Why bankers are intellectually naked

Kannu

Banking is going through one of its periodic gut wrenching rides. Every 10-20 years, there's a banking crisis somewhere in the world and then all hell breaks loose with demands to fix the banking system. They tinker around the edges and then things go along in the similar way. 

Couple of things. I visited the Bank of England museum over the holidays. And it's fascinating to see how that bank evolved. And the number of crises situations it went through. And is still going through. That's the nature of banking son. And that's because it's an intermediary between many stakeholders such as savers, corporates, funds, governments, etc etc. And they change. When they change, the role of banks needs to change as well. Sometimes things break. 

The second aspect to remember is that historically speaking, banking and money lending has always been in the cross fires going back to Jesus overturning the money lenders tables in the Jerusalem temple to how the banias in India and Jews worldwide were and still are spat upon because they do banking and money lending. Religions frown on it, Judaism Christianity and Islam frown on it and ban usury or any kind of interest rates in the case of Islam. 

And you know what? Life goes on and banking goes on. 

Fascinating. 

Love

Baba 

Saving...) (Saving...) Why bankers are intellectually naked - FT.com
http://www.ft.com/cms/s/2/39c38b74-715d-11e2-9b5c-00144feab49a.html#axzz2NsN8o3gj

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Why bankers are intellectually naked - FT.com

A definitive explanation of the industry’s economics warns the causes of the financial crisis have not gone away and will return

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, by Anat Admati and Martin Hellwig, Princeton, RRP£19.95, RRP$29.95

The UK’s Independent Commission on Banking, of which I was a member, made a modest proposal: the proportion of the balance sheet of UK retail banks that has to be funded by equity, instead of debt, should be raised to 4 per cent. This would be just a percentage point above the figure suggested by the Basel Committee on Banking Supervision. The government rejected this, because of lobbying by the banks.

Why might even so tiny an increase in the equity-funded proportio

Of Religion and Redemption: Evidence from Default on Islamic Loans

I think I am getting religion. Fascinating study

We compare default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the default rate on Islamic loans is less than half the default rate on conventional loans. Islamic loans are less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default.

Looks like a great idea to me, I wonder why banks aren't cottoning on to this fact :) :P

Bankers and their Bonuses*

A very interesting article.

We analyse the role of financial sector workers in the huge rise of the share of earnings going
to those at the very top of the pay distribution in the UK. Rising bankers’ bonuses accounted
for two-thirds of the increase in the share of the top 1% after 1999. Surprisingly, bankers’
share of earnings showed no decline between the peak of the financial boom in 2007 and
2011, three years after the global crisis began. Nor did bankers’ relative employment position
deteriorate over this period. We discuss proposed policy responses such as transparency,
bonus “clawbacks”, numerical bonus targets and tax.

Bankers seem to be doing very well out of the crisis. And this was a well argued paper. For example: I quote:

In terms of policy, we begin by considering whether there is really any “problem” to be
addressed. If bankers are paid in a competitive labour market and simply rewarded for their
talent, there seems little reason for government intervention, at least on efficiency grounds.
However there seems to be substantial evidence of rents within the sector – a result of
imperfect competition or arising from the implicit and explicit guarantees and subsidies that
the sector receives from the government due to the “too big to fail” problem. We discuss
various policy options that seek to either remove the basis for these rents or to tax them ex
post. Finally, we note that on equity grounds, policy may seek to reduce the post-tax income
taken by those in the upper echelons of the income distribution – which implicitly targets
bankers given their prominence among high-earning workers. This has primarily taken the
form of higher marginal tax rates.

The authors argue that regulators are unable to remove the rental issue. Which is a curious argument to make but then in the absence of a truly global government with one currency, this issue will keep on happening as national regulators will keep on making suboptimal decisions based upon large banks presence in multi country jurisdictions. We have been here before, remember the Dutch and East India companies? They were also too big to fail. So I suspect and concur with the authors that the result will be to increase the marginal tax rates on the top earners. This can have unforeseen implications.

See for example what happened in France. Here’s one example:

Over 8,000 French households paid taxes topping 100% of their incomes, according to French Finance Ministry data. See Taxes on Some Wealthy French Top 100% of Income. You may scratch your head in disbelief. How is that possible?

Stateside, you might guess it was the alternative minimum tax. In France, it was a one-time 2011 levy on incomes for households with assets over 1.3 million euros ($1.67 million). 8,000 families paying 100% may seem a small number, but nearly 12,000 households paid more than 75%. The percentages sure do grate.

Or this:

Hollande's 75% supertax on the mega-rich is at the centre of another row after French football clubs said they would cancel all matches scheduled for the final weekend in November to protest at the levy.

The symbolic tax – a 75% tax on income exceeding €1m (£850,000)a year – has caused a headache for the Socialist government since it wasthrown out as unconstitutional by France's top court. To avoid the embarrassment of a major policy U-turn, ministers redrafted the tax earlier this year to shift the burden from individuals to employers – a legislative shimmy that has spooked football clubs, which famously pay vast salaries even to bit-part players.

