing through New York, but if a major global bank such as Standard Chartered were to move part of its dollar transaction banking business to Hong Kong, the Chinese authorities would surely welcome this as a boost to their own ambitions to build an international financial centre. And other banks might well follow. HSBC is already committed to the project, as the clearing bank for Chats dollar payments.

There are signs that a strategic reappraisal is already beginning. A number of European banks have been quietly reorganising their US subsidiaries, and our data shows that capital levels have been falling, suggesting that they expect to handle smaller volumes of business in future years. Ratings agency Standard & Poor’s recently downgraded a Deutsche Bank transaction banking subsidiary in the US on the basis that it was no longer “core” to the group. As the balance of economic power shifts towards Asia, New York is increasingly engaged in a fight to maintain its status as a global financial centre. It would be a bitter irony if the New York DFS ended up decisively weakening the city’s position in that battle.

Ahead of its sale earlier this month of $470 million of new money general obligation bonds, all three rating agencies took a dim view of the district’s plan to dip so deeply into reserves, especially given its looming fiscal pressures.

Standard & Poor’s downgraded the board’s rating to A-plus from AA-minus ahead of the sale and assigned a stable outlook. Fitch Ratings revised its outlook for the board’s A-plus rating to negative from stable. Moody’s Investors Service downgraded the board’s $6 billion of debt to A1 from Aa3 and warned of further action by assigning a negative outlook.

The budget also relies on the maximum property tax increase to raise $62 million allowed under state caps and includes $144 million in non-classroom operating cuts to help close the budget gap. It fully eliminates the deficit by using $432 million in reserves. It will exhaust all of the district’s $349 million unrestricted balance, draw $25 million from a restricted fund balance and tap a reserve of $58 million in Illinois state fiscal 2012 funds that are not used.

“This budget process involved some very difficult decisions, but ultimately reflects our commitment to protecting our students and their learning,” the district’s chief executive officer Jean-Claude Brizard said in a statement. “While much of this budget forces us to address a very grim financial reality, we know that investments we’ve protected a such as those that support the full school day a will be a payoff for our kids in creating more opportunities for them to experience success in school and life.”

The original budget funded 2% raises for teachers, but that money was diverted for the extended school day agreement that calls for the hiring of additional teachers. The union also wants a larger raise and are threatening to strike over a series of issues that include wages and concerns over the district’s implementation of the longer day. Schools are scheduled to start the day after Labor Day.

The boardA a during a lengthy meeting that was marked by teacher protestsA a also on Wednesday approved spending $25 million on strike contingency plans should one occur. The district’s fiscal year began July 1. If the district and teachers reach an agreement that adds additional costs to the budget officials would need to amend the spending plan.

CPS has long maintained a healthy fund balance. It was cited as a credit strength while the district worked to rebuild its eroded credit after the state handed control of CPS back to the city in 1995. It has also provided a stable liquidity cushion that helped the district weather chronic delays in state aid payments.

The district faces a financial reckoning next year when its deficit will balloon to $1 billion due to rising debt service costs and a hike to $534 million from $196 million this year in required pension payments after the expiration of a state-approved pension holiday. School officials are expected to seek support from state lawmakers for pension reforms that would provide some relief from the escalating payment.

The district’s sale earlier this month will finance ongoing capital projects included in its massive campaign to rebuild and upgrade schools. The district back-loaded the bonds in terms on the long end with a final maturity in 2042 paying a 3.98% yield and 5% coupon.

The deal marked one of the board’s last large sales for some time, as it intends to dramatically scale back its capital spending to about $100 million to $200 million annually through 2017 compared to $500 million to $700 million in recent years.

Fitch said its negative outlook stems from the looming pension hike and labor dispute. “Fitch recognizes the district’s history of effectively addressing budgetary gaps but believes the upcoming combination of pressures is exceptionally difficult,” analysts said.

A local government watchdog group slammed the budget as irresponsible and had urged board members to reject it. “The district’s inattention to the future consequences of its actions could inflict lasting damage on the financial and operational viability of public education in Chicago,” said Civic Federation of Chicago president Laurence Msall. The federation has called on the district to undertake a massive restructuring that reflects the size. The district serves more than 600,000 students in 675 schools.

When, in the run up to late 2007, derivatives traders at Barclays Capital were sending e-mails to colleagues on the money market desk asking them to manipulate their London Interbank Offered Rate (Libor) submissions – and celebrating with bottles of Bollinger when their requests were met – they had little idea just how explosive the repercussions would eventually be.

Soon after Barclays revealed it had been hit with a $450m fine from UK and US regulators in late June for fixing Libor, its three top bankers – chairman Marcus Agius, chief executive Bob Diamond and chief operating officer Jerry del Missier – were forced to resign (although Mr Agius has since resumed his role to provide stability and find a new CEO).

Libor itself has come under huge scrutiny. Policy-makers across the globe have attacked the process by which it is set and even its very concept. Ben Bernanke, chairman of the US Federal Reserve, told US Congress that the Libor system was “structurally flawed” and “a major problem… for the confidence in the financial system”.

Libor, a daily measure of unsecured interbank lending rates across 10 currencies and 15 maturities, has long had its critics. Ever since it was introduced in 1986 under the auspices of the British Bankers’ Association (BBA), bankers have described it as an imperfect benchmark. Scepticism was especially rife amid the turmoil in 2008 and early 2009. Some investors, citing banks’ widening credit default swaps and bond yields, felt they were fudging their Libor quotes to try to give the market the impression they were still able to borrow at low rates.

Regulators also had their doubts. In May 2008, Tim Geithner, then head of the Federal Reserve Bank of New York, sent a recently leaked e-mail to Mervyn King, governor of the Bank of England, outlining ways for Libor to be improved.

