Sunday, 22 July 2018

On the victory of reason over the “egg-laying-woolly-dairy-pig”

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Anthony Peters mulls the easing of Basel III liquidity requirements, defeated politicians and how this is just the end of the beginning for the new banking era.

Anthony Peters, SwissInvest Strategist

It’s Monday and all the big hitters should be back at their desks, as long as they have neither broken a leg skiing nor eloped with a local girl on an exotic South Sea island. What they will find is a FTSE resolutely above 6,000 points, a Dax equally resolutely above 7,700 points and an S&P which is seriously flirting with 1,500 points, all levels which were talked about but not seen in 2012 but which seem to have been effortlessly clocked up during the opening three day week.

They will also come back to a credit market with a bounce in its step following the cracking performance of the BBVA 5yr senior deal of last week and with the announcement of the softening of the Basel III capital rules glaring at them from the front pages as a result of which they will now be looking forward to the next few weeks in a way which would have seemed improbable when they packed up their desks at the beginning of the Christmas break.

The seemingly sudden change in the regulators’ attitude towards liquidity comes as a surprise but, in my view, not a minute too soon. It is a clear acknowledgement that banks, although not the main driver of the economy, are the catalyst which turns dreams into GDP, jobs and tax revenues.

After five years of blaming bankers for all the world’s evils while deflecting criticism from a totally failed and inept regulatory framework and pronouncing a slash and burn approach to the industry, our own concerns that you can’t lend without taking risk have finally been heard. Although I refer to the regulators, I should in all fairness add that they are but humble civil servants who can do no more than implement the demands of their political masters and it is they who had clearly failed to smell the coffee.

We know what happened in Europe post 1918 and after the war to end all wars. By dint of a total overkill in the Versailles Treaty, the scene was set for a far more serious conflict just two decades hence. Well, the regulation which was supposed to prevent a banking crisis from ever happening again set out in doing so by producing a catatonic financial sector. Let’s face it, until fear and greed can be outlawed, there will be booms and busts and in those there will be winners and losers. The holy grail of politics is the creation a society in which everyone is a winner or, perhaps more precisely, a society in which there are no losers. The credit boom created just that, namely a world in which nobody had nothing. The political class had no intention of stopping the merry-go-round but when the wheels fell off, they were the loudest when it came to castigating the banks. If those who are without sin are to cast the first stone, then the politicians should have kept their hands firmly in their pockets. Instead, they had missiles shipped in by the truckload.

Now, five years on, they are beginning to realise the level of overkill. Nevertheless, the softening of regulatory demands is not being spun as an expedient review of a misdirected clamp-down but as the result of powerful lobbying, thus setting the scene for a further loosening of the corset over the coming years without governments having to admit to errors in policy.

Despite all that you will read and hear, this is not a victory for the banks, it is a concession of defeat by the politicians who still dream of what Germans delightfully refer to as the “egg-laying-woolly-dairy-pig”. But please do not be deluded; one swallow a summer does not make. The industry, especially the trading and sales side of it, remains under relentless attack and a reconfiguration of liquidity requirements is not the end, it is not even the beginning of the end, it is merely the end of the beginning.

Argentine tangle

Meanwhile, those outside the UK might not be aware that the Argentinian president, Cristina Fernández de Kirchner, last week took out a full page advertisement in the Guardian newspaper in order to publish an open letter to Prime Minister David Cameron in which she renewed her country’s claim on the Falkland Islands. I won’t go into a diatribe on the ins and outs of international law but the last time the conflict over the islands flared up, it was largely aimed at distracting from serious economic woes.

If Falklands rhetoric is the litmus paper for the state of the Argentinian economy, then it must be close to “game over”. “Index neutral” is not the place to be. It might be high time to review the investment guidelines of all those emerging market funds held in the portfolio.                                 

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