Clubs say they are already under financial pressures and that the tax would spark an exodus of top players to rival leagues abroad, killing the domestic game. In spite of a poll showing that 85% of French people are in favour of the tax being applied to football clubs, the clubs decided to step up their protests.

this promises to be fun. Much more ink and excited electrons will flow below the bridge before this is settled.

How the government helped the banking crisis

not this one, the one before. I quote the abstract:

This essay examines how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. The analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set, we find contingent liability reduced risk taking. In states with contingent liability, banks used less leverage and converted each dollar of capital into fewer loans, and thus could survive larger loan losses (as a fraction of their portfolio) than banks in limited liability states. In states with limited liability, banks took on more leverage and risk, particularly in states that required banks with limited liability to join the Federal Deposit Insurance Corporation. In the long run, the New Deal replaced a regime of contingent liability with deposit insurance, stricter balance sheet regulation, and increased capital requirements, shifting the onus of risk management from bankers to state and federal regulators.

Remember the partnership structures of the investment and other banks were unwound quite a lot. Once you have removed this contingent liability and make it public, well, you see what happens. Here’s an idea for the banking industry, bring back the partnership model (I know, I know, I am kidding)

When you run out of money, you can do this

When you run out of money, your bank card is useless, no? not really, see what you can do with bank cards

The law of contradictions

What me boss said…

“As we rebuild the regulatory system we need to be wary of two traps — firstly, we should also be wary of using the phrase ‘never again’ — if we learn anything from history it is that we are destined to repeat mistakes whenever we believe that we have solved definitively the cause of the most recent crisis. Secondly, we have to avoid being over-prescriptive, as we cannot foresee every possible scenario.

These traps are seductive, pandering to the basic human desire for there to be meaning in life, for there to be some kind of order to show that fate is not capricious — ie, somehow we all get what we deserve. Indeed, it is a core objective of both political and economic systems to promote a comforting perception of predictability. Ever more today, society does not want to acknowledge unpredictability, particularly around economic outcomes — we want to believe an unwelcome outcome is the cause of failings that need both to be compensated and cause revisions to be made to the system to reinforce predictability and so restore confidence in the future.

This leads us to seek out definitive solutions to identified problems. But just because a solution is demanded of course does not mean there is a soluble problem. Many commentators would make this observation about the eurozone today. If only it were as simple as moving a toggle switch between ‘austerity’ and ‘growth’.

And there are many such conflicts challenging the restoration of growth:

· We want stability as well as growth, we promote economic growth as well as fiscal austerity;

· We want banks to lend more and also grow capital both in absolute and ratio terms;

· We want the banking system to have access to private capital at the same time as we debate the future shape and capitalization of its activities and restrain dividends;

· We want to see more competition in financial services but we don’t want to see the higher returns that would attract external private capital;

· We want to see fewer interdependencies without losing the benefits of scale;

· We continue to incent the banking system to lend ever more to governments and then agonise what happens if the same governments don’t/can’t pay;

· We want the system to respect market signals but then we don’t like what ratings agencies say;

· We want greater transparency but fret about how immediately markets react to events not yet able to be responded to a policy level;

· And finally, while we have made great strides in defining what we don’t want the system to do we have made less progress in determining what we want the system to look like when we are finished.

We continue to pose important questions which underpin many of the challenges in getting the financial system back to business as usual.

· For example; are there gaps in coverage? Shadow banking?

· Is the aggregate of all the measures both complete and in train duplicative or reinforcing? Who is responsible for ensuring this?

· Is there coherence between banking, insurance, pension fund and asset management regulation? Again whose responsibility is it to check this?

· Is there market capacity for the capital raising and funding assumptions being made?

· Does the understandable focus of national fiscal authorities towards limiting their contingent risk to domestic deposit bases risk unwinding many of the elements of globalisation of economic activity?

· If fiscal authorities don’t want the contingent risk of the banking system does anyone else and at what price?

· If a consequence is to unwind globalisation to some degree and establish a ‘home market’ bias — does this impact the availability and cost of financial services delivered to multinational groups?

· Does this change the competitive landscape between companies domiciled in Europe versus the US versus Asia? Does this matter?

· Does the public policy concern over systemically important institutions create a greater probability of stability because of their higher capital requirements and supervision or does it further concentrate activity into these institutions because of their elevated status; current experience suggests that in times of great uncertainty customers prefer the largest institutions.

· Does prospective bail-in of creditors change positively the probability of a future bank failure because of greater market led discipline or does it simply reallocate systemic losses away from the future income of society (through taxation) towards society’s current and future savings (via insurance and pension funds) — and if so have we deceived ourselves that we have achieved very much?

· And finally, is there too much focus on products, platforms, infrastructure, capital and liquidity because they can be defined and measured as opposed to focussing on behaviour which is much more difficult to pin down objectively?”