Enormously significant

But despite its shortcomings, Libor’s importance has only grown with time. It now acts as a reference for hundreds of trillions of dollars (estimates vary from $300tn to as much as $800tn) of securities ranging from complex interest rate derivatives to corporate loans to consumer products such as mortgages. As a result, even a small change in its setting of one or two basis points can have far-reaching consequences.

“Libor matters not so much as an indicator of market sentiment, but because so many contracts are referenced to it,” says Richard Fernand, director of industry relations at the CFA Institute. “While there are alternatives, the bulk of interest rate-related contracts are still based on Libor. It is of enormous significance.”

Nonetheless, thanks to the sheer outrage – among the public as well as in high financial circles – over revelations of Libor-fixing, few believe that the system can continue in its current form. “Change will happen for the simple reason that the public and regulators are demanding it,” says Mr Fernand. “Everyone is saying that it needs to be reviewed.”

Some technical reforms are almost inevitable. One of the most popular suggestions is to expand the number of banks that make Libor submissions. Between six and 18 are on the panels for each of the currencies. Having more would likely increase Libor rates, given that the existing contributors typically include the world’s best-rated banks. New entrants would thus decrease their average credit quality (Credit Suisse says US dollar Libor rates could rise by 15 basis points [bps] if the group of submitters for the currency was expanded from 18 to 30-odd). But more importantly, say several commentators, including more banks would decrease the consequences of a single lender trying to manipulate the final Libor rate. And it should ensure a figure more representative of the overall interbank market. “Expanding the panels would give you extra data points to work with,” says a money markets analyst in New York. “The quality of the metric would be improved.”

In his leaked e-mail, Mr Geithner called for more local banks to be Libor contributors. He noted that only three US institutions – Bank of America, Citi and JPMorgan – were among the 18 US dollar Libor submitters, even though several more were active in the London interbank market. The situation is starker in other currencies. There are no local banks on the Swedish krone, Danish krone or New Zealand dollar panels, and only one (Commonwealth Bank of Australia) on that for Australian dollars.

Several commentators say the lack of local banks is strange given the BBA’s criteria of picking them based on the scale of their market activity and perceived expertise in the respective currencies. “If you wanted to know interbank rates in Swedish krone, is an international bank that is on the panel but probably borrows in the currency once in a blue moon going to be able to tell you?” says another analyst. “You’re probably going to get a better answer from SEB or Nordea.”

New York’s sleeping

Another idea is to change when Libor is set. At present, panellists are asked at 11am London time to give their quotes. Some argue it would be better if they made submissions only when the main markets for each currency are open. US dollar Libor might be improved, for example, if banks were able to take into account the changes in liquidity that often occur when New York, five hours behind London, starts trading. “If you’re going to set the dollar rate, do it when the US is open,” says John Rathbone, founder of advisory firm JC Rathbone Associates. “Equally, the yen rate should be set when Japan is open.”

More radical suggestions include making the quotes of each bank private and only publishing the final Libor figures (which are calculated as the mean of the submissions, excluding the top and bottom quartiles). Proponents say it is precisely because of the transparency of Libor that banks might falsify their rates, particularly in distressed markets when investors will be watching closely for any signs of a liquidity crisis.

Yet Libor’s lack of opacity, at least in the sense that all submissions are public, is seen as one of its strengths. In any case, now would hardly be the right time to take away a layer of accountability. “It wouldn’t help with the public’s perception if you had less transparency,” says Michael Cloherty, head of US interest rate strategy at RBC Capital. “And public perception is a greater near-term issue [than technical fixes].”

Almost all Libor-watchers agree that there are too many rates. Some 150 are calculated every day. Yet few of the 15 tenors, which range from overnight to 12 months, are considered important benchmarks. The vast bulk of instruments based on Libor are referenced to the three-month and, to a lesser extent, the six- and 12-month rates. The New York Fed made this point to the UK central bank in 2008. “For tenors such as the three-month tenor, Libor quotes provide valuable information to the public because of the volume of activity occurring at that tenor, while quotes for tenors at which little or no trading occurs, such as the 11-month, are… less valuable,” Mr Geithner wrote. “The current practice of soliciting rate quotes across 15 tenors, when only a subset of those tenors reflect[s] meaningful market activity, likely leads to more subjective and formulaic responses across all tenors.”

Flip the question?

Since 1998, Libor has been calculated by the BBA asking panellists the rates at which they think they could borrow cash. The CFA Institute’s Mr Fernand says it might be possible for the question to be modified, with contributors instead being asked for the rates at which they would lend to their counterparts. The banks could submit either a single, average lending rate they would offer the rest of the panellists, or provide rates for each of them.

The advantage is that banks would no longer be revealing potentially harmful information about their own ability to fund. “The one institution you wouldn’t be commenting on would be yourself,” says a banker involved in setting Libor.

Yet it would complicate the Libor process. The submitters would have to make a judgement about the credit quality of several different institutions. And they might be reluctant to reveal details about their capacity or willingness to lend. “It would be quite revolutionary [to flip the question],” says Juan Carlos Martinez Oliva, a visiting fellow at the Peterson Institute for International Economics in Washington, DC. “From an academic [point of view] it’s perfect. In reality, I’m not sure.”

A major criticism of Libor is that it is, in most cases, based on hypothetical trades. Contributors are asked for estimates of where they think they can borrow, rather than the rates at which they actually borrow. But this is largely unavoidable, given that no bank, regardless of its size, funds across multiple tenors and currencies each day.

The issue of whether to use perceived or real borrowing rates strikes at the heart of how to improve Libor. It has become increasingly important since late 2008, when interbank rates seized up. While better today, they have yet to recover fully. “The interbank market is still fairly illiquid, even if it’s nothing like as bad as it was in late 2008 and early 2009,” says Mr Rathbone, pointing out that three-month sterling Libor rates are roughly 35bps higher than the Bank of England’s base rate. “In a fully liquid market without anyone expecting base rates to move in either direction in the foreseeable future – which is where we are today – you wouldn’t think it would be more than 10bps or 12bps.”

