Capital matters. Let me put that another way. The current fight over additional capital requirements for the banking industry, eye-glazing though it is, also happens to be the most important reform moment since the financial crisis broke out three years ago. More important than the wrangling over Dodd-Frank. More important than the ongoing effort to regulate derivatives. More important even than the jousting over the new Consumer Financial Protection Bureau.

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Joe Nocera

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If investment banks like Merrill Lynch had had adequate capital requirements, they would not have been able to pile on so much disastrous debt. If A.I.G. had been required to put up enough capital against its credit default swaps, it’s quite likely that the government would not have had to take over the company. If the big banks had not been able to so easily game their capital requirements, they might not have needed taxpayer bailouts. A real capital cushion would have allowed the banks to absorb the losses instead of the taxpayers. That’s the role capital serves.

Adequate capital hides a plethora of sins. And because, by definition, it forces banks to use less debt, it can also prevent sins from being committed in the first place. “There is no credible way to get rid of bailouts except with capital,” says Anat Admati, a finance professor at Stanford Business School and a leading voice for higher capital requirements. “The only cure is capital,” says Daniel Alpert, a founding managing partner of Westwood Capital. A few days ago, The Wall Street Journal wrote an editorial applauding the recent suggestion by Daniel Tarullo, a Federal Reserve governor, that the biggest banks hold as much as 14 percent of assets in capital. I couldn’t agree more.

Which is why a hearing held last week by the House Financial Services Committee was such a sorry sight. Under the guise of examining whether the new financial regulations — including proposed capital requirements — were making American banks less competitive, the Republican majority peppered U.S. regulators, including Tarullo, with skeptical questions about the need for increased capital requirements. It was pathetic.

I should point out that the proposed international standards — Basel III, as they’re called, which are still being negotiated by regulators around the globe — would require banks to hew to capital requirements of only 7 percent, not 14 percent. They are also talking about adding capital surcharges of up to 3 percent, on a sliding scale, to the 30 largest, most systemically important institutions worldwide, meaning that JPMorgan Chase, for instance, would have capital requirements of 10 percent.

There are many experts, including Admati and, one suspects, Tarullo himself, who think this is still too low. The Basel committee has already agreed, somewhat absurdly, to delay the implementation of the requirements until 2019. (Good thing the world’s banks aren’t going to have any big problems between now and then!) And because the Basel standards, whatever their final form, must still be enacted and enforced by individual country regulators, there is no guarantee that every country will agree to them.

But the U.S. should, no matter what other countries do. Banks always want capital requirements to be as low as possible, because the less capital they have, the more risk they can take and thus the more money they can make (and the bigger the executives’ bonuses). But so what? Trading some bank profits for a safer financial system is a deal most Americans would take in a heartbeat.

Indeed, every argument put forth by the big banks and their Congressional spokesmen against higher capital requirements have been demolished by Admati as well as Simon Johnson, the banking expert, whose devastating rebuttal can be found in The New York Times’s Economix blog. But the idea that they will make U.S. banks less competitive with European banks deserves particular scorn.

European banks, to be sure, have fought fiercely against higher capital requirements. It’s not really because they hope to get a leg up on the rest of the world, though. It is because these banks are in far worse shape than the banks in other parts of the world; they can’t afford higher capital requirements. If Europe began insisting that its banks begin holding enough capital to cushion against all the risk on their books — starting with Greek debt — the truth would be out: Their insolvency would suddenly be apparent. If Europe wants to keep kicking the can, by turning its back on the surest measure to increase the safety of its financial system, why on earth would we want to go along?

Tarullo will soon travel to Basel, Switzerland, (yes, that’s why they call them the Basel accords) to push for the highest capital requirements he can get the rest of the world to agree to. He will also try to convince the international standard-setters that a significant surcharge on the most systemically important banks is vitally important. Really, there’s only one appropriate response:

Good luck, sir.

Sanusi Lamido, CBN Governor

Following the disquiet that has trailed the structure of Islamic banking since the granting of an approval in principle to the first Islamic bank in the country, the Central Bank of Nigeria (CBN) Tuesday amended the regulation and supervision of institutions offering non-interest financial services in the country.