Being a foreigner among domestic banks: Asset or liability?

Fascinating study. I quote the abstract

Do foreign banks perform better than domestic banks? The existing literature has come up with different answers, in part as data coverage has varied and often been limited. Studying the performance of foreign relative to domestic banks in many countries between 1999 and 2006, we find that the answer importantly depends on a number of factors. Specifically, foreign banks tend to perform better when from a high income country and when regulation in the host country is relatively weak. They also perform better when larger and having a bigger market share. Foreign banks from home countries with the same language and similar regulation as the host country also perform better. Geographical closeness, however, does not improve performance. These findings show that it is important to control for heterogeneity among foreign banks when studying their performance and help reconcile some contradictory results found in the literature.

Living in London where there is ferocious competition amongst so many banks and having seen the footprint across the world where there are foreign banks entering / withdrawing / competing, its an interesting perspective. So what do I do if I was a bank faced with competition? I would withdraw where I do not have sufficient market share. I will pour in more resources where I can bulk up and where regulation is lower/different from my home country. This is also a factor when people talk about banks moving elsewhere. Its no surprise that the profitable (not the biggest) banks usually come from high income countries. Interesting stuff.

The Public Philosopher - Should a banker be paid more than a nurse?

I was invited to this lecture by Professor Michael Sandel who is a professor of political philosophy at Harvard. Unfortunately I cannot make this lecture as I have to go to a charity fund raising dinner where we are trying to raise some dosh for one of my charities. So I figured, why dont I pen down my thoughts here specially I belong to one side of the argument. Bit disjointed but here we go.

• I look forward to the next lecture where we will be debating “Should a nurse be paid more than a street cleaner”. A street cleaner seems to earn £6-8/hour which roughly equates to £14,000 per year on the higher rate of £8/hour. A nurse on an average band 5 makes about £24,000 per year. So this argument should be interesting indeed.
• Now for some theory. We are all basically adding value of some kind or other. Whether I am a prostitute, an engineer, a pilot, farmer, parent, a hair dresser, politician, banker, or what have you, we are all adding some value of some kind.
• We take something, plonk in something additional, create a slightly different thing, and then pass it on. In return, we get some dosh. This argument holds true for all human economic activity.
• So then the question comes, what is this value? So what are the numbers we are talking about? The UK’s official graduate careers website says that a typical salary after 10-15 years for a banker is about £50000-100,000. Assuming the top number, a banker gets about 4 times a nurse’s salary. So does a banker add four times the value of a nurse?
• To answer that question, we need to know how do we ascribe a value to this value addition. Again, very simplistically, we first find out what is the value of the inputs. Then we try to find how many and what kind of “stuff” you will require to add value for a range of outputs with different values. Take a simple example. I have some sand and some more chemical stuff. These are my inputs to make glass. Its cheap as sand, yes? Then we have to figure out what outputs we need? Glass can be used to make different bits and stuff. For example, this LEICA APO TELYT-R 1:5.6/1600mm lens is worth about 2.02 million dollars. Its glass. A glass tumbler of this kind will cost you £7. Now both of these were made by glass makers. But as you can appreciate, the outputs can vary tremendously. So lets ask a blunt question. Will you pay the same amount for the LEICA technician as for the tumbler glassmaker ? If you do, I have a great bridge for sale for you.
• Now the above glass example was very simplistic, but there was a reason for this. I showed that despite the inputs and outputs being comprised of the same, the value added by the intervening labourer (LEICA technician versus tumbler glassmaker) is seriously different. Also you need to figure out how many LEICA technicians are available versus glass makers. How long it takes to train them, etc. etc. as the laws of demand and supply comes into the picture as well to do the valuation.
• And before you think this is a new debate as this blog post seems to think, the question of a just price has a very old pedigree including people like Thomas Aquinas who talked about usury. Fascinating, how these new arguments just are rehashing of old ones. Btw, I dont think these new chaps would appreciate that they are simply following some very dodgy religious teachings which you can see in Islam and Christianity and Judaism and and and.
• So lets get a bit more complicated. How do we compare the salaries of a banker with a nurse? Based upon how we are calculating it, we should compare the inputs, the outputs and the intervening value added, eh?
• So who wants to take a shot at trying to figure out how to compare the inputs to the banking industry versus the inputs into the healthcare industry? Does the phrase “comparing apples and oranges” come to mind? In this particular case, we seem to be comparing apples (nurses) with a black scholes equation (bankers).
• You can quibble about the differences in value of the outputs (a banking system versus a nursing system, a loan versus a healthy patient) or what have you, but then that argument very soon descends reductio ad absurdum to whether we need to have a capitalist system which measures value by money. Wake me up when you have decided to measure value with cowrie shells.
• In my view, therefore, I have better things to do than to sit there listening to silly arguments. If I had time to do that, i will sit and listen to my daughter tell me how I should cook brownies every day.

I will leave you with this great little clip about glass.