But calls for a market-based or auction setting, whereby banks are made to borrow to determine their rates, are unlikely to be heeded, say analysts. Submitters would resist proposals forcing them to fund on a regular basis when on any given day they might not need to, particularly across a range of currencies and maturities.

Elusive substitutes

As such, some have argued for Libor to be replaced with benchmarks that are derived from actual trades. One suggestion is to use banks’ issuance of commercial paper (CP), or short-term bonds. But while yields on these could be tracked, they would not directly reflect conditions in the interbank market. “CP is an imperfect benchmark because that’s where a money market would lend to an issuer, not where another bank would lend to it,” says Mr Cloherty. “It’s a different beast.”

Moreover, many lenders are cutting their CP issuance because of Basel III. Among its regulations, banks have to hold liquid assets against debt maturing in less than 30 days. Since they would also be required to hold Tier 1 capital of 3% on top of these assets, the effect is to make it more expensive than before to borrow for under a month or even three months (as the rules would apply for as much as one-third of the life of the debt). “It’s extraordinarily difficult to head towards a transaction-orientated rate when Basel III has the potential to knock out all your benchmarks,” says RBC Capital’s Mr Cloherty.

It wouldn’t help with the public’s perception if [Libor had] less transparency. And public perception is a greater near-term issue [than technical fixes]
Michael Cloherty
Interest rates that track interbank trades do exist. Among them are Sonia (Sterling Overnight Interbank Average Rate), which is a weighted average of borrowing rates between banks, and its equivalent for secured lending, Ronia (Repurchase Overnight Index Average). For the US market, the Federal Reserve funds effective rate, which is based on the trading of balances held at the Fed, could be used as an unsecured benchmark. And a newly launched repo futures rate might work as an equivalent for secured transactions.

But few of these benchmarks are liquid beyond an overnight tenor, especially when it comes to currencies other then the dollar, euro, sterling and yen. “Do we want rates across the maturity spectrum?” asks Mr Fernand. “If so, these [benchmarks] won’t fit the bill. If you want transaction-based data, you’re going to have to accept that there’ll be very little of it.”

Others argue that Libor was never intended to be a benchmark based on actual trades, and that changing it would increase its volatility. They say that using estimates smooths the rate in the medium term, which is what the derivatives market and corporate borrowers of Libor-based loans require. “Using a poll, rather than a traded rate, has its advantages,” says another interest rates analyst. “You are essentially asking professionals who are in these money markets every day to give their best estimates of where they could borrow cash. On any given day, those markets might not be that active. But in that situation, a traded rate might end up being based on one or two transactions that aren’t representative of the overall market, the result being volatility.”

Libor’s future

Most bankers and investors agree that there are no obvious substitutes for Libor and that replacing or fundamentally changing it would not help financial markets. “It’s very difficult to think of something better than the basic system,” says Mr Rathbone. “People have been looking at it for a long time, but without success.”

Nonetheless, Libor will change. The BBA began a review before Barclays was fined and is expected to announce proposals later this year. Along with technical reforms, the rules are likely to be tightened to prevent more manipulation. Bankers say accusations of panellists “lowballing” their quotes in distressed times are almost inevitable, given that the markets can be so illiquid an accurate rate might be impossible to determine. They are more worried about the type of fixing that occurred at Barclays, and doubtless many other banks, between 2005 and 2007, when traders enhanced their positions by asking for their institutions’ Libor submissions to be made artificially high or low. Clear punishments for this type of behaviour are needed for Libor to regain the credibility it has lost in the past two months, say commentators. And the UK, as the home of Libor, needs to be able to punish individual bankers specifically for falsifying rates or colluding with others to do so. “The market abuse regime does not apply directly to Libor fixing,” says Mr Fernand. “There’s now a pretty compelling argument that it should do.”

For this to work, the BBA might have to cede some of its oversight of Libor to another entity. That could be the Bank of England or the central banks for each of the currencies. “They’re possibly the best candidates should new actors enter the system,” says Mr Martinez Oliva. “They have the competence, experience and reliability necessary to control the process. They know the local banking market.”

If Libor contributors feel that any new regulations or the fines they face are too onerous, they could decide to leave the panels altogether. They are, after all, on them voluntarily. And bankers say that while there is seemingly little financial benefit to being a submitter, there are big risks, both material and reputational, as Barclays’ fine and the subsequent backlash demonstrated.

Nonetheless, having clear rules about what counts as manipulation and what does not should allay banks’ concerns. “If the mechanism is transparent and works properly, it makes sense for the banks to contribute,” says Mr Martinez Oliva. “Being on a panel is a good advertisement for them, suggesting they are considered reliable and safe.

“Libor has done its job for decades. Reforms would help. But I don’t see any reason to replace it. Rather, the rules need to be improved. After that, Libor can continue to play its crucial role as a benchmark.”

Last week’s promise by Mario Draghi, president of the European central bank (ECB), to engage in more bond buying and, where requested by governments, offer further supportive action from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) suggests this lesson has not yet been learnt. Spanish banks took more than €310 billion from Draghi’s last “shock and awe” operation – the provision of up to €1 trillion worth of “unlimited” liquidity to eurozone banks a few weeks ago.

The Spanish used the money to buy existing short- and medium-dated Spanish gilts (which nobody wants). Most of the gilts were sold by French and German banks that are progressively disengaging from Club Med markets.

The “outcome” of Draghi’s operation was pointless. The 10-year gilt yield in Spain hit 7.5% in late July. Back to square one.

