Monday, March 16, 2015

Stress testing our banks

The Americans started it, the Europeans copied them. When is it going to be our turn? Every regulator should be doing this, has been doing this if you are worth your salt but keeping private about it.

As and when investors need to publicly know the results of these tests, it cannot remain private.

Before such tests were private, they were transparent between regulator and banks. Now that they are public, they have become opaque. Irony! But I agree with David Reilly that it should be.

As of now the mindset of our big local banks, the post crisis environment make this inappropriate.

We recognize that we ought to take more risks but the experience of the last decade or two show that we do not know how. I hope we are learning from those mistakes.

In the Great Financial Crisis, we were so confident and rightly so that we didn't feel the need to guarantee our bank deposits. But the people don't know, so when Hong Kong declared that deposits will be guaranteed we had to do the same. Many lessons from that episode.

But I also have no clear enough idea how financially conservative we really are. Perhaps our President also only have a hazy idea if you go by the late Ong Teng Cheong's experience.

Financial conservatism has its great merits but if it is achieved with much pain to the people, could it be even more excessive than Chin Shihuang inflicted on the Chinese building the Great Wall? Just because this is more psychological than physical, it is less clear. Just because most other countries we compare with are so corrupt and wasteful, we do not have realistic comparisons. All virtues taken to the extreme turn into vice.

May be our banks can do very much better but we do not know how. Neither do any FTs we hire to run them because they bring all the bad habits from elsewhere. I think we have to invent our own solutions.

What I am beginning to realize is if the government turn corrupt, we are so rich that they can steal much wealth without us noticing for a very long time.

Update: 2:50 pm

According to Gmail, this article arrived in my in in box five hours ago. It was a fascinating read and here was my reply to the sender.

In a way this is a positive development and it is heartening to see so many smart people not waiting, but taking the initiative to do something about their future after seeing the writing on the wall. On the other hand FinTech is obviously becoming a crowd in a hurry and more than the usual number of start ups will fail. They are also part of the tech bubble which can burst any time. This will be be added misery were it to happen months or even a couple of years from now. Nevertheless anyone who can differentiate themselves from the crowd should try. For such types there are no good or bad times. Yet as usual too many people cannot help but thought too highly of themselves as the behavioral economists have in the experiments shown us.

Finance is definitely on the cusp of being transformed. The Fed first and later the ECB go about stress testing banks. After a few years of testing, bankers are going to tire and think of workarounds. They will figure something out even if they don't use the lobby option given their rotten reputation. Then we will have a shadow finance sector by another name that is massively enabled by FinTech. As this develop elsewhere what happens to our stodgy banking scene? Others had almost gotten  killed and going through rebirth. We are at risk of becoming irrelevant from playing it safe. But we weren't savvy enough to risk well either. What a conundrum. 

Unlike in the past when regulators possess an iron grip over financial institutions, this is no longer possible. Regulators have to learn to co-opt the market. Boring central banking is one of the hardest jobs now. Behind the calm and sometimes expressionless demeanor things are going to get exciting. MAS cannot have the attitude that only a few people at the top need to think and the rest just obey. It might now appear so yet, but change is coming in a hurry because in this business you move bits and not bricks. It is frictionless.

1 comment:

  1. Just take an inner look at what's really happening in our local banks with the influx of FTs, or rather let me be more specific, our asians once bathed in politics and "act pretty" in foreign institutions but now retrenched and hence infesting the local banks. Scary indeed