经济学人经济类文章4.doc

Inadequate
SOMETIMES the only thing people can agree on is a mediocre idea. Ahead of the G20 meeting, some regulators are pushing to introduce dynamic provisioning for banks. Under this system, in boom years banks make provisions against profits which then sit on their balance-sheets as reserves against unspecified potential losses. In the bad years they draw down on these reserves. This smooths banks’ profits over the cycle, making their capital positions “counter-cyclical”. Supporters point to Spain, which uses this approach and whose lenders are in relatively good nick.
Banks should be encouraged to save more for a rainy day. But the importance of Spain’s system has been oversold. Going into the credit crisis, its two big banks had an extra buffer equivalent to about 1.5% of risk-weighted assets. Banks like UBS or Citigroup have had write-offs far beyond this, equivalent to 8-15% of risk-weighted assets. Whether dynamic provisions influenced managers’ behaviour is also questionable. Spain’s BBVA was run using an economic-capital model that, according to its 2007 annual report, explicitly replaced the generic provision in its income statement with its “best estimate of the real risk incurred”.
Accounting standard-setters, meanwhile, are not amused. They support the objective of counter-cyclical capital rules but think dynamic provisioning is a bad way to achieve this. Why not simply require banks to run with higher capital ratios, rather than go through a circuitous route by smoothing profits, which investors tend to dislike? Accountants worry their standards are being fiddled with needlessly, after a decades-long fight to have them independently set to provide accurate data to investors.
Is there a solution? If anything, the crisis shows that accounting and supervision should be further separated to break the mechanistic link between mark-to-market losses and capital. Investors should get the information they want. Supervisors should make a judgment about the likelihood of losses and set the required capital level accordingly. Warren Buffett, an astute investor, has endorsed this approach.
Sadly, bank supervision is as dysfunctional as the banks. The Basel 2 accords took five years to negotiate. Local regulators interpreted them differently and many failed to enforce them. Confidence in their integrity is now so low that many investors and some banks and regulators have abandoned Basel as their main test of capital. Given this mess, it is easy to see why policymakers might view tweaking accounting standards as an attractive short cut: with some arm-twisting, the rules can be changed quickly and are legally enforceable. But this is a matter where short cuts are not good enough.
Unsavoury spread
TEN years ago Warren Buffett and Jack Welch were among the most admired businessmen in the world. Emerging markets were seen as risky, to be avoided by the cautious. But now the credit-default swaps market indicates that Berkshire Hathaway, run by Mr Buffett, is more likely to default on its debt than Vietnam. GE Capital, the finance arm of the group formerly run by Mr Welch, is a worse credit risk than Russia and on March 12th Standard & Poor's downgraded its debt—the first time GE and its subsidiaries have lost their AAA rating in over five decades.
The contrast highlights the sorry state of the corporate-bond market. A turn-of-the-year rally was founded on hopes that spreads (the excess of corporate-bond yields over risk-free rates) more than compensated investors for the economic outlook. That has now petered out.
The weakness has been much greater in speculative, or high-yield, bonds than in the investment-grade part of the market. This is hardly surprising. First, economic prospects are so dire that companies already in trouble will have difficulty surviving. Banks are trying to preserve their own capital and do not need to own any more toxic debt. Even if refinancing were available for endangered firms, it would be prohibitively dear. It is only a matter of time before some go under.
Moody’s cites 283 companies at greatest risk of default, including well-known outfits like Blockbuster, a video-rental chain, and MGM Mirage, a casino group. A year ago just 157 companies made the list. Standard & Poor’s says 35 have defaulted this year, against 12 in the same period in 2008. That translates into a default rate over the past 12 months of just 3.8%.
The rate is likely to increase sharply. Charles Himmelberg, a credit strategist at Goldman Sachs, forecasts that 14% of high-yield bonds will default this year, with the same proportion going phut in 2010. Worse, creditors will get back only about 12.5 cents on the dollar. All told, Goldman thinks the combination of defaults and low recovery rates will cost bondholders 37 cents on the dollar in the next five years.