Financial education petition hits the magic 100,000 signatures

This really bugs me, why on earth are we not teaching our school kids the basics of financial education? There is a huge pent up demand from ordinary citizens and parents who desperately want their kids to be financially literate. What the hell is the government doing? Or not doing?

I quote:

Over 100,000 people have now signed our petition calling for compulsory financial education in schools, which means it must be considered for a Parliamentary debate.

We hit the magic 100,000 number last night, showing the enormous nationwide support for our campaign to help rid the nation of financial illiteracy, which can lead to serious debt problems (click here to sign the e-petition on the Government's website

Here is the petition:

Make financial education a compulsory part of the school curriculum

Responsible department: Department for Education

It's a national disgrace that in the 20 years since introducing student loans, we’ve educated our youth into debt when they go to university, but never about debt. We're a financially illiterate nation, with millions caught by misselling, overborrowing and being ripped off. Is it any surprise we’ve just had a debt imbued financial crisis. This must change. Companies spend billions on marketing and teaching their staff to sell – it's time we got buyers' training. The most cost effective way to start is to ensure every child in the country gets a basic understanding of personal finance & consumer rights before leaving school. This isn’t a large resource requirement. Some schools already do it, but the majority don’t and that needs to end. Unless it's compulsory, head teachers can’t prioritise for it. 97% of people support this, yet no one will take up the baton. We have one of the world’s most complex consumer economies; it's time our children were taught how to thrive and survive in it.

The government says:

In the meantime, we would like to update you on the Government’s current position on the substance of this e-petition.
“The Government agrees that young people should have access to good quality personal finance education, so that they leave school with the knowledge and confidence to manage their money effectively. Parents can also play a crucial role in helping young people to become financially aware in their day-to-day lives.
Schools already use Personal, Social, Health and Economic (PSHE) education as a framework within which to teach young people about personal financial management. The existing PSHE programmes of study include elements aimed at ensuring that by the time they leave school, pupils should be able to manage their money, understand and explain financial risk and reward, and identify how finance will play an important part in their lives and in achieving their aspirations. We are currently carrying out a review to determine how best to support schools to improve the quality of all PSHE teaching.”

Sighs, this is the response. What the hell, guys, get moving quickly on this.

Half of children's bank accounts offer less than 1%

Children’s Bank accounts are a rip off. See here.

Which? Money found that half of children's easy access savings accounts offer a measly 1% AER or less,

One, First Trust Banks Junior Saver account, offered a return of just 0.05% just one tenth of the Bank of England base rate.

That's just 50p pocket money for every £1,000 saved.

And what happens when this kind of return is offered?

It's not the tax free limits, but the poor rates of return on offer that are a topic of conversation on the Mumsnet forum.

''Even with budgets so tight, parents do want to teach children value of savings," said Mumsnet chief executive Justine Roberts.

"They may have very small amounts of money, perhaps its birthday money or money from their grandparents, but the rates don't incentivise them to save at all.''

I agree, we closed our bank accounts for the kids and then moved all that money into ISA’s for them. Stock and Shares ISA’s to be precise. Nothing wrong in getting the little they store in their bank accounts moved into more productive ways of investment and buy shares, investment trusts, ETF’s etc. all in a nice little tax efficient shelter. Anybody who has put their kids’ money in a savings account is literally giving up a huge amount of upside on their children’s future. So never put the money in a savings account. The only reason might be for very young kids who are interested to see a passbook and understand the increase in savings. But even that? dont do it, just get them into share ownership as soon as they are able. My son did that from 12 years of age. I am going to try to do that with Diya from next year when she turns 8. Lets see if that works out.

Do I suffer from these phobias?

From here

 

Here's a list of 13 of the most common phobias bankers have.

1. Atychiphobia – fear of failure. A bit yet. Hate failing. Used to fail regularly at school but then I had extenuating circumstances (girls)

2. Autophobia – fear of loneliness (billy banker no mates). Not, happy to be alone.

3. Coulrophobia – fear of clowns (boss related). Nope, most certainly not, usually I am the clown.

4. Decidophobia – fear of making decisions. lol, no, dont think so, love to make decisions

5. Ergophobia – fear of work or functioning (another boss related phobia). nope, dont think so.

6. Gelotophobia – fear of being laughed at (bonus related). nah, dont really care about what people think of me anyway.

7. Gerascophobia – fear of growing old or aging (career related). well, i am already an old fart anyway.

8. Halitophobia - fear of bad breath (usually boss related). yes, this is a bit of a fear, when I used to smoke, sometimes it felt that something had crawled inside my mouth and died there. Smoker breath. Disgusting now, specially when it makes me wish to smoke as well.

9. Nomophobia – fear of being out of mobile / cell phone contact. well, i do have a horror of being without my iphone. heh.

