Bankers Fear the ‘Terrifying Prospect’
of Banking System Collapse
Sept. 26, 2017 (EIRNS)—Bloomberg news service published an op-ed today by Bloomberg and La Repubblica columnist, and former Financial Times editorial board member Ferdinando Giugliano which reflects the frantic discussion going on in banking circles about what politicians ignore and the public is not told: The "terrifying prospect" of a collapse of the trans-Atlantic financial system.
"Many economists fear the financial system remains exceedingly vulnerable to shocks," Giugliano wrote. He singles out three areas of vulnerability these economists are focused on: bank capital levels not being anywhere near sufficient for the amount of leveraged debt held by those banks, the banks use of "risk weights" to cover their actual situation, and the fact that commercial and investment banking have not been split.
On the latter, like others in his circles, Giugliano is not talking about the necessary full Glass-Steagall separation, but deludes himself that British "ring-fencing" or the U.S. Volcker Rule might somehow mean something in a crash.
Giugliano cites presentations given at the Sept. 22 conference on "Ten Years After the Crisis: Looking Back, Looking Forward," sponsored by the Centre for Economic Policy Research, held (appropriately enough) at the Imperial College Business School in London. That must have been a doozy of a conference; according to the CEPR website, the opening address on financial stability was given by former Italian Prime Minister and British agent Mario Monti.
The two speakers referenced by Giugliano were John Vickers, former head of Britain’s Independent Banking Commission who pushes "ring-fencing" to protect merchant banks against Glass-Steagall, and Tamim Bayoumi of the International Monetary Fund. Vickers reportedly spoke of how regulators now accept "a level of leverage which is still around 25 or 30 times a bank’s core capital." Bayoumi detailed how "banks learned to game the system" after the 1996 decision by the Basel Committee to allow banks to use their own internal models for the valuation of risks, piling up "assets simply by tweaking their risk-models." This means that there is no guarantee that if regulators were to toughen required leverage ratios, that a new financial crisis can be avoided, Giugliano warns. "Not only are we asking banks to hold too little capital, but we are also underestimating how problematic their exposures really are.
"The fear, therefore," he continues,
"is that sooner rather than later, governments may again be called upon to rescue a troubled bank. And here lies the third dangerous similarity with the pre-crisis world: Many Western countries have proven unable to separate investment banking from commercial lending. As a result, even if governments only wanted to keep the latter going, in many cases they will be forced to rescue everything, as it is impossible to split the two."
Unless, of course, Glass-Steagall measures are adopted now.