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The ongoing fight over 18 holes for Volcker and the future of banking in the US| Banking Insight

With Gini Rometty a certified hacker at the Augusta Open yet unable to play, making it a first for a female and a Corporate Honcho to appear at US’ most prestigious Golf tournament(if she had got it), it is probably time for bankers nettled by Greg Smith and fortified by their 2012 Q1 performance to look for more than Mormon donations and charities as a pastime at the bank.

Trading income is safe with a gradual implementation of the Volcker provisions already in place without the sanction of the final Wall Street Reform and Consumer Protection act and banks know they have to work hard to salvage their image and play the tough twisting course the Economy is taking them on, without rooting for “under par” in privileges, provisions and profits and/or without rooting extra hard for their /opponents’ team score to beat all records for strokes on the index for penalties, promoting  and (p)lobbying  for clients and parking capital (market making, enhancing Tier I capital and purloining client monies)

The big banks are ahead on the new Liquidity coverage ratio(2015) holding between $155 bln to $355 bln in liquid assets, Net Stable Funding (2018) and the systemic capital surcharges to bridge the gap between Basel 2.5 and Basel 3 regimes and stamp the importance of a US specific round of Wall Street reforms that for now seems to have achieved more than the regulators in Europe facing troubles of reducing RWA books of banks resulting in good loans being sold from bank balance sheets, leading the banks to the precipice at the other end of the line, with Economies already contracting far more than was expected for 2012.

China on the other hand is holding hands of banks and promoting International Investors and shadow banking /NBFC institutions to share more credit issuance in the mainstream economy and fund industry and services businesses into an era more defined by trade than by consumption. Again, like Gini Rometty we need more from the corporate world to share new roles and responsibilities that remove American reliance on Domestic consumption as the only forbearer of good fortune.

China’s problems are different in that their few and far in between trade deficits are being encouraged for increasing wages further but for domestic consumption, yet they are unlikely to give up the advantage of being able to reduce their one off imports every time they near a slowdown with warehouse capacity allowing them to plan “big brother” purchase plans now fortified with local currency agreements. The local government loans have been absorbed so credit may be slower but still growth is likely not lost as they can manage with a lower new credit take-off and use the government machinery to look for a better starting point for reform and yet grow at 8%

We do not need Big Blue in a cloud and we do not need another Bernie Madoff but we need more Corporate citizens, maybe not from Silicon Valley but still eligible for the new “JOBS” Act or maybe like FleetBoston and PNC Financials, a regime driven domestic financial institution and yet not stuck to a size and tender like that of community banks which are important always present and whose size limits their area of operation.

America’s support for Community banking and SME lending thru institutions like Bank of America and Chase may yet turn out to be substantive but the markets are sceptical. It is harrowing enough for Social security benefits to be rolled on by SME employers waiting for the next bi monthly saga in a gridlocked Congress/Whitehouse web as lobbying spends are likely to increase from bigger brothers on the Street having a better year in 2012

Banks do need considerable leeway and where Global convergence is required like in OTC derivatives reform, we are unlikely to get banks the required leeway in keeping the implementation of OTC derivatives reforms non-standard outside US jurisdiction courtesy presence of International standards and clearing hegemony established thru multilateral institutions and SIFMA and ISDA which have to work together to not replace the old regime with a new one where the entire Atlantic and the Pacific ponds are just holes to ferret away lax controls and become victim of a new capital failure or two.

Yet use of standard clearing and the virtual extinction of long dated derivatives contracts is going to cause funny mind spinning effects for banks that are used to pockets of deeper profits subsidising businesses. China’s banks despite the lax controls are examples where gross exposures of $2.5 tln are common for the Top 4 banks and 80% of the annual income is thru traditional credit businesses yet keeping bank profits growing. That could be a mirage when banks open up to International derivative contracts to grow trade by that 10X multiple which is all too common in Asia in a 5-10 year horizon

Yet the situation is fluid and as of now OTC derivative reform is being mulled over for international jurisdiction and for issues of market-making and warehousing being denominated in hard lines on the Course charted on the back nine of Derivatives.

Free flowing analytics and Profit & liquidity measures that vary from product to geography to repo 105 like reasons for existence of contracts, distrust is unlikely to pave the way for a clear set of policy speak and rule making for easy traction.

Trading rooms have already had more than one taste of failure in the Post crisis world as Returns on Banking equity is limited for other lines of business and leans towards unlimited losses for both big banks and breakaway traders with new hedge funds/ private funds that have not done too well at Trading and Derivatives desks in Equities, Fixed Income and the expanding universe of Commodities and non-standard assets as Sports management and other Shadow banking pastimes look to break into main street finance burroughs

Retailers looking for a pit stop as a Financial Hypermart, Information services institutions waiting with more quasi banking services and funds and asset management companies and even sedate Institutional investors managing larger sums of money more actively across global jurisdictions are unlikely to remain operative in domestic cash businesses only. Additionally, the sums of money they add to systemic risk will be debated endlessly and the so called surcharge on their capital would also imply more pressure on Fed to expand TBTF regime support and access to Fed funds to these new class of shadow banking and retailers and IS companies running larger financial businesses even as losers like Metlife and GMAC fade away as good examples of how these experiments could go wrong.

Till now the one part of reforms that has been closed completely is that of Depository institutions limiting their non-banking businesses outside SME lending and retail deposit taking and lending. Others have already been reduced by endless discussions where one could have easily proceeded with a simpler limit of leverage for anyone dealing in the business of money whatever be the classification, which is still too high in Europe at the 33X limit proposed by Basel.

Coming back to Volcker rules Section 619 and Section 716 (Swaps “push out”) in the Dodd Frank Act have raised serious questions for the competitiveness of US institutions  abroad and that of International Institutions activating lending and trading businesses in the US markets, the Derivatives business acting as a virtually limitless bridge between the two streams and necessitating the first Basle reforms extending leverage limitations to the market book or the trading business of the banks

Both rules make a considerable difference between US and non US players even as banks like BofA have sold out their previous edition of International Businesses and trading banks and survivors like Goldman Sachs and JP Morgan are pursuing profit opportunities internationally. 716 semingly requires swaps activities to be handled by international affiliate entities where possible but the rules become different for US domicile global banks and International entities operating in the US which obviously will be regulated only for their US footprint however it is defined.

As Fed Reserve Board Governor Tarullo mentioned in his recent testimony

On the one hand the provision (Section 716) will require US banks to restructure their global derivatives dealing activities in ways that will not be required of Foreign banks abroad. At the same time, the provision may require U.S. branches and foreign banks to restructure their derivatives dealing activities in ways that will not be required of US banks


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2 comments on “The ongoing fight over 18 holes for Volcker and the future of banking in the US| Banking Insight

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