10. Sociophobia – fear of people or social situations (client related). nope, happy to meet people.

11. Scopophobia – fear of being looked at or stared at (layoff related). look away to your hearts content, lol

12. Telephone phobia – fear or reluctance of taking phone calls (layoff related). some people specially lol but no, i am usually on the phone.

13. Tokophobia – fear of childbirth (maternity leave related). most certainly not, i actually would love being pregnant.

Show me the money and who owns it

Over the past couple of years, there has been a steadily rising crescendo of voices, initiatives, conferences and papers, all concentrating on enhancing and improving the regulatory framework around the banks so as to avoid another banking crisis. By and large, all of the initiatives and suggestions concentrate on the risk element of the bank’s portfolios. Whether they related to the portfolio being too big (too big to fail), having badly designed instruments (toxic debt and credit instruments), bad remuneration policies (the hoo haa over bonuses), separation of prop trading from deposit making (the Volker plan aka Glass Steagal v 2.0), to globally coordinated regulation to improved liquidity standards and the like. What has not been considered, at least the little bits that I have read, is the factor of bank corporate governance. Thankfully, a recent paper sheds some light on this issue.

The authors find that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Their sample has 279 publicly listed banks across 48 countries, so it’s pretty much a global study of the top banking firms in the world. In other words, you can pretty much take these outcomes to the bank (if you excuse the rather laboured pun) and generalise the results. The bank corporate governance is defined as relating to control rights and cash flow rights usually expressed in terms of one large shareholder having more than 10% of voting rights. If there is no single shareholder with more than 10% of voting rights, then it’s considered to be widely held. So what they find is that banks with a single large shareholder have a statistically significant greater bank risk and this is, surprisingly so, holding for all the 48 countries in the sample. No outliers at all. Policy implications are simple, regulators should also aim to get banks to diversify their shareholding, so that there is no single shareholder who manages to have banks hold greater risk than usual.

But then, there is a different angle to this. If the regulations are too onerous, then the utility value of holding a bank reduces because of increased capital requirements, and therefore existing owners can be tempted to increase risk to show greater returns. And the authors find that this behaviour is exacerbated when there is a single large shareholder in the bank. In other words, just increasing the requirement to hold more capital may not make the banking sector less risky if there are banks with large single shareholders. By how much you ask? The regression figures show that for widely held banks, for every 1 standard deviation increase in capital stringency, bank risk falls by 0.3 standard deviations, but increases by 0.1 standard deviations if the bank has a single large shareholder.

More worryingly, the authors find that capital requirements no longer have a robust direct link with banking stability and posit that this is due to the lack of attention paid to bank governance elements. Putting it in another way, it is crucial for regulators to factor in the bank governance elements in their analysis of the efficacy of proposed bank regulations. If they do not, then their attempts to reduce bank risk will be compromised at best and be ineffectual or even negative at worst.

Quite an interesting paper.

(Laeven Luc and Levine Ross, 2009, Bank Governance, regulation and risk taking, Journal of Financial Economics, 93, pp 259-275.

Bank Bosses: The law of unintended consequences

As Bloomberg reports,

Ten percent of candidates for senior management positions at Britain’s biggest financial companies withdrew their applications rather than learn whether they could pass an interview with the nation’s markets regulator.

Reynolds Porter said that some candidates drop out rather than challenge what may be an eventual FSA determination on whether someone is “fit and proper.” Appeals are public and the disclosure might damage a company’s reputation or the ability of the candidate to find another job.

“In the current environment no financial-services company would want to take the risk of being publicly accused of putting forward a supposedly sub-standard candidate,” said Jonathan Davies, a regulatory partner at Reynolds Porter. “There is a concern about just how much arm twisting the FSA is entering into to force companies into dropping their preferred job candidates.”

Now this is a pretty penny. I have further issues with this. If the FSA is actually interviewing candidates, then I am concerned about whether this is an examination driven bar? And why only for British Banks? And quite interestingly, the FSA is hiring a banker to interview other potential bankers for senior leadership positions. Look at the ranks of the FSA and you will find most if not all are also bankers. And what is the test?

The interviews test skills, behaviour, knowledge and expertise, including ethics.

I am really not sure about making all this public is a good idea. You can definitely injure a firm badly, not mentioning the personal injury to the candidate. We all know interviews are not good mechanisms for hiring people. And if I and rest of the world didn't see the damn crisis coming, how on earth will an interview tell you that I am good in managing crisis? weird or what?

Cleaning up the corrupt stinking mess in Nigeria

I am a firm believer that Africa no longer needs aid. What it needs is the belief of the outsiders that they can do it themselves. Frankly, we keep on pumping in money and they keep on stealing it. If giving money indeed was the solution, then it would have sorted out the damn continent 4 times over. Think about Nigeria, one of the most valuable resource owning countries in that continent, but it is now a byword for corruption. But still, some small steps are being taken. I quote from here:

 

Nigeria's special fraud police say they are preparing to act against business tycoons who have failed to pay back billions owed to banks. The move comes with the expiry of a deadline for those owing money to return it to the troubled banks.