This was no isolated incident of costly “can kicking”. The ECB has abstained from bond purchases in secondary bond markets for 20 weeks now but its total outlay on Irish, Greek and other “distressed” gilts stands at €212 billion.

There has been little or no long-term payback.

The ECB cash was used to allow unwilling bondholders off the hook.

By last week, euro fanatics – including Jean-Claude Juncker, the Euro Group president; Christine Lagarde, the IMF managing director; and Mario Monti, the Italian prime minister – admitted the eurozone had hit a defining moment. The euro, Draghi declared, was “irreversible”.

Europe’s masters of the universe clearly do not study their economic history. If they researched the lessons of 1929-33 they would learn two things.

First, contagion does not stop at the doorsteps of the poor: it also visits the homes of the rich.

Second, a solution to the problems of inflexible foreign exchange markets can only be found when man becomes the master of money and money ceases to be the master of man. This means that business people in deeply depressed countries must be given a currency with a value that is appropriate to their needs. In other words, a devalued currency: the type that normally accompanies an International Monetary Fund rescue.

Nothing of the sort is on the cards. The euro cheerleaders have just coerced Spain’s leader, Mariano Rajoy, into adopting new austerity measures totalling €65 billion.

They rammed through another €12 billion of cuts in Greece last week. Neither seems the right medicine for countries where the output will drop by 2% and 7% respectively in 2012.

Confronted by unaffordable bailout costs of possibly €400 billion in Spain, Draghi’s pronouncements have become somewhat melodramatic. “Believe me … we will do what it takes,” he has said repeatedly.

Others are more sanguine. Philipp Roesler, Germany’s deputy chancellor and economics minister, has observed drily that an exit by Greece from the eurozone “lost its horrors a long time ago”.

Draghi wants the Spanish to seek unspecified forms of aid from the EFSF/ESM, provided it is “within their remits”. But how much further can Spain be pushed in terms of austerity? The Spanish financial press has been quoting unnamed government sources who say Madrid has already intimated to the Germans that Spain might be better off outside the euro. The notion of a eurozone break-up seems wholly unorthodox only because commentary on the subject is dominated by euro zealots. Those who read economic history books will recall how the global economy was saved when Britain was forced off the ruinous gold standard by a run on its reserves in September 1931 and President Franklin D Roosevelt followed suit after his inauguration in March 1933.

Roosevelt sensed that the “orthodox” advice of the Ivy League types who ran the Treasury was “poppycock”.

He broke the fixed exchange rate between the US dollar and gold. Then he and some wily associates set a more tolerable daily exchange rate for US business every morning over his soft-boiled eggs at breakfast in the White House. It involved significant devaluation. The US economy, which had all but collapsed, began to recover rapidly.

In Britain Winston Churchill and John Maynard Keynes celebrated the new flexible currency system by going on what historians describe as the longest and most liquid lunch break in economic history. Aided by a near 40% devaluation, the British economy also recovered quickly.

Eurozone members are being nailed to a cross just like those who adopted the gold standard in the 1920s. The Germans are taking a lot of stick for insisting on austerity as a price for assistance. Yet the most sensible long-term ideas for a solution to the crisis may be coming from within Germany.

Hans-Werner Sinn, president of the Munich-based Ifo Institute, and Professor Friedrich Sell, an academic colleague, last week suggested that countries under fire, such as Spain, adopt “associate membership” of the eurozone. This would involve a stress-free devaluation followed by membership of an ERM Mark Two (remember the 1990s), where a country’s exchange rate was fixed but adjustable by common agreement, as was the case for Ireland.

Sinn and Sell suggest a putative two years in the “sin bin” – if you’ll forgive the pun. Some countries might requalify for full eurozone membership, re-entering at tolerable exchange rates. Others would stay out indefinitely.

The idea is infinitely preferable to pouring money into Spain (and then Italy) that the EFSF and the yet-to-be created ESM does not have. Spain alone may need a sovereign bailout of up to €400 billion, with a toxic debt problem north of €200 billion in its regional banks and a budget crisis in up to nine administrative regions.

Using scarce ECB funds to buy more Spanish gilts, or giving the EFSF/ESM the power to buy new gilts directly from Madrid would offer only short-term relief. Besides, the Germans will not permit unconditional, direct funding of a country’s ongoing deficits, seeing such as “a bailout without the necessary troika discipline”.

Yet as I said, contagion affects rich ones too. Moody’s has put Germany, the Netherlands and Luxembourg on “negative watch” with analysts in Frankfurt warning that a eurozone break-up could cost Germany up to €3 trillion.

The Sinn/Sell idea raises the possibility of a friendly exit for Greece from an economic straitjacket. It also reflects the more fundamental ideas being floated by the economists Paul Krugman and Nouriel Roubini and the investor George Soros.

Spain may be the Rubicon. Why put hundreds of billions more into a contracting economy with 25% unemployment, debt which will hit 90% of GDP by year end, and whose bank balance sheets should be treated with grave caution? Why not give Spain a long-term way to restore what was a hugely prosperous economy until recently? Einstein famously defined insanity as repeating one’s previous mistakes over and over, and anticipating a different outcome.

As for Ireland, where does it stand? In the sin bin or not? That is for another day.

PS: A third of buy-to-let (BTL) mortgages are in arrears at some of the big banks. In a desperate effort to curb bad debts, the banks are appointing “rent receivers” who simply bypass landlords and collect rents directly from tenants. This sounds like a great idea, but is it? For a start the rent receivers are paid a fee or bounty of 20%. With typical rents down by 30% since Celtic tiger peaks, this means that the rent receiver will be remitting about 56% of the peak rent to the bank.

So far so (sort of) good. In such cases the landlord is frozen out of the transaction. But who will attend to the other aspects of renting such as emergency and routine property maintenance, registering with the private residential tenancies board, service charges, government taxes on second homes and the remuneration of property management companies? Many of the latter are thought to be insolvent at present, which may raise insoluble problems regarding conveyancing work on sold rented property in the future if repossession becomes common among the same banks.