A circular by the apex bank titled: Re: Framework for the Regulation and Supervision of Institutions Offering Non-Interest Financial Services in Nigeria, signed by the Acting Director, Financial Policy and Regulation Department, Mr. Chris O. Chukwu, explained that Islamic banking is not the only form of non-interest banking product in the country.

The new guidelines also clarified the contextual definition of non-interest banking which it said is not restricted to Islamic banking, but also include other forms of non-interest banking not based on Islamic principle.

It specifically categorised non-interest banking models into non-interest financial products and services based on principles of Islamic commercial jurisprudence and others which are based on any other established rules and principles.

But it warned that discrimination on any grounds in the participation by individuals or promoters, depositors or other relevant parties in any transaction regarding a non-interest financial institution, whether based on Islamic or other model, is strictly prohibited.

Islamic banking is a non-interest banking product. It serves the same purpose of providing financial services and operates in accordance with principles and rules of Islamic commercial jurisprudence that generally recognise profit and loss sharing and the prohibition of interest as a model.

The circular on the revised guidelineswas apparently a reaction to the agitation by some groups and professional bodies in the industry following the earlier guidelines rolled out by the CBN. One of such groups was the Concerned Citizens of Nigeria, which asked the apex bank to elucidate its definition of non-interest banking.

The CBN Governor, Mallam Sanusi Lamido Sanusi, had only on Monday said the banking watchdog had granted approval-in-principle to Jaiz Bank International Plc, the countrys first Islamic bank.

Another significant review of the guideline was the removal of any reference to Sharia Council which it changed to Advisory Council of Experts.

The circular with reference FPR/DIR/GEN/01/017 read thus: The CBN wishes to clarify that Islamic banking is not the only type of non-interest banking contemplated under the new banking model which categorized non-interest banks as part of specialized institutions. The CBN recognizes that Islamic banking is a form of non-interest banking and that there are other forms of non-interest banking than Islamic banking.

The CBN also argued that section 23 (1) and section 66 of the Banks and Other Financial Institutions Act (BOFIA) 1991 (as amended) explicitly provides for the licensing of Non-Interest Banks (NIBs).

It explained that it would later issue guidelines governing the provision of non-interest financial services based on established principles other than Islamic finance.

The CBN remains committed to reviewing and evaluating applications for banking licenses for non-interest financial institutions based on other principles. In line with CBNs objective of promoting financial inclusion in Nigeria, individuals and groups wishing to practice non-interest banking based on established rules and principles other than Islamic may apply for a license to operate such institutions and the CBN will accordingly issue guidelines pertinent to that type of banking, it said.

A statement from CBN signed by its Head of Corporate Communications, Mr. Mohammed M. Abdullahi, assured stakeholders that the apex bank was open to receiving and evaluating applications for licensing of non-interest banking institutions based on other principles rather than the Islamic variant and will soon issue separate guidelines for non-interest banking under other principles.

Roger Beverage, president and CEO of the Oklahoma Bankers Association, reversed his earlier opposition. Beverage called on the president to use his recess appointment powers to name Warren after 44 Republican senators said earlier this month they would oppose any nominee unless changes are made to the bureaus structure.

‘Wait no longer

“I encourage you to wait no longer and give Elizabeth a recess appointment before the July 21st transfer date,” Beverage wrote in a letter delivered last week.

Monday, Beverage said meetings with Warren prompted his change of heart. He said he wrote the letter out of frustration with the politics surrounding the appointment. He said the letter, on OBA letterhead, reflects his personal feelings and not those of the entire association.

“Pick somebody, whoever the hell it is — I suggest Ms. Warren — and lets get on with it,” Beverage said Monday. “This waiting and hanging around and playing political games is driving everybody crazy. In the meantime, weve got enough uncertainty out here around bankers and customers.”

Frank Keating, head of the American Bankers Association, said his organization takes no official position on who should head the newly created Consumer Financial Protection Bureau.