The government was forced to rescue five banks and sack their entire leadership teams last week to save the banks from collapse. Some senior bankers are in custody but two chief executives are on the run.

Yes, chuck them into jail and demand performance. And yes, i speak as a banker. Naming and shaming them is not going to work, its not as if they have any honour really. They are thieves, pure and simple. I further quote from here:

The central bank has published a list of dozens of prominent Nigerian businessmen as debtors to the ailing banks.

The list includes tycoon Aliko Dangote, rated by US Forbes magazine as one of the world’s richest Africans with a net worth of around 3.3 billion dollars, as debtors to these banks.

Dangote, 52, who is also the new president of the Nigeria Stock Exchange (NSE), has denied managing the oil and gas company listed as owing Intercontinental Bank more than eight billion naira.

Central bank governor Sanusi Lamido Sanusi put the total loan portfolio of the five ailing banks - Afribank, Intercontinental Bank, Union Bank, Oceanic Bank and Finbank - at 2.8 trillion naira (17.8 billion dollars).

Criminal.

A bank in your mobile phone

This was very interesting news. I was discussing automation with some friends elsewhere and what I said was the because of the miniscule revenue per customer in the retail area, higher automation is a must for increasing revenues by reducing cost. But more importantly, the level of customer satisfaction and quality is much more because it gives you control over your money and investment products rather be driven by the vagaries of a human being who might not be at the right level to satisfy your level of demand.

And then you see this. I quote some extracts:

"Unlike traditional banks where mobile banking is used as a secondary channel through which customers can only conduct account enquiries and basic transactions, Jibun Bank is entirely based in the mobile phone, with the Internet serving only as a secondary channel," Tohara explains. "For a Jibun Bank customer, the entire lifecycle of products and services are available on the mobile phone, right from account opening to account closure.

In addition to more standard transactions such as Yen deposits and funds transfers, customers can access more complex banking services such as foreign currency deposits, loans, credit cards, electronic money, e-shopping payments and financial planning tools. The bank also has started selling insurance products and is planning to add the new products aggressively, according to Tohara.

Can you see the level of services there? fascinating. Quite an interesting perspective. Specially for vast swathes of the world ranging from India, China to Africa, Latin America, this would work brilliant. More importantly, in the countries where people are asset rich and time poor like in the OECD countries, this can work as well.

The account opening process was an eyeopener to me.

"A virtual bank with the mobile phone as the primary channel requires the highest level of automation," he explains. "The account opening process for Jibun Bank (which is from a mobile phone) is a fully automated process from both the bank and customer points of view."

He says the only manual processes are printing the forms and dispatching account information, which are outsourced to a printing company. The files are uploaded directly from the mobile phone or sent by the customer to a printing company. Further processing is executed at the printing company, which processes the data and delivers the information in electronic format to the bank, which then automatically processes the data to execute account activation. As such, he says the technical design of the project needed to undertake a much higher level of automation than conventional banking.

More evidence that the intermediation element of the bank is changing face dramatically.

Risk Manager role with Afghanistan International Bank

Sometime in the dim and distant past, I had registered myself with an India based job site. This was when my father was ill, and I was considering moving back to India. Anyway, I had forgotten all about it, till today when this email landed in my inbox.

Post Title: Risk Manager
Organization: Afghanistan International Bank
Location: Kabul - Afghanistan
Duration: Permanent
No. of Post: 1
Sex: Any
Nationality Any
Salary: 4000 US $ p.m.+ accommodation + travel+ other benefits.
Background: Afghanistan International Bank (AIB), a commercial bank incorporated in Afghanistan and managed according to international best practices is looking for an experienced Risk Manager for its Head Office in Kabul.
Job Summary: Overall Job Purpose:
Due to rapid expansions of its business and operations the banking is looking for a Risk Manager. The position allows the successful candidate to be part of the senior management team of the bank and play a major role in its continued development.
The successful candidate will be expected to build a risk monitoring systems complying with Basel II requirements thus additional experience in market and operational risk management will be a distinct advantage.
Priority will be placed on credit management and the successful candidate will have had experience in:
1. • Credit Policies & Procedures
a. Credit policy, review and development
b. Acquisition or development of decision support tools for commercial and retail credit
c. Risk rating framework review
d. Underwriting standards development
2. • Risk Asset Review
a. Review of individual credit risk ratings
b. Credit quality assessments
3. • Portfolio Management Unit
a. Profitability and risk analysis
b. Pricing policy
c. Develop predictive dynamic monitoring
Qualification • Master degree
• Minimum 10 years experience directly related to risk management where at least 5 years in senior risk management capacity.
• Fully functional in monitoring of documentation, portfolios & exposure limits of the bank.
• Excellent analytical, creativity and problem solving skills.
• Posses good presentation and organizational skills.
Interested candidates can send their CVs with recent photo to this address:

Few thoughts crossed my mind.

