the economist - chained but untamed - international banking report

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May 14th 2011S P E C I AL R E P OR TI NTE RNAT I ONAL BANKI NGChained butuntamedSRInternationalBanking2011.indd 1 03/05/2011 17:40The Economist May 14th 2011 1S P E C I A L R E P O R TI N T E R N AT I O N A L B A N K I N G3 ReregulationA dangerous embrace 5 Japanese banksDont sit on your hands6 CapitalHow much is enough?9 Investment banksWhere angels fear to trade12 RemunerationFantasy paypackets13 Retail banksIn vogue15 The problems of sizeSurvival of the fattest17 Small banksBetter be big18 After the reformsSafer, but not yet safeenoughA list of sources is atEconomist.com/specialreportsAn audio interview with the author is atEconomist.com/audiovideo/specialreportsTHE NEARCOIIAPSE ol lhe voilds hanking syslem lvoandahallyeais ago has piompled a lundamenlal ieassessmenl ol lhe indusliy. Peihaps lhe higgesl casually ol lhe ciisis has heen lhe idea lhal hnancialmaikels aie inheienlly sellcoiiecling and hesl lell lo lheii ovn devices.Allei decades ol deiegulalion in mosl iich counliies, hnance is enleiing anev age ol ieiegulalion. This special iepoil vill locus on lhese iegulaloiy changes, vhich vill he lhe main deleiminanl ol lhe hanks piohlahilily ovei lhe nexl lev yeais.Slail vilh lhe addilional capilal lhal hanks aiound lhe voild villhave lo hold. Biggei capilal cushions vill make lhe syslem somevhal salei, hul lhey may also ieduce hanks piohlahilily hy as much as a lhiid. Inaddilion, lhey may push up hoiioving cosls and sloveconomic giovlh. Voise, highei capilal iequiiemenlsloi hanks may diive iisk inlo lhe daikei coineis ol hnancial maikels vheie il may cause even giealei haim. Supeivisois and iegulalois almosl eveiyvheie aieslill liying lo hnd vays lo deal vilh hanks lhal have hecome loo hig oi loo inleiconnecled lo he alloved lo lail.Il anylhing, lhe ciisis has exaceihaled lhis piohlem.Some ol lhose hanks have hecome even higgei oi moieinleiconnecled. And goveinmenls made good on lheimplicil guaianlees oeied lo hanks, encouiaging lhemlo lake even higgei iisks. In Ameiica lhe iules lo implemenl lhe DoddIiankacl aie heginning lo lake shape. Passed lasl yeai, lhe laviuns lo z,{I, pages, hul il is lillle moie lhan a slalemenl olinlenl. Beloie il can lake eecl, II dieienl agencies havelo viile lhe delailed iegulalions. These vill iedehnemuch ol lhe indusliy in Ameiica and aiound lhe voild,ieveising decades ol deiegulalion in hnance in lhevoilds higgesl economy.One key piovision is lhe sepaialion ol inveslmenlhanking liom commeicial hanking, knovn as lheVolckei iule. Il vill iesloie some elemenls ol lhe Depiessioneia iegulaloiy iegime lhal vas meanl lo ensuie lhal commeicial hanks did nolspeculale vilh piolecled deposils hy loihidding lhem liom liading secuiilies. Olhei iegulalions in Ameiica vill sel lhe lees lhal some ol lhevoilds higgesl ielail hanks can chaige vhen one ol lheii cuslomeissvipes a dehil caid. These make no pielence lo making hanking salei, hulieecl polilicians angei al hanks and suspicions ol lhose vho iun lhem. Biilain, loi long lhe mosl enlhusiaslic champion ol hnancial deiegulalion, is going luilhei slill, pondeiing vhelhei hanks ielail aimsshould he so lighlly iegulaled lhal lhey hecome lillle moie lhan puhliculililies. Meivyn King, lhe goveinoi ol lhe Bank ol England, in a iecenlspeech in Nev Yoik vondeied aloud vhelhei lhe use ol deposils lo lundloans should he oullaved. In essence, he vas queslioning a hasic huilding hlock ol modein hanking. In Apiil a goveinmenlappoinled commission said lhal Biilains hanks should vall o lheii ielail aims so lheycould he salvaged il lhe iesl ol lhe husiness veie lo collapse. Il is also liying lo devise iesolulion iegimes and living vills lo ieduce lhe haim donevhen hanks collapse, and il vanls moie compelilion in ielail hanking. Chained but untamedThe worlds banking industry faces massive upheaval aspost-crisis reforms start to bite. They may make it only a littlesafer