An Efficient Monitoring of the Banking System
Michel Morkos Al Hayat - 07/04/08//
Some major international banks still announce losses incurred as a result of the subprime mortgage crisis. The announced losses are outpacing all expectations. They are attaining amazing levels of up to $20 billion per every single bank or financial institution, on the assumption that they would not mount even further in the near future. Victims of the crises, the so-called financial "fortresses" that were, until recently, the guardians of wealth, savings and private assets consisting of shareholder bonds, or that formed the bases of the monetary body in the most important international financial market, such as Wall Street, are falling. As these financial fortresses crumble, they do not solely alarm investors and savers, but also monetary and financial policy makers. They also confuse political decision makers and instigate the search for a better protection of the global financial system, then the monetary system.
Banks that were exclusively destined to the high net worth individuals, investors and competitors, such as Merrill Lynch, City Group, UBS, Crédit Suisse, Northern Bank, Deutsche Bank, Bear Stearns, Société Générale, and others, fell under the strikes of expansion as the limits of banking control were overtaken. With developments spiraling out of their control, these banks lost billions of dollars. Hence, the rings of the banking chain rolled down, just because the first ring fell, in a clear indication to their linked operations and blind, reckless obsession in pursuit of a quick profit. The US banks alone incurred losses of $400 billion, while the losses of their German counterparts ranged between $70 and $95 billion. Still, the size of the incurred losses has not been fully determined yet. Irrespective of whether the real losses outpace estimates or remain inferior to them, the disaster raises the question about who is monitoring banks and how.
Banks were responsible for the most damaging economic crises since 1971, amounting to 24 crises all in all. In the post-crises periods, these banks tightened their lending mechanisms. They raised the loan prices and caused a liquidity crunch, thus causing the global economies to shrink. Crises alter the once-free operating environment to a stricter one. In 1936, John Maynard Keynes said that when banks become one the biggest players in the casino, economies are the ones that whither. Every financial crisis is translated by the madness of banks, which, following the crisis, run away from assuming the risks necessary to finance the actual economy. They highly increase interest rates, thus diminishing loans and shrinking economic activity. And so it was that, in 1990, 60% of US banks announced an increase in loan cost in the wake of US savings funds crisis; in 1998, 50% raised the loan cost after the bankruptcy of LTCM (Long-Term Capital Management); in 2000-2002, 60% followed suit after the burst of the dot-com bubble; and more than 40% of US and European banks increased lending rates due to the subprime mortgage crisis, according to the data of this year's first quarter.
Banks play an "irresponsible" game as they boom and attract capitals. They are now diversifying the means to make high and quick profits, especially in funding competitors in financial and raw material markets. The latter bet on the possibility of winning and rarely expect any losses in their medium-term deals. In their modern techniques, "by-products' and "share transformation" helped in stealthily leaking the crisis symptoms into the economic body. By-products are financial assets that can be bought or sold at a later date and at a fixed priced determined upon deal closure. The second technique allows the transformation of any loan into assets that can be sold in financial markets. Both techniques involve risks.
Unlike these two techniques, French Société Générale went overboard with the trade of financial instruments. It employs 2500 "trader" (among them was Jérôme Kerviel who caused the bank to lose 4.9 billion Euros) who are supposed to buy instruments and assets from "financial markets" at low prices then sell them at higher ones, in order to fructify the bank's savings and private assets. Such instruments lost after global stock markets saw a huge decline in share value, caused by the US crisis, which is deeply rooted in the economy.
Undoubtedly, the banking system is taking chances. Yet, the laws and regulations force it to control its risks, not only with international insurance companies, but also with its borrower clients. When the bank lends a person to buy a house, an institution to invest or a developing country to import, it borrows money on a short term to lend it on a long term along with an interest that includes risk assessment margin borne by the borrower. Banks play this role to provide the credit needed for economic growth. However, they always seek to make large profits and attract the biggest wealth possible by making profits. They can reasonably distribute their funding or risk it in financial markets in a brutally random fashion. In that case, they would fund, among others, financial, real estate and IT bubbles. If crises burst, banks would retreat from their offensive lines to their first line of defense before some, or the major ones, fall due to unchecked and uncontrolled over-funding and write off assets that guaranteed bank investments.
Certainly, global political authorities and main monetary authorities - represented by central banks - are looking for a "road map" that protects banks from their dangerous slides to the abyss, provides them with a future protection that reassures clients, savers, investors and shareholders and gives global economies ongoing stability that stimulates growth.
Oscar Wilde says: "Experience is the name everyone gives to their mistakes." Will these experiences push international banks to show restraint?
|