1. The package is way too low for what is a hardship posting, so I am curious to know why would they have selected that compensation level.
2. Its an interesting job all right, but very ambitious. Candidates for this role with the required background and experience will be very few globally.
3. But it is good to read that they are aggressive, and I wish them luck with their hiring.
4. I researched the bank on the net and I was not really that comfortable to see that the address of the bank related to some house. Here is the address: House no. 1608 Behind Amani High School Wazir Akbar Khan, Kabul. Reminded me of the addresses I would see in the tiny lanes old Bhopal. 
5. One of the unsung success stories in Afghanistan is the steady development of the banking system. Considering that the Mullah's had effectively eviscerated the banking system, in a matter of 5 months, they have passed a series of banking laws, have presence of many international and local incorporated banks, got some good governmental backing from the Ministry of Finance.
6. Here is an interesting Afghan review report for the IMF. Gives you hope, no? and no, I am not suffering from the curse of low expectations. Give the country a break, it is starting from near zero.

I further quote some numbers on how Afghanistan has progressed since 2001 from this speech. (even though the verbiage could be a bit optimistic and is after all, coming from a US State Department Employee, the figures, even if adjusted, are noteworthy).

Reconstruction and development work remains on track in most of the country and the Afghan economy continues to grow at impressive rates, with licit Gross Domestic Product more than doubling since 2002. Thanks in large part to our colleagues in the U.S. Government, the lives of millions of Afghans have improved considerably: In 2001, just 8 percent of Afghans had access to some form of healthcare; now, more than 80 percent of the population has access to medical care. Almost 11,000 medical professionals have been trained. More than 680 hospitals and clinics have been built and outfitted. For the first time in 10 years, the grain harvest was sufficient to meet consumption needs inside Afghanistan. In 2001, 900,000 children – mostly boys – were enrolled in school; now, there are more than 5 million and more than 1.5 million of these (34%) are girls and young women. Since 2001, there has been a 22 percent decline in mortality rates for infants and children under 5 years of age – we are saving 85,000 more young lives every year. Two years ago only 35 percent of children were being inoculated against the polio virus. Now more than 70 percent of the population – including 7 million children – are inoculated. In 2001, there was a dysfunctional banking system. Now, Afghanistan has a functioning Central Bank with more than 30 regional branches and an internationally-traded currency. There are now 3 mobile telephone companies serving over 3.5 million subscribers – this is almost 11 percent of the population. In 2001, there were 50 kilometers of paved roadway in the country, now there are more than 4000 kilometers of paved roads.

The main thing which struck me was the sheer banality and normality of this advertisement. A very small thing, but something which gave confidence to me that Afghanistan is improving little by little, despite all the gruesome news coming out of Afghanistan and all the efforts by the Taliban to drag that benighted country back into the medieval ages. Sometimes, its good to see the good side of the story as well. I can only wish the country the best of luck and here's hoping that the Taliban are defeated. And if it keeps on hiring professionals of the type in the advertisement, it can only get better.

PS: then I read something like this and feel very depressed.

Technorati Tags: Afghanistan,Banking,Risk Management

How markets work?

Disclosure, my firm is mentioned in here... :)

Hat Tip: The Monkey Cage.

Technorati Tags: Banking,Financial Institutions,Financial Markets

When Second Life bumped into First Life!

Very interesting article here. Only those banks who have physical presence and have banking licences are allowed to do banking in Second Life. Second Life said:


"As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in [Linden dollars (L$)] or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter. We're implementing this policy after reviewing Resident complaints, banking activities, and the law, and we're doing it to protect our Residents and the integrity of our economy."


All this to be taken with a grain of piquant salt!!!

The future of an intermediary is to be intermediated out

Even though I work in a bank, the relentless pressures from changing lifestyles, changing technology, globalisation, cost pressures and the like will eventually mean that banks will atomise and in many cases, will disappear.

On the other hand, this is deeply worrying for the government who is trying to get individuals to take more and more financial responsibility in their own hands and is pushing policy down the banking channel. Now if the end customers arent simply coming to the bank, where does that leave the banking policy of the government?

Read this and go hmmm.

Banks have suffered a -dramatic drop in demand for financial advice as Britons increasingly manage their money using the internet.
Just 4 per cent of individuals still see their bank as their main financial adviser, down from 28 per cent in 2003.
*The proportion of consumers expecting to take out new savings, investments or borrowings in the next six months - or add to existing balances - has fallen to its lowest level since March 2002, according to a survey by GfK NOP, the market researchers.

All this to be taken with a grain of piquant salt!!!

How much capital should a bank keep?

I have been thinking about corporate performance, capital and corporate governance for some time now. These three are very tightly linked together. In almost every case of a bank getting into difficulties, it was because the firm had bad capital controls and bad capital management. And thus it leads to bad performance and the balance sheet looks like Swiss cheese.