Hong Kong’s economic success looks set to continue for some time yet, but challenges lie ahead for its exchange. How will it cope with declines in listing growth, and ultimately all out competition with its peers on the mainland?

The position of special administrative region to what may (or may not, if pessimistic predictions come to pass) be the greatest growth story of our lifetime has, thus far, treated Hong Kong rather well. The Pearl of the Orient’s ‘Gateway to China’ status has assured its continued growth and prosperity, even while debt concerns threaten to fragment the eurozone, and the US mounts an economic recovery that might charitably be described as faltering.

Today, of course, Hong Kong enjoys a position as one of the world’s pre-eminent financial centres, largely as a result of its role as offshore capital formation centre for mainland firms. Since 1993, when Tsingtao Brewery became the first Chinese incorporated firm to list an ‘H-Share’ in the region, its contemporaries have queued up to list on the Hong Kong Stock Exchange (HKEX) and gain access to Western investors keen for exposure to the Asian Dragon.

Primary Slowdown

But growth is slowing. The primary market, which has maintained Hong Kong’s development for more than a decade, is still robust, but it has become so large that even 2010’s record total fund raising of $110bn in initial public offerings (IPOs) and follow-on offerings amounted to just 4% of HKEX’s $2500bn underlying market cap of listed companies. And the stream of domestic listings may be drying up as Shanghai and Shenzhen’s exchanges become stronger. Recently, Hong Kong has even lost the position it held for two years running as the world’s number one IPO destination.

“[Primary market growth] doesn’t move the dial like it used to,” rues HKEX’s head of market development, Romnesh Lamba. “We really see growth coming from other areas now.”

Perhaps most immediate among these sources are international listings. Recent months and years have seen firms such as Prudential Insurance come to Hong Kong for a ‘listing by introduction’ for strategic or branding reasons, as well as others, such as Glencore or Prada, which have opted for primary or dual primary listings. The latter is a trend that is very much evident among natural resources firms, branded consumer goods (including luxury), and spin-offs of Chinese or Asian subsidiaries.

It is also one that looks set to continue, as more and more emerging market firms look eastwards, says Yes Bank’s co-founder and senior managing director, Aditya Sanghi. “There have been some very successful listings in Hong Kong of late among global firms, which have led to an increasing awareness among Indian companies of its potential as an alternative market to list internationally.”

What [HKEX is] doing is investing in the future. But we’re not going to see the results this, or next, year, because we’re taking a medium- to long-term view. We will always be the exchange that has the greatest access to China

However, relying solely on international listings for growth may not be sensible. Market conditions have not lent themselves to an IPO-heavy climate anywhere in the world, and not everyone is convinced that Hong Kong has the international clout to compete effectively with its peers. “Recently, Hong Kong has focused more on attracting companies outside of Asia to list,” says Tracey Pierce, director of equity primary markets with the London Stock Exchange. “What we’ve found at the current time is that there is very limited appetite there for equity stories without a substantial Chinese footprint, so those companies that are looking for a truly international exchange are still looking towards New York or London.”

Plans for Growth

Whatever the shape of demand for international listings, one of HKEX’s key priorities is increasing turnover velocity – the ratio between an exchange’s electronic order book turnover of domestic shares and its market capitalisation – a reflection of how often cash equities are traded. Hong Kong’s 2010 average was 61% as opposed to NYSE Euronext’s 130% and Nasdaq OMX’s 340%, according to World Federation of Exchanges data, and figures for the US market would be even more striking if alternative venues such as Direct Edge and BATS were included. Meanwhile, despite less sophisticated markets, figures for Shenzhen and Shanghai are still 344% and 178%, respectively.

So how can HKEX catch up? A small contribution should be made by a growing pool of core investors, via start-up and relocating hedge funds, for example, although this is not likely to increase trading dramatically.

In Europe and the US, higher velocity is, for the most part, a result of super-fast equity trading strategies. But for Hong Kong, high-frequency trading (HFT), as seen in the US and European markets, is rather harder to achieve. Most importantly, Hong Kong’s government imposes stamp duty of 10 basis points (bps) on each side of a cash equities trade, which effectively kills HFT, because such strategies typically generate margins of less than 10bps. “[HFT operations] just don’t play, and I don’t think the government is going to get rid of stamp duty any time soon,” says Mr Lamba. Not that it would necessarily be a welcome development if it did, he adds. The main issue is technical, even though HKEX recently upgraded its trading infrastructure and improved average transaction time by many orders of magnitude, it still lags behind the latest in lightning-fast platforms.

However, exchange personnel are unlikely to be overly concerned at present, especially when, as Gabriel Butler, director of global execution services for Asia with Bank of America-Merrill Lynch, points out, there is still plenty of mileage from close links with its mainland neighbours. “There is no impetus for HKEX to embrace high-frequency trading until its gateway to China status dries up,” he says. “[It is] doing the smart thing for [itself] and the city of Hong Kong.”

Opening Up

And it is here that Mr Lamba and HKEX envisage significant growth, thanks to the expectation that China will open up its capital controls, and gradually allow investors the freedom to buy securities elsewhere. Hong Kong, they hope, will be the first port of call.

China already allows for a qualified domestic institutional investor tranche to make overseas investment, although 2007’s much hyped ‘through train’ proposal of allowing retail investors direct access to Hong Kong-listed shares was never implemented. But that does not mean it will not happen eventually, even if the concept of losing millions of Chinese investors to Hong Kong at a single stroke never comes to pass. “This time around, I don’t think it is going to be as simple,” says Mr Lamba. “[But] we believe that they are going to increasingly let foreigners into China, and they will let Chinese investors come out of China.

