Page 34 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

BANKING
“I suspect economic history will judge the macro-prudential medicine that was administered to the critical function of money supply and credit extension, to banking, to be bad medicine.”
Making matters even worse, once the results were released, the credit rating agencies then took their turn. Based on the results, the rating agencies then got to decide whether to downgrade these miscreant banks for ‘failing’ the tests. When downgrades do occur they usually lead to widening credit spreads for these banks’ own funding, and thereby to an increase in the cost of funding, a depression in margins and earnings, less retained earnings and further pressure on capital levels.
Recall that these are the same credit rating agencies that various US and European government-led investigators found seriously wanting in the run-up to the crisis. ese agencies had issued triple-A ratings for CDOs which were vastly more dangerous than the one in ten thousand chance of default that this rating implies. And they did a lot of this – tens of thousands of ratings on tens of thousands of CDOs.
eir business model – which is to have the issuer pay for the rating – inspires at the very least some question of con ict of interest. And it is a business model that remains largely unchanged, nearly a decade after the Financial Crisis.
Banks have responded to these sustained attacks on their balance sheets by doing one of two things that they can easily control and that speaks well to investors – cutting costs or selling assets. In some cases they have cut costs, and this has meant job losses. And where assets have been sold it has generally meant a reduction in geographic diversi cation, such as the sale of Asian subsidiaries, or a reduction in asset class diversi cation, for example a focus on investment banking at the cost of retail banking.
In both cases this translates into an increase in risk pro le for these banks, who have sold assets at re-sale prices, under pressure from regulators and rating agencies.
ere have been litanies of other regulations that have each had their own e ect on the business of banking. We have not touched on the new liquidity rules for banks, for example, nor on the protection of personal information laws. Nor have we covered the treatment of trusts and shell companies, nor the innocent-sounding, but very onerous law called ‘Know Your Customer’.
In each and every case the rule has been conceived symptomatically – it has been made to address a particular failing observed at the time of crisis in 2008. In some cases the intention of the law has been clearly politically motivated, such as rules governing executive pay. But in many
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