More importantly, if you control the amount of capital you can have very tightly based upon the risk factor, then counter-intuitively, in times of market turmoil, you make the problem worse. For example, say based upon their internal risk measures, you have determined that the capital I need to keep aside is 10 quid. So far so good. But say the markets have dived like a dingo down its hole. Now the risk measures would be saying that I have to either get rid of positions or I have to increase my capital. In the case of the former, I will be exacerbating the market problem by increasing the selling pressure. In case of the latter, you will end up with no take-up of your capital increase (either by a rights issue or bond issue or what have you) (who wants to purchase in a selling market?).

Furthermore, as we have seen in the case of the Northern Rock (btw, did you know that we have spent more on this stupid incompetent fiasco of Northern Rock than the entire military budget of this year? our squaddies are dying because they do not have equipment and our taxpounds are going to save the collective patooties of the government, FSA and the central bank - makes me furious, I tell you!), corporate governance problems kicks in, who wants to purchase it? Hedge Funds? Private Equity? Other banks? What? So what do you do?

Well, here’s one answer: In other words, it is not sufficient to just meet Basel II requirements, but also to go ahead and have a buffer over and above it! But more importantly, certain economies which have a preponderance of bank lending compared to market lending (such as Germany or countries with less developed capital markets such as China and India) will be hit harder despite having buffer capital!. I quote the full conclusion as it is worthwhile reading it.

The problem of cyclicality of the Basel II minimum capital requirements is currently the subject of an intense discussion in the financial and supervisory community. This paper provides two important contributions to the debate. First, whereas previous research has largely focused on fluctuations in capital charges only, it finds that the behavior of capital buffers is crucial to assess the impact of capital requirements on bank lending. Second, it provides an analysis of macroeconomic consequences emphasizing the conceptual difference between the cyclicality of regulatory capital ratios and lending and their pro-cyclical effect on the real economy.

With regard to the cyclicality of lending I find that the capital buffers are likely to mitigate the impact of changes in capital charges. I find that by ignoring this effect one might substantially overestimate any potential lending volatility. At the same time, the capital buffer will only partially absorb the fluctuations in minimum capital (roughly by 50%). It is worth noting that the cyclical effects of regulatory capital on lending are not unique to Basel II, but that they are also present in the old framework with time invariant risk weights.

While pro-cyclical effects occur or are to be expected under the old and the new framework, the capital buffer is found to differ completely. Under the old framework this paper predicts an increase in the capital buffer during an economic downturn due to a reduction in lending (which is in line with previous empirical research). Under Basel II, however, the capital buffer will actually decrease, because the rise in the average risk weights will usually overcompensate the reduction in lending. I think that this finding has important implications for further empirical research on Basel II. In my view, it would be wrong to look at the movements of capital buffers under the old framework and assume a similar pattern under Basel II, as some previous papers seem to suggest.

As to macroeconomic fluctuations, the impact of Basel II on aggregate demand can be significant – even if banks hold significant capital buffers – in particular for economies where bank lending plays an important role in the firms’ investment decisions. However, the pro-cyclical effects on macroeconomic fluctuations will vary among countries. In general, bank-based economies will most probably experience the biggest effects, while the effects in financial markets-based economies will be smaller. The magnitude of any such pro-cyclical effect will depend on various factors, which are not specifically modelled in this paper, such as the firms’ access to outside capital for instance. Among other things, the average size of firms, the sectoral specialization of a particular economy, its accounting framework and the competitive condition in the banking industry play an important role in this regard.16

Finally, I need to mention some other qualifications of the model presented above. First, it assumes that the riskless interest rate remains constant over the business cycle. This assumption was made to separate the pro-cyclical effects of Basel from any potential counter-cyclical measures of the central bank. In the present context this means that the central bank needs to accommodate any income-induced changes in money demand in order to keep the interest rate fixed, and this has an additional effect on real demand. Further research is necessary to assess the interdependence of the prudential regulation of banks and monetary policy. Secondly, the model is not explicitly dynamic but makes interpretations that are dynamic in nature. However, augmenting the model with a dynamic specification is unlikely to change the basic results in principle unless one assumes very high portfolio adjustment costs on behalf of the bank.17 Deviating from the assumption of full flexibility in the portfolio adjustment – for example if assets are illiquid – it suffices to assume that a sufficiently large fraction of loans expires every year.

Frank Heid, The cyclical effects of the Basel II capital requirements, Journal of Banking & Finance, Volume 31, Issue 12, , December 2007, Pages 3885-3900.
Abstract:
Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is in the process of changing the current framework by introducing risk sensitive capital charges. Some fear that this will unduly increase the volatility of regulatory capital. Furthermore, by limiting the banks' ability to lend, capital requirements may exacerbate an economic downturn. The paper examines the problem of capital-induced lending cycles and their pro-cyclical effect on the macroeconomy in greater detail. It finds that the capital buffer that banks hold on top of the required minimum capital plays a crucial role in mitigating the impact of the volatility of capital requirements.


All this to be taken with a grain of piquant salt!!!