Friday, December 12, 2008

What credit crisis?

For the last few months we have all been inundated with news stories telling us that the interbank lending market has dried up, along with bank lending in general and that commercial paper markets have virtually ground to a halt.

But there are some dissenting voices emerging from the wilderness to tell us that all is not as it seems; that the figures don't support the US Federal Reserve's and Treasury Secretary's assertions about the dire state of bank lending.

Yesterday, Octavio Marenzi with analyst firm Celent, released a report aptly titled: Flawed Assumptions About the Credit Crisis, which makes no bones about the fact that Ben Bernanke, Federal Reserve chairman and Hank Paulson's comments about the so-called credit crisis are incorrect as they are not backed up by publicly available data, including stats provided by the Federal Reserve Bank itself.

Marenzi does not discount the fact that we are in a deep financial crisis with banks failing and countries teetering close to collapse. However, he says US lending markets are in "good health" and lending by US commercial banks increased 15% during the credit crisis. In fact it says an all-time record high in US commercial bank credit (more than $7.2 trillion) was reached in October 2008.

Marenzi contends that:

  • Interbank lending reached its highest level ever in September 2008, and since the beginning of the credit crisis, it has increased approximately 22%. The cost of interbank lending also remains at low levels, he says.
  • Contrary to the assertion that commercial paper markets had stopped functioning or become prohibitively expensive, Celent says outstanding volumes in the commercial paper market for non-financials are higher now than at any point since early 2004 and that the cost of borrowing in that market has dropped to at least 10-year lows for non-financials.
  • Bank real estate lending also reached a record high in October 2008 and has grown consistently during and before the crisis
Marenzi proffers two possible explanations for the huge discrepancies between what Federal Reserve and government figures are saying and publicly available data. Perhaps Mr Paulson and Bernanke have additional data available to them that supports their assertion that credit markets are in trouble, although Celent is sceptical that such data is available.

The only other explanation, says Marenzi, is "that policymakers are reacting to the situation of a particular set of businesses and financial institutions, and are incorrectly generalising this to
the market as a whole. If this is the case, the policy tools being employed may well be the wrong ones."

Celent was inspired to publish its report following publication of a paper in October 2008, Facts and Myths about the Credit Crisis, which was written by three researchers at the Federal Reserve Bank of Minneapolis. According to Marenzi, the paper claimed that there appeared to
be an abundance of credit flowing in the US market and that the researchers were critical of US policymakers' lack of serious analysis and of "substituting hard data with their own speculation."

Marenzi also looked at commercial lending in Europe and said the data shows no evidence of a credit crisis with consumer lending in France and Italy continuing on the same trajectory since the beginning of 2003, while in Germany, consumer lending has been flat for some years. Commercial lending to non-financials in the three major eurozone economies was also at its highest ever levels at the end of October 2008, having shown steady growth since late 2005.

Based on Bank of England data and its own analysis, Celent also says that lending by UK banks is at its highest levels ever, growing at a rate of 12% annually since 1994. So it appears that the financial crisis has not translated into a general credit crisis, although we are being told differently.

UK Prime Minister Gordon Brown who accidentally remarked that he had saved the world by pumping billions into the UK economy to get credit flowing again, may be eating humble pie alongside various other political leaders.

Thursday, December 11, 2008

Risk management in your Xmas stocking

Go to a Christmas lunch these days and most people will be talking about what they are filling their Christmas stockings with or how they are looking forward to eating turkey yet again for the fourth time in a week.

While the conversation at business intelligence and analytics vendor, SAS's Christmas press lunch today may have been peppered with such conversational tid bits, the subject of the lunch was for SAS to publicise its recent foray into the capital markets space.

Building on its already strong base in the retail banking sector, particularly in the areas of operational risk, credit risk, market risk and financial crime, SAS has put together a team based in the UK that is wholly focused on selling its analytics and risk management solutions to capital markets firms.

2009 is likely to see increased regulatory oversight, particularly when it comes to the overlooked areas of liquidity and counterparty risk; and not one too miss an opportunity, SAS is eager to sell its solutions to a business that is drowning in information, but not quite sure what to do with it or how to make sense of it in order to determine risk, fraud liability etc.

It seems the poor old trader is likely to come under increasing surveillance with intelligent software algorithms monitoring their every move and looking for unusual patterns of behaviour (the ability to match seemingly unrelated events across different parts of the business). The technology is certainly to provide such surveillance, but the cynic in me says most banks are only likely to embrace these technologies as a 'box ticking' exercise in order to comply with regulation, rather than seeing it as good business per se.

Risk management is suddenly the business to be in, but one has to wonder where was all this wonderful bells and whistles technology when things started going wrong in capital markets? And at the end of the day technology can only do so much.

If the people in charge still view "betting on the bank" as a necessary part of making money, or don't want to listen to those 'little voices' in their risk department warning them that something bad is about to happen; then no amount of technology can account for the fact that the culture within firms has to fundamentally change if risk management is to be viewed as a strategic asset and not something that is ferreted away in a back office somewhere filing reports to regulators that no one really concerns themselves with.

Interestingly, while we only get to hear about the multi-billion dollar losses racked up by rogue traders like Jerome Kerviel, there are plenty of other million dollar losses within banks, which occur on an almost daily basis (be they the result of human error or internal fraud) that we don't get to hear about.

Mark Hudson, industry consultant, Capital Markets, SAS, believes if firms can start minimising those million dollar losses we don't get to hear about via market or trader surveillance technologies then perhaps the industry will have achieved something.

Surely saving the bank a few 'mill' from combating accidental or internal fraud is going to make a CFO's ears prick up in this challenging business climate? And even if it doesn't, then Hudson believes the banks' customers and may be even their shareholders (which lets face it is the government these days) may insist on more risk management oversight.