“Well wait and see if his letter was helpful or not, but it really was his (Beverages) call,” Keating said. “Im not going to jump in the middle of peoples decisions to support or not support. The ABA view is were not going to get involved in the nomination process. Its not our hunt.”

The former Oklahoma governor, in Norman to attend the Oklahoma Bankers Association annual convention, said his organization will work with whomever is chosen to lead the consumer protection agency.

Opposed to agency

“If Elizabeth Warren is ultimately confirmed by the Senate, then we support her leadership, and where shes right, well agree, and where shes not right, we will disagree,” he said.

The American Bankers Association remains opposed to the consumer protection agency, arguing that banks already are “highly regulated,” he said.

Beverage admitted that some banking industry insiders “chewed on me” for sending the letter in support of Warren.

Warren, who grew up in Oklahoma City, is a Harvard law professor and was one of the first to call for a new federal agency aimed at protecting consumers.

“Shes a pretty big champion of community banks,” Beverage said. “Compared to some of the other names Ive heard, … Elizabeth Warren is head and shoulders above them. Shes gets both sides of the equation. She knows that you cant have consumer financial services without community banks.”

Nigeria’s index of bank stocks fell
to the lowest in more than six weeks after the central bank
increased lenders’ cash-reserve requirements and raised its
benchmark interest rate for the third time this year.

The Bloomberg NSE Banking (NGSEB10) Index of the 10 biggest and most
liquid lenders dropped for the sixth day, retreating 0.9 percent
to 393.15 by 3:04 pm in Lagos, the lowest intraday level since
April 8.

The Central Bank of Nigeria, based in Abuja, increased the
monetary policy rate by half a percentage point to 8 percent
yesterday as it tries to stabilize the naira and bring inflation
below 10 percent. Five of six economists surveyed by Bloomberg
had forecast the rate would be left unchanged. The reserve
requirement increased to 4 percent from 2 percent.

“The policy decision will probably put some pressure on
bank margins, but their loan-to-deposit ratios are not very
high,” Ayo Salami, the London-based chief investment officer at
Duet Asset Management Ltd., said by phone today. “Overall it’s
not great news for the banking sector, but they will recover.
The way the MPC is behaving is quite aggressive, but I think the
Nigerian economy needs it.”

United Bank for Africa Plc (UBA), Nigeria’s fourth-largest lender
by market capitalization, slumped the maximum daily limit of 5
percent to 6.08 naira, the biggest drop since March 31. Diamond
Bank Plc (DIAMONDB) retreated 5 percent, the most since March 2, to 5.92
naira, while Skye Bank Plc (SKYEBANK) fell 2.6 percent to 8.2 naira.

Central bank Governor Lamido Sanusi bailed out some of
Nigeria’s 24 lenders and fired eight bank chiefs in 2009 after
loans to equity speculators contributed to 700 billion naira
($4.5 billion) of non-performing debt, according to the Economic
and Financial Crimes Commission. The government rescued lenders
by buying bad debt totaling 2.04 trillion naira through its
Asset Management Corp. of Nigeria.

To contact the reporter on this story:
Chris Kay in London at
ckay5@bloomberg.net

To contact the editor responsible for this story:
Gavin Serkin at
gserkin@bloomberg.net

* New super rich need private and investment banking

* Private banking becoming more elite

* Growing trend of investment bankers moving to wealth

By Chris Vellacott

LONDON, April 20 (Reuters) – Banks are sending some of their
best talent to work in private banking as clients get richer and
demand more, siphoning off recruits from a traditionally higher
paying and racy career in capital markets.

Many banks reporting first-quarter earnings in coming weeks
are prioritising expansion in wealth management because its
stable deposit base offsets more volatile business lines like
trading or investment banking.

But banks are also eyeing an emerging client group, namely
the international oligarchy of families that have amassed vast
wealth through control of global companies.

While these clients will want personal services for the
super rich like premium credit cards or mortgages on
superyachts, as owners of huge business empires they are also
heavy users of investment banking.

Where once private banking was seen as a genteel arm of the
industry, dealing in inherited wealth, it now needs higher
calibre staff with investment banking expertise, bankers say.

