RiskMinds – Tuesday Panel Debate
December 10, 2008
Panel debate this morning was interesting, speakers included Riccardo Rebanato of RBS, Bob Scanlon of Standard Chartered, Andreas Gottschling of DB and David Morgan of the UK regulator, the FSA. A few sections from the debate:
Current Crisis – Scanlon said that the current government guarantees offered to the banking industry will realistically have to be in place for 7 to 10 years, not the 3 years that is officially spoken of. He also said that he was concerned that current government intervention will pervert the market, with the transfer of credit risk from corporates to governments. Put a different way Gottschling said that "nationalising crap does not turn it into strawberry cake". Morgan said the FSA is aiming for tighter liquidity and capital standards since the future risk of something similar to the current bail out is unacceptable to the public. Rebanato criticised the FSA for focussing too much on recapitalisation and too little on liquidity provision. Morgan emphasised that the "discount window" funding from the Bank of England was only there for crisis times and not to be used as "lender of first resort". Morgan seemed forceful on this last point but seemed on the back foot relative to the practioners in the panel.
MTM Accounting – all seemed united that mark to market accounting should stay and that we should not effectively "shoot the messenger" i.e. the real source of the crisis lies elsewhere, not in MTM accounting.
Securitisation – Rebanato said that the key to getting securitisation going again was a rethink of how an investor can trust the due diligence done in assessing the risk of a product, in particular a total rethink on the role and practices of the credit ratings agencies. Scanlon added that increased capital requirements combined with no securitisation market would slow economic growth and as such securitisation is a necessary part of the future of the markets and essential for the growth of the global economy.
Liquidity Risk – Rebanato said that ideas such as "liquidity VaR" were invalid given that a liquidity crisis is such a digital event. Gottschling favoured robust scenario analysis but ultimately management skill and judgement is key. Morgan of the FSA criticised the banks for very poor liquidity management in place now regardless of what new regulatory requirements may come. Rebanato made the point that many private companies would (in the absence of regulation) choose not to deflate balance sheets and reduce profitability in order to be better placed to deal with future (but infrequent) liquidity crises. Morgan again came back to the costs to the tax payer of the current crisis and Scanlon threw in that the FSA and other regulators were going to cause the crises of the future…
At that point the debate ran out of time which was a shame since Scanlon was only just getting warmed up on hitting (verbally!) at the regulators…