Publish and be damned
The Independent Commission on Banking has recently published the 150 submissions received from academics, banking institutions and members of the general public. One key point in their summary stands out:
“There was considerable interest, both positive and negative, in the question of splitting retail and investment banks…..It was also argued by some that a split would not increase financial stability.”
Not increase financial stability? I’m curious to know both who has declared this, and on what basis they are arguing that stability would not be increased by splitting the banks. Regulars to this site will be aware of the following key points argued in my ICB submission that the conjoining of retail & investment banks unleashed the Securitisation genie, creating the following key concerns:
1) Securitisation awakens deep rooted concerns about the exploitation of asymmetric information, namely Adverse Selection and Moral Hazard
2) The expectation of market operations to effectively regulate credit risk is shown to be unfounded, instead resulting in ill-conceived and excessive lending practices
3) The recent growth in debt levels therefore may be masking a more fundamental issue of declining debt quality
4) Risk transfer practices mean that poor credit risk judgements are increasingly likely to be borne by unsuspecting counter-parties such as central banks enjoying Government support
It is not so much about whether institutions are primarily Retail or Investment banks, this distinction is currently irrelevant, as the issue is actually about the way that they operate. My ICB submission chose to analyse banking through a functional perspective (i.e. what banks actually do), not their notional institutional form (i.e. what they say they are).To defend the current situation means that the banks have to contest each and every one of these clear pieces of evidence of major flaws of Securitisation:
– Academic theory suggesting that Securitisation would lead to Moral Hazard, Adverse Selection and poor loan supervision
– The implementation of Glass Steagal regulations post the 1930s crash as a direct consequence of unstable financial structures
– The fact that banks who suffered most during the 2007/8 crisis were those most exposed to Securitised loans (Nothern Rock, Lehman Bros, Bear Stearns, Countrywide etc.), irrespective of which side of the Retail / Investment fence they sat
– Clear academic evidence (Berndt & Gupta 2008) demonstrating that loans handled through the “originate-to-distribute” (securitization) model underperformed compared with those under the traditional “originate-to-hold” process
The case against Securitisation is laid out clearly and one might say convincingly. For the banks to deny that any evidence against the model exists is at best misleading, and at worst an outright lie. Given the seriousness of the allegations laid out in the article, the burden of proof for challenging these points must rest with the banks. The case for the prosecution rests. We have yet to see any defense counsel re-buff these points, instead chaff and obfuscation reigns.
To continue to ignore these issues is of grave national concern. If we have unilateral responsibility to underwrite the banks liabilities, then we must exercise unilateral discretion to monitor and regulate them. Anything other than this leaves us completely exposed to assymetric risk and rewards – Privatised profits and socialised losses.
The Reuters take on the ICB publication shows the outright bias and deception of the media on this subject:
“The combination of retail and wholesale banking never materially contributed to the crisis in the first place; making such an issue out of it was doing nothing more than pandering to populist opposition to an exaggerated notion of investment banking as casino banking.”
So we have a so-called financial journalist writing a prominent report which is factually incorrect, biased, and resorting to patronising and lame rhetoric rather than cogent argument. Oh dear. And the FT article wasn’t much better either.