A second problem for the corporate-bond market is that optimism about the scope for an imminent end to the financial crisis has dissipated. “People have given up hope that the new [Obama] administration will be able to do anything to make things better quickly,” says Willem Sels, a credit strategist at Dresdner Kleinwort.
Banks are still the subject of heightened concern. Credit Derivatives Research has devised a counterparty-risk index, based on the cost of insuring against default of 15 large banks; the index is now higher than it was after the collapse of Lehman Brothers. Jeff Rosenberg, head of credit strategy at Bank of America Securities Merrill Lynch, says investors are uncertain about the impact of government intervention in banks. Each successive rescue, from Bear Stearns to Citigroup, has affected different parts of the capital structure in different ways.
A third problem for the high-yield market is that plans for quantitative easing (purchases by the central bank of government and private-sector debt) are focused on investment-grade bonds. As well as reviving the economy, governments are concerned about protecting taxpayers’ money, and so will not want to buy bonds at high risk of default. If the government is going to support the investment-grade market, investors have an incentive to steer their portfolios in that direction.
The relative strength of the investment-grade market even permitted the issuance of around $300 billion of bonds in the first two months of the year, albeit largely for companies in safe industries such as pharmaceuticals. Circumstances suited all the market participants. “Spreads were wide, which attracted investors, but absolute levels of interest rates were low, which suited issuers,” says Mr Rosenberg.
Although the Dow Jones Industrial Average jumped by nearly 6% on March 10th, it is hard to see how the equity market can enjoy a sustained rebound while corporate-bond spreads are still widening. Bondholders have a prior claim on a company’s assets; if they are not going to be paid in full, then shareholders will not get a look-in. However, credit investors say their market often takes its lead from equities. If each is following the other, that hints at a worrying downward spiral.
A Plan B for global finance
In a guest article, Dani Rodrik argues for stronger national regulation, not the global sort
THE clarion call for a global system of financial regulation can be heard everywhere. From Angela Merkel to Gordon Brown, from Jean-Claude Trichet to Ben Bernanke, from sober economists to countless newspaper editorials; everyone, it seems, is asking for it regardless of political complexion.
That is not surprising, perhaps, in light of the convulsions the world economy is going through. If we have learnt anything from the crisis it is that financial regulation and supervision need to be tightened and their scope broadened. It seems only a small step to the idea that we need much stronger global regulation as well: a global college of regulators, say; a binding code of international conduct; or even an international financial regulator.
Yet the logic of global financial regulation is flawed. The world economy will be far more stable and prosperous with a thin veneer of international co-operation superimposed on strong national regulations than with attempts to construct a bold global regulatory and supervisory framework. The risk we run is that pursuing an ambitious goal will detract us from something that is more desirable and more easily attained.
One problem with the global strategy is that it presumes we can get leading countries to surrender significant sovereignty to international agencies. It is hard to imagine that America’s Congress would ever sign off on the kind of intrusive international oversight of domestic lending practices that might have prevented the subprime-mortgage meltdown, let alone avert future crises. Nor is it likely that the IMF will be allowed to turn itself into a true global lender of last resort. The far more likely outcome is that the mismatch between the reach of markets and the scope of governance will prevail, leaving global finance as unsafe as ever. That certainly was the outcome the last time we tried an international college of regulators, in the ill-fated case of the Bank of Credit and Commerce International.
A second problem is that even if the leading nations were to agree they might end up converging on the wrong set of regulations. This is not just a hypothetical possibility. The Basel process, viewed until recently as the apogee of international financial co-operation, has been compromised by the inadequacies of the bank-capital agreements it has produced. Basel 1 ended up encouraging risky short-term borrowing, whereas Basel 2’s reliance on credit ratings and banks’ own models to generate risk weights for capital requirements is clearly inappropriate in light of recent experience. By neglecting the macro-prudential aspect of regulation—the possibility that individual banks may appear sound while the system as a whole is unsafe—these agreements have, if anything, magnified systemic risks. Given the risk of converging on the wrong solutions yet again, it would be better to let a variety of regulatory models flourish.
