China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Categorized | Banks

Europe must address its banks’ enduring malaise

Posted on September 29, 2016

The logo for Deutsche Bank AG sits on the exterior of the bank's office in Berlin, Germany, on Tuesday, Sept. 27, 2016. Deutsche Bank AG rose in Frankfurt trading after the German lender agreed to sell its U.K. insurance business for 935 million euros ($1.2 billion) and Chief Executive Officer John Cryan ruled out a capital increase. Photographer: Krisztian Bocsi/Bloomberg©Bloomberg

Commerzbank may be regretting the sponsorship deal that placed a model diplodocus in its Frankfurt lobby earlier this year. This week, with concerns intensifying over the financial strength of the German banking sector, the dinosaur earned a mention from Andreas Dombret, a top Bundesbank official. Survival depends on the ability to adapt to changing conditions, he remarked. Since the financial crisis, the conditions in which banks do business have been transformed — by low interest rates, demographic change and new competition, as well as regulation. Some banks are already extinct, and size is no guarantee of survival.

Given these existential questions over the future of European banks, the latest intervention by Valdis Dombrovskis, the EU’s financial stability chief, is at best short-sighted. The European Commission vice-president has pledged to oppose reforms that would require European banks to raise more capital: specifically, he is fighting amendments to international banking standards that would give lenders less discretion in the way they measure the riskiness of their investments — and so calculate the amount of loss-absorbing capital they need to hold.

    The political pressure on Mr Dombrovskis is undeniable. The latest collapse in the share price of Deutsche Bank, Germany’s biggest lender, reflects acute anxiety over the bank’s capital position if it is forced to pay any significant proportion of the $14bn fine sought by the US Department of Justice. Investors fear many German and Italian banks are under similar strain. There is understandable resistance to imposing fresh burdens on the eurozone’s banks, who issued more than €250bn of new equity between 2007 when the global crisis struck, and 2014.

    Lenders say that any increase in their costs would merely force them to curtail lending to the real economy. They say the changes under discussion would hit European banks harder than their US counterparts, partly due to differences in the mortgage markets. They also argue that further rule changes, following years of regulatory shake-up, would be counterproductive. Uncertainty spooks investors and makes it harder to raise capital.

    Yet these arguments are disingenuous. The changes proposed by the Basel Committee on Banking Supervision are not a radical new departure in post-crisis regulation. They are an attempt to stop banks gaming the rules that have already been put in place.

    At present, large banks are allowed to use their own internal models to calculate risk-weighted assets — a crucial measure for determining the amount of capital they are required to hold. Yet over time, banks’ RWA as a proportion of total assets have been drifting down. There is a strong suspicion that this is not just due to making safer loans.

    Banks: Too dull to fail?

    Regulators have pushed the sector to behave more like utilities, but similarities only go so far

    Whatever the reason, the reliance on risk-weighted capital requirements in the current regulatory regime is problematic. The whole process is inherently subjective. Banks are best-placed to assess the risks they are taking, but have an incentive to understate them. Regulators can try to prevent abuses, but it is hard for them to second-guess what is essentially a judgment call.

    It would be preferable to put more emphasis on the leverage ratio — the backstop that requires banks to hold a set percentage of common equity relative to total assets. Here, the current requirement is a paltry 3 per cent.

    Mr Dombrovskis, whatever view he takes on these questions, should heed the clear message of concern that investors are sending. The commission’s objective should be to make the system safe and protect eurozone taxpayers — not to pretend that all is well.