And so it came to pass
Jul. 28th, 2010 12:00 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksIt seemed plain that one way to solve at least partially the current liquidity paradox at the banks ("you must lend more, oh, and you must hold more capital") was to change the rules on capital. The difficult bit was to do this without causing a massive loss of confidence in the banks.
As I wrote at the weekend, one of the things that might save the banks in general (although not some weaker individual banks) was that the banking system today is much more intertwined with everyday life than it was even 30 years ago. A couple of generations ago I would guess that the majority of people in western Europe lived an entirely cash-based life. Today I doubt if more than 5% of adults live in such a fashion. If 95% of the population have a vested interest in there not being a systemic banking crisis, that goes a long way towards preventing a systemic banking crisis.
Unfortunately, accounting rules are not so amenable to self-deception. They actually have to be changed.
And this is what the Basel Committee on Banking Supervision did late on Monday. Since what we are talking about here is confidence, the trick is not the normal one of appearing to do a lot while in fact doing very little. What the Basel Boys wanted to do was a lot, while appearing not to be changing the rules in any significant fashion.
I should point out that these new rules are still tougher than they were before September 2008 -- the "you must hold more capital" demand is still in place. But what the Committee has done is ease a wide swathe of technical details, ranging from delays in implementation (leverage ratios, net stable funding ratio), through to alterations of definition (what qualifies as tier one capital and what doesn't, what qualifies for the liquidity coverage ratio and what doesn't).
Since banks have been functioning for a year or so under far worse anticipation, this is a bit like winning back £200 in the last half-hour after you have been £500 down for most of the night. You are still down, but it almost feels as if you are up.
It appears to me that the thing which will be the biggest plus for the banks is not the change in definition, but the delay in implementation. One of the most worrying requirements, the so-called net stable funding ratio, which would force banks to match more of their assets to their liabilities in time-terms, has been delayed until 2018. That, in Birks speak, is the equivalent of "cancelled".
Banks, of course, can't function on such an asset v liability system, as I pointed out a couple of weeks ago. If they can't lend long and borrow short, it reduces their leveraging capabilities so severely that you might as well say "Depression this way".
You might be unsurprised to read that Germany was the lone voice holding out against what the Committee said on Monday. I suspect that part of this is because Germany is incapable of taking any macro-economic decision without six years of consultation. But part of it might be down to the oddities of the German banking system, which rather resembles the UK banking system in the late 19th century, except that local governments are running the small institutions. Lots of small savings banks which have zero equity capital. That kind of model just doesn't fit with modern banking and doesn't really fit with IFRS accounting.
In terms of the long-term changes we are going to have to make to our consumption habits, all of this is sticking-plaster stuff. The banks seem to think that part of the solution is just to make people pay 30% of their income in interest charges rather than 25%, or whatever it might be at the moment. That way the loans do not become "non-performing" and the books look ok. In practice, of course, it just means that people have less money to spend on stuff, unless they increase their total level of capital borrowing.
This heads into rather another complex area. I wrote a couple of days ago that I had missed spotting in what fashion QE would feed through to the economy (boosting the major capital markets and benefiting larger companies at the expense of SMEs, because the latter get their funding from banks rather than the capital markets), but in retrospect I think that I was only wrong on a technicality. If that money is in the economy, and if there are people around who want to borrow money, eventually capitalism will find a way in which the putative borrower finds the potential lender, and QE will eventually have its (undesired) inflationary effect. Simple macroeconomic principles will hold good. It just won't come about in the manner that was expected. The destination is unchanged, but the route is slightly different.
__________
As I wrote at the weekend, one of the things that might save the banks in general (although not some weaker individual banks) was that the banking system today is much more intertwined with everyday life than it was even 30 years ago. A couple of generations ago I would guess that the majority of people in western Europe lived an entirely cash-based life. Today I doubt if more than 5% of adults live in such a fashion. If 95% of the population have a vested interest in there not being a systemic banking crisis, that goes a long way towards preventing a systemic banking crisis.
Unfortunately, accounting rules are not so amenable to self-deception. They actually have to be changed.
And this is what the Basel Committee on Banking Supervision did late on Monday. Since what we are talking about here is confidence, the trick is not the normal one of appearing to do a lot while in fact doing very little. What the Basel Boys wanted to do was a lot, while appearing not to be changing the rules in any significant fashion.
I should point out that these new rules are still tougher than they were before September 2008 -- the "you must hold more capital" demand is still in place. But what the Committee has done is ease a wide swathe of technical details, ranging from delays in implementation (leverage ratios, net stable funding ratio), through to alterations of definition (what qualifies as tier one capital and what doesn't, what qualifies for the liquidity coverage ratio and what doesn't).