HKEX has a privileged first-mover advantage here, but it must be sure not to squander its position. To that effect, the exchange is currently in a period of transition and planning. “What we’re doing right now, is investing in the future,” says Mr Lamba. “But we’re not necessarily going to see the results of that this, or next, year, because we’re taking a medium- to long-term view. We will always be the exchange that has the greatest access to China when it begins to open up. But if we don’t [capitalise on that], someone else will.”

We want the product to be renminbi. If it can be currency-neutral for Chinese investors, it’s going to be more attractive for them

Efforts are being made to make sure that it does include the exchange’s preparations for an offshore renminbi equity market, Mr Lamba adds. “We want the product to be renminbi. If it can be currency-neutral for Chinese investors, it’s going to be more attractive for them.”

Redundant Gateway

But it seems unlikely that the liberalisation of China’s capital markets will stop there. Almost inevitably, at some point, overseas investors will no longer need to rely on Hong Kong to buy shares in Chinese firms. So what will happen to the gateway when the walls come tumbling down?

It may well find itself in a diminished position, says Larry Tabb, CEO and founder of research and advisory firm Tabb Group, but it is not, of course, an immediate problem. “If you wind up having a floating Chinese currency and a relaxation of capital controls, you could see Shenzhen and Shanghai growing at the expense of Hong Kong.”

It is a danger, Mr Lamba says, that HKEX is keenly aware of. So for now, while there is plenty of room for further growth in the exchange’s core equities classes, the realisation that it will not last forever has led to moves towards diversification, such as its first steps into futures and options markets. “While we feel there’s plenty of growth to come from equities, if we don’t start in other asset classes, that’s an opportunity cost, because China at some point could do it directly.”

HKEX seems determined to seize the opportunity, but as the financial world realigns itself on a more Asia-centric focus, losing out may not be inevitable, says Mr Tabb. “China is just so big that you can’t assume there’s only going to be one or two exchanges. There’s enough growth and demand and scale that there should be multiple markets with enough different models and product sets to keep everyone happy.” For HKEX then, the coming years may not be easy, but the outlook is not necessarily bleak.

Understanding Forex Trading

When you are traveling to a foreign country, say from UK to Singapore, and exchanging your British pounds into Singaporean dollars, such a transaction would be qualified as the action of Forex trading. All Forex trading involves in 2 currencies (or a pair of them, if it please you). For instance, if you would like to convert your local currency, GBP in this case, to another currency, say, SGD (Singaporean dollars), then it actually means you are selling your GBP at the current exchange rate, in order to buy SGD. A decade ago, stock trading would have been much more popular in comparison with Forex trading, for it was believed to be a game for the big boys – banks, funds, governments, corporates, etc. With recent advancement of technology, common folks like us are able to trade Forex from the comfort of our home, and ease of our PC and internet connection.

Advantages of Forex Trading

Unlike Stock trading, Forex brokers allow serious leveraging power, anywhere from 10 to 500 times of what you invested in your initial capital (depending on where you live, and where the broker is registered.) Such an unbelievable leveraging power is about the first in history, spurring dreams that anyone could turn into a millionaire with the kind of leveraging potential. As if to make things even more attractive, Forex traders are able to access the market and commence trading right off the bat anytime through their trading platform from early Monday to late Friday, and any serious events would trigger the market on the spot, without needing to wait for the next opening session on a daily basis, thus opening up more much more opportunities to make money.

Why Forex Traders Failed?

Good things don’t come easy though. A recent statement from a respectable Forex broker admitted that over 90% of the retail Forex traders lose money at any given day. If you haven’t already guessed so, then you should come to know that leverages go both ways – A $5000 gain potential could also mean a $5000 loss potential on the flip side of the card. Additionally, once you are getting very familiar with the market, you’ll discover that the continuity of the market that was promised to you didn’t work out just as you were make believed. You’d have experienced lots of trading sessions that the market almost refused to move, stalling trades and your patience in the process. One of the most pressing question in the minds of newbie Forex traders is that whether over 80% of the Forex traders lose their entire initial capital within the first year of trading? Perhaps. But then again, any seasoned Forex trader would tell you that you’ll need to blow an account in order to be a “complete” trader. Truth be told, diving into the Forex market without learning the market’s behavior is akin to committing suicide. At such, one shouldn’t be surprised when new traders are being bitten and torn apart ruthlessly by the market – for he came prepared for anything but the worse. High leverages also shift our trading mentality too – leading us unknowingly to over-trade because the amplified profits have every power in the world to tempt us into its trap. Little did new traders foresee that when the trade turns sour, so does your account. And trades always turn sour.

The above paragraph might have depicted Forex trading as a nightmare, but seriously, are there fellows out there who really made money enough to support their full time income – month after month? More than a dozens that I know of. We are not talking about muscled banks and funds here, mind you, its the small dogs retail traders. How did they do that?

How To Make Real Consistent Profits Trading Forex

I have been trading both stocks market and Forex for more than 30 years now, and the only way to get to where I am now is by devoting a good part of your precious time to this, and you’ll be successful. Yes I heard your shouts, neither do you own 30 years trading time, nor are you prepare to give it that. Say “Cheese!” to our Forex Signals Services…

Consider this, the next morning you wake up, you’ll find a team of experts working on your trading station. You see them calling up bankers for positions placements, refreshing private news wire for breaking news, and setting up complex machines that drills live economical data, etc. And these are not just experts, they are experts with lots of valuable experience, having worked for major banks and investment institutions. All in all, they are highly qualified.

When quantity matters, 2 is better than 1 and 10 is better than 5; and when quality matters, a 30-year professional trader is way better than 30 novice traders. Agree? Successful traders have always claim that they succeed because they trade with their teams of passionate traders… And their teams are made up of quality traders, too.

