RiskMinds – DB on reforming the financial markets
December 11, 2008
Hugo Banziger, CRO of Deutsche Bank, gave a presentation on his ideas on how best to reform "The Global Financial Architecture".
He started by emphasing:
- The economic imperative to resolve the current crisis for the benefit of all people, not just the financial markets.
- That the current crisis is very close to the crisis of the 1930s (he did his PhD on the Great Depression, so he should probably know).
- He has been involved in the rescue of 3 banks recently, and said that one major German financial institution was only 6 days away from insolvency before it was saved.
- His opinion that letting Lehman go was a bad decision that has worsened the crisis.
- That without goverment help the financial markets would have gone into meltdown and that this state of affairs is totally unacceptable for the industry.
He proposed action in three areas:
- Monetary Policy – Governments and central banks should pay more attention to the interaction between monetary policy and global capital flows. Central bank policy should also consider targetting how to prevent asset price bubbles as well as more standard measures such as inflation (Comment: maybe my bubble index idea wasn't so stupid?). Emergency liquidity provision also needed a rethink in light of past failures.
- Regulation and Supervision – Capital requirements should be increased and capital calculations need redesigning to reduce pro-cyclical aspects so as to provision in the good times for the bad (Spanish regulator had already done this apparently). Capital calculations should be calculated over longer time periods (30 yrs?) using the worst of events from the past. Scenarios need adding into the capital calculations so they are not just probabilistic in nature. Regulators should insist upon better transparency and disclosure, in particular on valuation methods and the methods of the Credit Rating Agencies. Ultimately, regulation needs be co-ordinated on a global basis given the global nature of the markets.
- Private Insitutions (the Banks) – Appalled by the lack of integrated risk management at many banks, and clear governence of the risk is essential. IT systems should be robust and centralised access to data to calculate exposure is essential. A typical cost of $200m to implement Basel II indicates to him that basic technology infrastructure is not in place and good risk management cannot be being done. Having data in spreadsheets and reporting to regulators with a 3 month timeframe is not good enough and the industry needs to get the infrastructure in place to properly handle and report in a timely manner upon the risks it is taking. He proposes that each bank needs to get a diversified and stable funding base in place – DB issued long term funding recently to reduce dependence on short-term sources and has $65b in reserves, so (maybe at the risk of sounding smug) he believes DB is well positioned.
Interesting talk, Hugo risked coming across as a little smug in the presentation but did admit that DB had faced problems too (but just not as bad as most other institutions though!).