Since banks have been functioning for a year or so under far worse anticipation, this is a bit like winning back £200 in the last half-hour after you have been £500 down for most of the night. You are still down, but it almost feels as if you are up.
It appears to me that the thing which will be the biggest plus for the banks is not the change in definition, but the delay in implementation. One of the most worrying requirements, the so-called net stable funding ratio, which would force banks to match more of their assets to their liabilities in time-terms, has been delayed until 2018. That, in Birks speak, is the equivalent of "cancelled".
Banks, of course, can't function on such an asset v liability system, as I pointed out a couple of weeks ago. If they can't lend long and borrow short, it reduces their leveraging capabilities so severely that you might as well say "Depression this way".
You might be unsurprised to read that Germany was the lone voice holding out against what the Committee said on Monday. I suspect that part of this is because Germany is incapable of taking any macro-economic decision without six years of consultation. But part of it might be down to the oddities of the German banking system, which rather resembles the UK banking system in the late 19th century, except that local governments are running the small institutions. Lots of small savings banks which have zero equity capital. That kind of model just doesn't fit with modern banking and doesn't really fit with IFRS accounting.
In terms of the long-term changes we are going to have to make to our consumption habits, all of this is sticking-plaster stuff. The banks seem to think that part of the solution is just to make people pay 30% of their income in interest charges rather than 25%, or whatever it might be at the moment. That way the loans do not become "non-performing" and the books look ok. In practice, of course, it just means that people have less money to spend on stuff, unless they increase their total level of capital borrowing.
This heads into rather another complex area. I wrote a couple of days ago that I had missed spotting in what fashion QE would feed through to the economy (boosting the major capital markets and benefiting larger companies at the expense of SMEs, because the latter get their funding from banks rather than the capital markets), but in retrospect I think that I was only wrong on a technicality. If that money is in the economy, and if there are people around who want to borrow money, eventually capitalism will find a way in which the putative borrower finds the potential lender, and QE will eventually have its (undesired) inflationary effect. Simple macroeconomic principles will hold good. It just won't come about in the manner that was expected. The destination is unchanged, but the route is slightly different.
__________
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no subject
Date: 2010-07-30 06:34 pm (UTC)You have a touching faith in simple macroeconomic principles. I hope you're right. They tend to come good on a hindsight basis, with appropriate Basel-like adjustments, so I'm sure it's a more consistent system of belief than, say, chicken-strangling by woad-encrusted dentally challenged tribal elders.
I'm not complaining though. Your discussion of German tergiversations (in the spirit of the German enlightenment, zurückabzweigungen) is completely absent elsewhere. I might disagree with this notion of "modern banking," but not as much as I'd like, say, to punch Niall Ferguson in the face; and a clear description of the consequences of banning borrow short/lend long is, again, something completely absent elsewhere.
I still think you're oversold on the intertwining of the population and banking system, though. Easily explicable, since you live in London, where the banking system is (minimally) responsive. For the rest of us, not so much.
Russian student
Date: 2010-08-24 10:19 am (UTC)Could you help me answer the test task.
I do not know very well English (I'm from Russia).
Here's the original test:
"1) All the holding companies are located in the same country, while all the branches and subsidiaries are registered and perform their activity in different jurisdictions. Please consider how would you organize the implementation process, what ERP systems would you suggest to use for each of the company and on the Group level from the point of view of the cost / benefit analysis.
2) Company A recharges a number of its costs to its Branch. The costs are recharged with 5% markup. Part of these costs are capitalized by the Branch as far as they relate to drilling of the well, which is currently the main activity of the Branch.
Please summarize how the intercompany balances reconciliation and elimination process shall be organized in the consolidation module of the accounting system ..
"
I doubt that Google correctly translated my answer:
"TFor the final consolidation of holdings makes sense to use one ERP-system. If holding companies are located in Russia, it is economically expedient to stop the choice on the decision of IFRS on the basis of" 1C Enterprise 8. In its subsidiaries and affiliates to change your system makes sense if the existing system does not meet the needs of operational records and prepare reports on standards regulated countries in the jurisdiction where they belong.
2. The cost of recapitalizing the need to make a separate document to reflect the increasing capitalization of the company A.
To separate intra-speed inside the Holding Company should be in subsidiaries and affiliates to enter classifier holding companies and put the line contractors and a single classifier related companies.
Typically, all accounting systems keep records of debtors and creditors in the context of contractors. Thus, standard reports will show an intra-turnover and turnover with related parties. "
Thank you for your help:))