Given that financial crises are caused by herd-like behaviour by banks, it is hard to know whether to be encouraged or dismayed by the latest mass shift – away from investment banking and toward retail and commercial banking.
The Bank for International Settlements annual report, published today, finds that one-third of banks that entered the financial crisis in 2007 as wholesale-funded or trading institutions switched to retail banking by 2012 (19 out of the 54 in its sample). Read more
How well is Wall Street doing? That depends on whether you are looking at their results as a casual observer, or a shareholder.
This is turning into one of the best earnings seasons on Wall Street since 2009, when banks made a rapid recovery from the 2008 crisis. Not only were they bailed out but supported by ultra-low interest rates and official backing for troubled assets. Read more
Lehman Brothers collpsed in 2008. Getty Images
The demise of London’s merchant banks, which were sold to US and European banks in the mid-1990s after the collapse of Barings in 1995, showed they could no longer exist in the modern world of finance.
Was the US much different, though? Looking back at the 2008 financial crisis, the collapse of Lehman Brothers had roughly the same effect on the Wall Street investment banks as the collapse of Barings in 1995. Read more
Having become accustomed over the years to the calm, soothing, “don’t panic” talk of financial regulators, it was a shock to read Andrew Bailey, the senior UK banking supervisor, bluntly describe banks’ risk models for commercial real estate as “bogus”.
Mr Bailey clearly has very little, if any, time for banks’ internal risk models, which calculate how much they might lose in stressed market conditions, and therefore how much they need to put aside in capital.
As Brooke Masters reports:
After two decades of working with failed and failing institutions including Barings, HBOS and Royal Bank of Scotland, he was openly sceptical of bankers’ ability to police themselves.
Their commercial real estate risk models are “bogus”, he said, and their internal stress tests “are not stress at all, they’re mild, it’s a failure of imagination”. As a result, banks “never should have been allowed” to use their own models to determine capital requirements as currently permitted under the Basel rules.
Jeremy Irons as the bank boss in 'Margin Call'
To those who think all bankers are villains – or heroes, for that matter – let me commend Margin Call, the excellent and balanced film about a Lehman-like bank’s implosion, released last autumn in the US and out this week in the UK.
When the movie first came out, the FT invited two real-life bankers to the screening. One of them said:
I don’t think any banker will want to go, because they lived this, and traders will just point up the stuff that wasn’t right.
It was a film “made for outsiders who want to be smart about the inside”, he added.
But, speaking as an outsider, I think it’s much better than that. Read more
Jingle mail – the practice of handing back the keys to a property you have borrowed money to buy when your equity is wiped out by falling prices – is not confined to home owners in California.
Defaulting on mortgages was frowned upon by some when done by homeowners in California – as Felix Salmon once pointed out – but is spreading to commercial real estate funds. Read more
Now John Mack, Morgan Stanley chairman, has undercut much of the banking industry’s attempts to justify big bonuses at a time of economic pain largely caused by the financial sector.
All through the current bank earnings season, banks have sought to defend bonuses by saying the ratio of compensation to overall revenues has been cut back. That might be true, but in absolute terms bonuses rose sharply on Wall Street while people were losing jobs on Main Street.
“I still don’t think the industry gets it,” Bloomberg reported the veteran banker as saying yesterday during an appearance in Charlotte, North Carolina (hat tip Huffington Post). “The issue is not structure, it is amount.” Read more