One of the results of the boom in emerging markets and
commodities has been a huge rise in the number of owner-occupied
firms that have become global businesses, Des Byrne, managing
director at Barclays Wealths (BARC.L) UK and Ireland arm, said.

Thats given rise to this ultra need that many of the
banks are targeting … — the application of investment banking
style products and services to individuals, to human beings as
opposed to the board or management teams of companies, he said.

Prominent examples of people associated with dominant global
companies include Mexican telecoms billionaire Carlos Slim,
steel tycoon Lakshmi Mittal or Russian magnates like Oleg
Deripaska.

Reflecting this blend of private and corporate banking,
British bank Coutts has set up a division aimed at turning
corporate shipping clients of its parent Royal Bank of Scotland
(RBS.L), many of which are owned by Greek families, into private
bank customers. [ID:nLDE6B50NW]

Citis (C.N) private banking arm reshaped itself after the
financial crisis to sit within the groups institutional
business, focusing on clients rich enough to own big companies
needing regular access to global capital markets.

Recruiters and bankers say the entry requirements for
private banking are far higher than they were a decade ago.

And a once unimaginable phenomenon — investment bankers
opting to become private bankers — is gathering pace.

The top ranks of many international private banks are
already well populated by people who cut their teeth in
investment banking.

Byrne joined Barclays private banking arm in 2008 from
Barclays Capital. His boss Thomas Kalaris, chief executive of
Barclays Wealth also came from an investment banking background.

Other notable examples include Rory Tapner, head of RBSs
wealth management arm and a one time joint global head of
investment banking at UBS (UBSN.VX).

Stephen Russell, chief of staff at UBSs wealth management
arm in the UK, says the few private banking jobs on offer in his
business are routinely inundated with applicants.

In the context of this year, weve made eight hires and
interviewed about 140 people … The challenge for us is
getting a fit with what we and our clients expect from people
and what exists in the market, he said.

Investment banking remains potentially more lucrative,
paying up to 40 percent more in total compensation according to
Sophie De Ferranti, head of private wealth management at
ValensGoldberg, a headhunter based in London.

But private banking pay is less volatile, Byrne says, and
attracts many former capital markets staff looking for an escape
from the increasingly technical and narrowly focused word of
investment banking.

Its not an easy option, Its a different lifestyle, he
said.

(Editing by Sinead Cruise and Mark Potter)

(For the Funds Hub blog: blogs.reuters.com/hedgehub)
(For Global Investing: here)

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Banking regulator to launch mortgage stress testing

• Source: Global Times
• [04:08 April 21 2011]
• Comments

By Zhao Qian

The countrys banking regulator will launch a new round of stress tests for property loans to minimize the financial risks, while a senior researcher at a government think tank said on Wednesday that further credit tightening policies may be needed.

The China Banking Regulatory Commission said in a statement on its website late Tuesday that banks should start stress tests on lending in the property market, citing a speech by commission chairman, Liu Mingkang.

Banks should strictly control financial risks, both in mortgage loans for homebuyers and in lending to developers, the China Banking Regulatory Commission statement said.

No more details about the test procedure were released.

In the middle of last year, the commission twice ordered banks to carry out stress tests on property lending. The results of these tests found that banks could sustain a drop in house prices of up to 30 percent.

There are signs that there is still a risk of a property bubble, and further credit tightening policies may be the most effective measure to cool down the over-heated market, judging by the current excess in liquidity, said Wang Jun, deputy director of the research department with the China Center for International Economic Exchanges, a government think tank, on Wednesday.

Some policies, like limiting home purchases for homeowners of multiple properties, is a short-term strategy since money being squeezed out of the property market can enter into other areas like commodities, thus adding to the countrys inflationary pressure, Wang said.

Minimum down payments for multiple home purchases could be higher, for instance, Wang added.

In January the State Council raised the minimum down payment requirement for second-home purchases to 60 percent from 50 percent.

The central bank revealed that new yuan loans in the first quarter totaled 2.24 trillion ($343 billion) yuan, down 352.4 billion yuan from the previous quarter, but no data about property loans was disclosed.

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