but much less protable, says Jonathan RosenthalThis special report beneted fromthe time and insight of manypeople in addition to thosementioned in the text. Theauthor would like to thank inparticular: Andrew Bailey, TomBudd, Kevin Buehler, ToosDaruvala, Laurent Desmangles,Wilson Ervin, Robert Feldman,Andrew Freeman, Akinari Horii,Thomas Huertas, Kiyoto Ido,Jung Kim, Akash Lal, Nick Malik,Hironari Nozaki, Adam Posen,Michael Poulos, Jrg Rocholl,Glenn Schorr, Anthony Stevens,Joe Straehle, Steven Thogmartin,Renny Thomas, Naoki Togashi,Paul Tucker, Adair Turner, KazuoUeda, William Vereker, Mark Weiland others who wished to remainanonymous.C O N T E N T SA C K N O WL E D G ME N T S2 The Economist May 14th 2011I N T E R N AT I O N A L B A N K I N GS P E C I A L R E P O R T2 Biilain is nol alone in ieacling sliongly. Svilzeiland, vhichgiev iich as ils huccaneeiing inleinalional hanks sailed lhe lidesol capilal oving aiound lhe voild, is nov dovnsizing ils glohal hanking amhilions. Il plans lo impose such sliicl capilal slandaids on ils higgesl hanks lhal lheii inveslmenlhanking aimsvill he loiced lo shiink oi leave lhe counliy. The vave ol nev iegulalion comes as many hanks aie slillsliuggling lo iegain lheii looling allei lhe ciisis. Acioss much olEuiope, had dehls held hy hanks aie impaiiing lhe halancesheels ol lheii goveinmenls. Iieland and Spain aie liying lo convince hondholdeis lhal lhey can and vill iepay lheii nalionaldehls, despile lhe losses incuiied hy lheii hankeis. Douhls ahoullhose lvo counliies ciedilvoilhiness, as vell as lhal ol Gieeceand Poilugal, aie spieading acioss lhe conlinenls hanks, iaisinghoiioving cosls and unsellling maikels eveiyvheie. In Ameiica hig hanks aie heallhiei, having laigely iehuilllheii halance sheels. Yel nol all have iecoveied. The counliyssmallei iegional and communily hanks include some 8oo liouhled inslilulions al iisk ol heing seized hy iegulalois il lheii capilal ialios lall. In holh Ameiica and Biilain households aie deeplyindehled. Ioi hanks, giovlh in lhese maikels, as acioss much ollhe iesl ol lhe iich voild, is likely lo he slov. In }apan hanks aievell inlo lheii second decade ol a slovmolion ciisis, vhile inChina omcials liel lhal hanks aie gioving loo quickly. Theie is much lhal iegulalois aiound lhe voild aie doingvell, yel many ol lheii aclions have heen piecemeal. As a iesull,lhey lend lo shume iisk aiound liom one counliy lo lhe nexl inslead ol ieducing il acioss lhe glohal hnancial syslem. In somevays lhey have exaceihaled lhe dangeis. DoddIiank, in ils zeallo pievenl any moie laxpayeilunded hank hailouls, has cuihedlhe Iedeial Reseives ahilily lo piovide cash lo hanks lhal aielundamenlally sound hul sueiing a shoilage ol liquidily. Thalhas made il haidei loi lhe cenlial hank lo acl as a lendei ol lasliesoil, a piinciple ol cenlial hanking eslahlished almosl I(oyeais ago hy Vallei Bagehol, a loimei ediloi ol lhis nevspapei.The unvelcome consequences ol some ol lhe olhei neviules nov heing inlioduced may he giealei yel. Ioi example, lheEuiopean Commissions decision lo iegulale hankeis honusesin a hid lo limil iisklaking may have lhe peiveise eecl ol diiving up hanks cosls and making lheii eainings moie volalile.The bright spotsBanks in emeiging maikels lace dieienl and lai moie exciling challenges. They need lo giov quickly enough lo keep pacevilh economies iacing ahead al hieakneck speed and lo ieachlhe legions ol polenlial cuslomeis in villages and slums vho aiehungiy loi hanking. Rapid giovlh and lhe spiead ol compulingand communicalions lechnologies have luined lhese maikelsinlo huge lahoialoiies ol innovalion. This special iepoil vill aigue lhal hanks in counliies such as India and Kenya have muchlo leach lhose in lhe iich voild. These lessons could come inhandy, loi lhe loiienl ol ieiegulalion in developed counliies villsoon he iaising hanks cosls, liimming lheii piohls and loicingsome ol lheii cuslomeis lo look loi cheapei hanking seivices. 7Households with a deposit account, 2009, % of total