More regulation for banks in the UK

The chairman of the Financial Services Authority in the United Kingdom (FSA), Lord Turner, said in an interview last Wednesday that before the crisis, the FSA’s approach was based on the logic that markets correct themselves. However, after the collapse of few big banks, the FSA will use more regulation to tackle the problems of the financial sector, instead of leaving it to fix itself. Lord Turner proposed a move to a philosophy of ‘intense supervision’. He didn’t go into details about how exactly they are going to achieve it, but it looks like the new regime will be costly. Some examples for future regulation might be that banks will be required to hold more and higher-quality capital. Banks could also be required to build up their capital buffers in good times. The FSA also thinks that bank liquidity should be monitored closely using a liquidity ratio. Lord Turner even proposed a new European institution with legal powers to be created, but this may cause more problems and difficulties than help.
The news was reported in the Investment Chronicle. Except the statements made by Lord Turner, they also analysed what he have said and the measures which might be taken in the future. However, on this early stage it is hard to predict the exact details and the steps which the FSA will take.
The magazine also provided arguments for and against the plan of the FSA, which helps people to judge the current situation better, rather than imposing them a one-sided argument. The positive comment was made by Laura Cox, partner in PricewaterhouseCoopers. She said that only changes in the rules will not be enough. The FSA will have to change its own culture and supervisory approach in order to deal with systematic risks in the future. There are a number of measures which can prevent another financial crisis in the future. Some examples are an early warning system to identify banks in trouble, better crisis management procedures, restrictions on lending and the requirement for banks to build up reserves. The changes will have a huge impact on the business models of the banks and will influence their directors’ and senior executives’ responsibilities, their governance structures, their compliance functions and products offerings. Laura Cox thinks that the Lord Turner’s Report is a way forward but it shouldn’t stay in the way of the banking industry’s product innovation.
The comments from the negative side of the argument were made by Dr Eamonn Butler, director of the Adam Smith Institute. He argues that even though at the moment higher reserve requirements seem like the right think do to, it means that banks will have to cut back their loans, which right now would be a disaster. It doesn’t matter how much banks loan as long as they have‘insurance’ and the government should provide this insurance. However, the government have failed to do this when customers all wanted their money back at once.
Dr Eamonn Butler says that by imposing that kind of regulation will only shift risk higher up rather than eliminate it, because most banks will remain dependent on credit from investment banks. His opinion is that there should be more small banks, not fewer bigger ones, to spread the risk. The real threat to investors, savers and the economy are banks ‘too big to fail’ and incompetent regulators.

Fed to boost US economy by $1.15 trillion

On the 19th of March the Fed announced that they are going to pump another $1.15 trillion in the financial system. The news about the decision of the Fed was reported by The Canberra Times. In the article they use different interviews and comments on the subject, made by the Fed and specialists in the area.
The aim of this step is that the US avoids a new Great Depression and by pumping money into the economy, the Fed at least increases the hopes of the people that the country will emerge from its slump.
In the last 2 meetings the Fed disappointed market participants, but this time the chairman, Mr Bernanke, took drastic measures. He said that he is not willing to be responsible for the biggest downturn since the 1930s.
Interest rates are no longer available to improve the economic conditions as they are at their lowest at 0.2%. Therefore, the Fed has to use other methods, hence the input of capital in the economy.
However, Wall Street stocks failed to maintain the upward momentum of the previous session. Some are doubtful that the move of the Fed will ease the financial conditions. After plunging 28% to 12-year lows, the S&P 500 shot back up rapidly, gaining 17% in seven sessions. But stocks slipped at the end of last week.
The Standard & Poor’s 500 Index dropped 1.3 percent to 784.04. The Dow Jones Industrial Average lost 85.78 points, or 1.2 percent, to 7,400.80. JPMorgan, the biggest U.S. bank by market value, fell 8 percent to $24.95. Morgan Stanley declined 13 percent to $21.04 and Goldman Sachs slid 5.7 percent to $99.30 (March 19, Bloomberg).
Experts argue that this is just a temporary drop and the stocks will recover during the following week. Also, with the measures taken by the Fed, people are expecting improving economic conditions in the US.You can see 2 charts attached – the first one for the Dow Jones Industrial Average Index and the second one for the Standard and Poor’s 500. The time period is 10 days.

The Financial Crisis and Bulgaria

The first effects of the financial crisis become visible around 2 years ago. They were expressed by bank losses starting in the third quarter of 2007, and bonuses already decreasing in 2007 compared to 2006. The negative economic effects become visible in the second half of 2008 in the form of job losses and a huge change towards more debt and lower saving rates.
In Bulgaria everybody talks about the financial crisis and its negative effects, even though it is still not noticeable in the country. In September, last year people were still expecting from the government to take some actions in order to soften the crisis when it gets to the country, which is inevitable. One of the reasons is that over 80% of the banks in Bulgaria are owned by foreign bankers and another reason is the high prices and high investments in real estate. When the real estate prices start to plummet, it will have negative impacts on people who have used credit to invest as well as on the construction sector in Bulgaria.
In October 2008, Bulgaria’s foreign minister, Ivailo Kalfin, said in an interview that the financial turmoil will have real impact next year (2009) when the GDP growth will drop to 5% compared to 7% in 2008. The Bulgarian National Bank was increasing interest rates, while other nations affected by the crisis were decreasing them. In the beginning of 2007 the base rate was 3.43% and by December 2008, it reached almost 6%. At the moment some banks offer around 10% interest rate on savings accounts.
When 2009 started experts made predictions about the economic environment in the country and they were much different from what Mr. Kalfin has said. According to Standard & Poor’s, and quoted in Bloomberg, in 2009 Bulgaria will have a small economic growth of 1%. However, negative growth is also possible. And even though people have been talking about the financial crisis in Bulgaria for a whole year, 2009 will be the actual time when it will affect the country. The demand for Bulgarian goods and therefore exports will deteriorate, investments will decrease and the slowdown in the private income growth will cause the households’ consumption to drop.
The Bulgarian National Bank decreased the base interest rate from 5.17 in January this year to 3.49 in March. However, it will be some time until the commercial banks are affected and my personal opinion is that they will cause the crisis in Bulgaria to become more severe than it would have been if measures were taken earlier. There is a huge risk that Foreign Direct Investment and capital inflows could decrease sharply. A sudden slowdown could be avoided with tougher measures from the government to improve the business environment and sustain investor confidence. Hopefully, with election coming in July, we will see some adequate activity from the government.