regulation

John Gapper

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.

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Andrew Hill

Jeff Bezos is famously smart but I wonder whether he has thought through all the political implications of Amazon’s strategy of becoming back-office ecommerce infrastructure provider to the world.

The first part of FT colleague Barney Jopson’s series on the etailer was full of insight, but it was the comparison between Amazon and investment banks that struck me most forcefully. As Barney writes:

One investment banker says Amazon’s position is reminiscent of Goldman Sachs’ dual role as a broker and trader at the centre of capital markets. “People complain about conflicts of interest. But you still have to do business with them.”

Like Goldman and others, Amazon has set out to simplify the life of its clients, so they can concentrate on what they do best.  One business identified by the FT investigation – RJF Books and More – has delegated the “selling, shipping, customer service, payments and complaints” functions to Amazon, which left me wondering what else was left for RJF to do. Simplification was a strong theme of my recent trip to Silicon Valley, where countless start-ups, and a few larger businesses like NetSuite and Salesforce.com, are offering businesses the opportunity to “plug in” their operations to outsourced back-office services and payment systems. Read more

Andrew Hill

European Union commissioner Michel Barnier’s proposals for tough new rules for audit firms have the Big Four professional services firms in a lather.

As the specialist journal Accountancy Age puts it:

Big Four interests are most threatened by Barnier’s proposals. At their size, they will cop the full force of regulation completely separating audit and non-audit services, potentially compelling them to split and trampling on their business model.

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Andrew Hill

Most companies aim to get bigger. But beyond a certain point, bigness becomes synonymous with badness. Think of Big Pharma, Big Auto, Big Oil.

Worse, if you are regularly described as one of the Big Four, Five or Six in any business sector, you are probably already in the sights of regulators and lawmakers.

This demonisation of corporate girth is nothing new. I can’t find a source for this image – which Marc Gunther uses to illustrate a blogpost about the growing power of US big business – but I’d say it dates from the first half of the last century, and there are plenty more where it comes from. Read more

Andrew Hill

“Ringfencing” is the word of the day – in the City of London at least. On Wednesday night, chancellor of the exchequer George Osborne will get his annual opportunity to excite, extol or excoriate the financial sector in his Mansion House speech. He’s expected to endorse proposals to “ringfence” banks’ deposit-taking and payment systems from their riskier investment banking arms. The aim is to keep customers’ savings safe in any future financial meltdown.

Like most plans for regulatory reform, this is easier said than done. Read more