WCCForex – Best Forex Signals Service Provider

That’s the exact blueprint that the founder of WCCForex.com has followed – building a strong, quality team – with members stationed around the globe to cover the “globalized shifts”, meaning 24 hours a day, 5.5 days a week. With a team of 50 professional traders working round the clock – like machines, yes – checking markets, calling bankers for insiders, studying figures and interpreting charts simultaneously, it’s no surprise that this WCCForex team stood a much higher ground than a typical newbie trader asking for free Forex signals in a chaotic forum. Reports have stated that over 170 WCCForex members have successfully multiplied their trading balance, from some $10k start up capitals to over $100k, all done in less than a year. The figure itself might have sounded too good to be true, but ask anyone who have been with them for at least 6 months, and they would have told you the figure was more likely an understatement.

For a time, it seemed to me that many traders were “getting used to” losing in Forex trading. Here’s one of the biggest opportunities that you are being presented – I’d say try them out, and see your profits soar, or get your money back with their guarantee. Either way, you’ll everything to gain, and nothing to lose.

Based on the speech of the President of European Central Bank, Mario Draghi, the worst part of the crisis on Eurozone has already over. Eventhough it is already too late to have any influence to Germany’s March Ifo survey of business confidence, the report from Mario Draghi could give a little signal on the improvement of the market.

German consumer confidence, nonetheless, is predicted to have delayed since the country’s consumers are dealing with significant higher fuel prices. French consumer confidence might have obtained a little enhancement to assist small business after pointed out on the negative unemployment rate. Both of the surveys are dated to release tomorrow.

Money supply data should also demonstrate that the current liquidity injections from ECB has been able to consistently promote advancement in private-sector loans. Afterall, the european has not taken serious action to establish a bounding recovery, however, by increasing liquidity, as well as, raised bank funding, it has a higher possibility to save the current economy.

On Thursday, The Germany’s Unemployment rate would be released, and it is expected to be held at 6.8 percent in March, and the release of the report could largely indicates the differences in the eurozone economic health. The expected 6.8 percent is very much a difference along with the 10.6 per cent rate in the eurozone all together and is lower than a third of the rates in Spain and Greece, at 20.7 percent and 22.9 percent correspondingly.

High oil prices have stunted the fall on the particular rate of inflation lately, although eurozone inflation is noted in falling to 2.6 percent in March from 2.7 percent in February, it persists stubbornly on top of the ECB’s target rate of 2 percent.

In the week, the final readings of US and UK development in the final quarter of previous year are due. On Tuesday, The UK data are predicted to determine that GDP dropped 0.2 percent in three months time, offering an 0.7 percent increase in the annual growth. Despite all this, the atttention has been concentrated on whether the economy can recover and bounce back to growth in the 1st quarter of 2012, and to determine this is all pointing towards the consumer spending power.

On Thursday, the readings for US data on the annual growth rate is predicted to be 3 percent, there might be slightly adjustment to the predicted value however, due to the inclusion of healthcare spending data, and also most analysts believe that personal consumption has improved, thus might push annual GDP to 3.2 percent.

The Bank is extensively expected to increase its expenditures on assets by an additional of £50bn, eventhough the readings from the UK has been improving in the final quarter of 2011, which indicates the recovery on the economy.

Consumer confidence continues to be negative due to the reason of high unemployment rate, while salary growth is stopped. Therefore, it appears that the Monetary Policy Committee hawks would not discuss against the increase of assets purchase by the bank. Even with an obvious growth in the manufaturing and service industry in the previous month, it seems fair for the Bank of England to take further actions to stimulate the economy growth.

The Central Bank is also predicted to decrease the main cash rate to 4 percent on Tuesday, in additional to previous point cuts in December and November correspondingly, due to the bullish trend of Australian dollar against US dollar which has already reach the target of five-month high.

It seems that is most likely that European Central Bank could maintain the refinancing rate at 1 percent, however, the investors might be eager to discover last month’s ECB measures, in order to assist the banking industry.

After the operation of €489bn loan has been approved for the banks, it has totally aid in relieving some concerns in the world financial market, especially in the debt market of eurozone. More supports are expected in the near future (coming months) to assist in the recovery of the economy.

We can also see important fundamental elements such as data regarding UK and Germany industrial production for December this week. Since Germany has been the main figure of the growth of eurozone, investors are expecting a better news coming out from the Germany side. As for the UK, after a survey is taken, we are expecting the data would increase and pull the figures out of its recent bottom range.

While policy-makers and regulators across much of the globe are determined to prevent a recurrence of the 2008 financial crisis – and the scale of intervention that was required to prevent the collapse of the financial system – putting in place mechanisms able to resolve complex cross-border bankruptcies has been easier said than done.

Following long debate and consultation, the first steps towards change are under way. Banks have been told to produce ‘recovery and resolution plans’ by the end of 2012, a deadline that may seem reassuringly distant but that is, in fact, frighteningly close.

Recovery positions

The difference between recovery and resolution is simple, at least in theory. A bank is deemed to be in a state of recovery when it is struggling to survive but it has not yet collapsed completely. It can recover, provided certain steps are taken. At this stage, existing management would still be in place but regulators would expect them to be taking specific actions to deal with the loss of capital or liquidity.

These actions can take a number of forms. A bank could reduce the size of its balance sheet by withdrawing from capital-intensive business; it could turn to emergency back-up lines with other banks or even central banks, if feasible; it could sell businesses, if feasible; it could conserve capital by stopping the payment of shareholder dividends and employee bonuses and it could issue new capital, most probably by triggering the conversion of contingent capital from debt to equity.

Banks are being asked to calculate now how they might deal with a recovery situation, drawing up a menu of options and addressing each option in turn. But fundamental questions remain.