Who says one size fits all?
But the most fundamental objection to global regulation lies elsewhere. Desirable forms of financial regulation differ across countries depending on their preferences and levels of development. Financial regulation entails trade-offs along many dimensions. The more you value financial stability, the more you have to sacrifice financial innovation. The more fine-tuned and complex the regulation, the more you need skilled regulators to implement it. The more widespread the financial-market failures, the larger the potential role of directed credit and state banks.
Different nations will want to sit on different points along their “efficient frontiers”. There is nothing wrong with France, say, wanting to purchase more financial stability than America—and having tighter regulations—at the price of giving up some financial innovations. Nor with Brazil giving its state-owned development bank special regulatory treatment, if the country wishes, so that it can fill in for missing long-term credit markets.
In short, global financial regulation is neither feasible, nor prudent, nor desirable. What finance needs instead are some sensible traffic rules that will allow nations (and in some cases regions) to implement their own regulations while preventing adverse spillovers. If you want an analogy, think of a General Agreement on Tariffs and Trade for world finance rather than a World Trade Organisation. The genius of the GATT regime was that it left room for governments to craft their own social and economic policies as long as they did not follow blatantly protectionist policies and did not discriminate among their trade partners.
Fortify the home front first
Similarly, a new financial order can be constructed on the back of a minimal set of international guidelines. The new arrangements would certainly involve an improved IMF with better representation and increased resources. It might also require an international financial charter with limited aims, focused on financial transparency, consultation among national regulators, and limits on jurisdictions (such as offshore centres) that export financial instability. But the responsibility for regulating leverage, setting capital standards, and supervising financial markets would rest squarely at the national level. Domestic regulators and supervisors would no longer hide behind international codes. Just as an exporter of widgets has to abide by product-safety standards in all its markets, global financial firms would have to comply with regulatory requirements that may differ across host countries.
The main challenge facing such a regime would be the incentive for regulatory arbitrage. So the rules would recognise governments’ right to intervene in cross-border financial transactions—but only in so far as the intent is to prevent competition from less-strict jurisdictions from undermining domestic regulations.
Of course, like-minded countries that want to go into deeper financial integration and harmonise their regulations would be free to do so, provided (as in the GATT) they do not use this as an excuse for financial protectionism. One can imagine the euro zone eventually taking this route and opting for a common regulator. The Chiang Mai initiative in Asia may ultimately also produce a regional zone of deep integration around an Asian monetary fund. But the rest of the world would have to live with a certain amount of financial segmentation—the necessary counterpart to regulatory fragmentation.
If this leaves you worried, turn again to the Bretton Woods experience. Despite limited liberalisation, that system produced huge increases in cross-border trade and investment. The reason is simple and remains relevant as ever: an architecture that respects national diversity does more to advance the cause of globalisation than ambitious plans that assume it away.
One crunch after another
CALLS for co-ordinated fiscal stimulus to lift the world out of recession were joined at the weekend by Larry Summers, Barack Obama’s top economic adviser. Such co-ordination has been absent up to now, though that could change at the meeting of G20 leaders in London in early April. But there has been plenty of fiscal stimulus, led by America’s $787 billion package, as many governments seek to offset a collapse in private demand. There are worries not only about how much these measures cost up front but their longer-term effects on government finances.
The direct costs of such packages are indeed large. The IMF reckons that for G20 countries stimulus packages will add up to 1.5% of GDP in 2009 (calculated as a weighted average using purchasing power parity). Together with the huge sums used to bail out firms in the financial sector (3.5% of GDP and counting in America, for example),