“There are several challenges facing regulators and banks. First and foremost, at what point is a bank deemed to be in recovery? Who decides? What will the trigger be? Banks may well be in denial but if regulators become involved too quickly, they may precipitate the very outcome they were trying to avoid,” says John Liver, head of global regulatory reform, Europe, the Middle East, India and Africa, at Ernst & Young.

Broken resolutions

The outcome everyone is seeking to avoid is the point of resolution, when a bank is no longer independently viable and the regulators take over.

At this point, it becomes a public policy issue around who should bear the losses and who should be protected. In 2008, everyone apart from shareholders was bailed out; now the feeling is that a wider range of creditors should share the losses, including bondholders.

In terms of protection, no one disputes that individual deposit-holders should be paid out but there are further questions around small and medium-sized enterprises, for example, as well as mortgage customers and savers. And payment systems need addressing too. If a large clearing bank collapses, systems should be in place to ensure smaller players do not lose out.

On the wholesale side, the situation is even more complicated. If a bank has lots of outstanding derivatives positions, for example, the challenge is to find a way to wind them down in an orderly fashion without triggering a loss of confidence. This means knowing what a bank’s outstanding positions are and in what jurisdiction they are booked: no small task when trades are multi-faceted and go across borders and legal entities.

Resolution planning is at an early stage but banks have been asked to amass certain key pieces of information, such as the range of products they sell, where they sell them and to whom; what their exposures are and where they are located; which IT systems they use; where these sit within the organisation and the link between a bank’s headquarters and its international offshoots.

Information drive

The purpose behind such questions is speedy resolution. Specifically, regulators are concerned about how to avoid the ‘Lehman’s weekend’ when the bank failed on a Friday and turmoil ensued from the following Monday. Should such a weekend ever recur, policy-makers are determined to be better equipped, and recovery and resolution planning is supposed to allow better decision-making to be made in very little time.

But the provision of information is not a passive exercise. If a bank provides information that shows its current structure would prevent policy-makers from achieving swift resolution, they will request a change of structure now.

Banks need to make sure the information they give recognises the wider agenda. In other words, the authorities do not just want a mass of information, they want to know what impediments may exist that would prevent a bank being rescued in a short space of time. This is what a living will is all about.

In many respects, this is entirely understandable. Governments now know the taxpayer is the banking industry’s ultimate sugar daddy, there to bail the sector out if need be. But, just as banks are unwilling to lend capital without knowing the borrower’s creditworthiness, so governments are reluctant to extend even the possibility of credit without knowing as much as possible about their potential debtors.

Inconsistent application?

Nonetheless, many banks are concerned about the implications of the recovery and resolution debate. They are worried about regulators interfering prematurely in their businesses, so hastening the move from recovery to resolution. And they are particularly worried about regulators moving at different speeds and with different priorities in the UK, Europe and the US.

“In the UK, the Independent Commission on Banking [ICB] has recommended that large banks ring-fence their retail banking operations but they have until 2019 to do it. Michel Barnier, the EU commissioner for internal markets, has said he is interested in what the ICB is doing but we believe there is almost no chance of Europe following the UK’s lead. And in the US, the political will seems to be blowing against the separation of investment and retail banks. In fact, Republicans are openly talking about repealing Dodd Frank, which was supposed to be the big financial reform act in the US,” says one banker.

Some bankers are concerned that different attitudes towards recovery and resolution are already affecting business activity on a regional basis. “European regulators seem much more intrusive and European banks are in contraction mode. US banks are not,” says one.

Barney Reynolds, partner at Shearman Sterling, admits this is an unsettling time for banks. While there is no supranational authority in charge of regulation, he does not necessarily agree with banks’ concerns that some jurisdictions will be harder to do business in than others.

“Of course, there could be differences between the US and Europe and little glitches are opening up but there is broad agreement about recovery and resolution at a high conceptual level. The key issue is local application but overall, I believe harmonisation is less of an issue than many people think,” he says.

Ernst & Young’s Mr Liver, however, believes that this could be a real problem. “Insolvency regimes and developing resolution regimes, while working to achieve the same objectives, do diverge by country. This presents major challenges to both the authorities and the banks as they consider the impacts on individual parts of the group and their creditors, as it falls into resolution.”

Questions remain

The conundrum is far from straightforward. Regulators claim to be keen to work with one another, share information and promote global co-operation. But, their primary role is to protect the local taxpayer. This dichotomy becomes clear when the rescue involves a bankrupt entity with overseas branches or subsidiaries. And divergent insolvency regimes only highlight the tensions.

With this in mind, regulators are keen to ensure that banks operating in their jurisdiction are adequately capitalised at a local level. Currently, many banks operate a centrally capitalised branch system. Now they are being encouraged to set up locally financed subsidiaries rather than branches outside their own jurisdiction. But this, too, has wide-ranging implications, such as ‘trapping’ liquidity in a country that may not need it.

Moreover, it is not an efficient use of capital. “If banks have lots of subsidiaries, this could create pockets of excess capital and this is fundamentally inefficient. At the moment, therefore, it seems as if the new regulations will reduce capital flexibility and potentially liquidity too,” says Jon Peace, banking analyst at Nomura.

Overall, banks and their advisors are pushing hard for a global approach to regulation, particularly around recovery and resolution planning. In the meantime, banks will be required to submit their initial thinking on this issue and the more thought they put into it at this stage, the more fruitful discussions with the regulators are likely to be. Predicting the pitfalls around their own possible downfall is fraught with challenges for the banking community. But these need to be addressed sooner rather than later.

Mr Liver says many banks are under-estimating the extent of work involved. “These are big complex projects that require a lot of thinking. Uncomfortable questions need to be asked and difficult issues need to be addressed. Fundamentally, banks are being asked to assess their business through a different lens. Ranging from the complexity of their organisation to merger and acquisition activity to outsourcing, there are consequences for every big business decision.”