The AFP survey, which can be accessed in full here, confirms that 12 months on from the US ‘fiscal cliff’ issue that was holding back hiring and investment by American corporates, the continuing political uncertainty and lack of initiatives on tackling the country’s deficit are still eroding its economic growth prospects.
The mood reflected in the survey reflected that struck in the speech given by Sheila Bair, former chairman of the US Federal Deposit Insurance Corporation (FDIC), who was appointed for a five-year term in June 2006 by George W Bush, As AFP chairman Susan Glass noted in her introduction, Bair therefore presided over a tumultuous period in US economic history. Bair added that in the depths of the 2008-09 financial crisis, the FDIC faced a continuing struggle to convince a sceptical media that it was not about to run out of funds.
More recently, she had been on an “informative trip” to Malaysia and spoken at a conference there. “They’re very anxious about the current [political and fiscal] situation in the US and also appalled by the spectacle of Congress squabbling over the debt ceiling,” Bair told delegates. “Let’s hope that Congress can now redeem itself and start doing its job.”
Bair’s experiences, as one of the main players in efforts to repair the economy in 2008, are recounted in her recent bestseller, entitled ‘Bull ByThe Horns’. She noted that the words of Confucius aptly described the lessons of the crisis: “Study the past if you would define the future” and financial regulation always appeared to be destined to repeat the same lessons.
Five years on from the crisis, the flaws of Basel II – agreed in the late Nineties and implemented in 2004 – were all too obvious, particularly the assumption that banks were sophisticate enough to calculate the riskiness of their assets. “Fortunately that was an attitude that the FDIC was already resisting before I joined,” said Bair.
Added to this were the fundamental mistakes of the government permitting excessive leverage to maintain economic growth and the deterioration in lending standards over the period leading up to the 2008 financial near-meltdown. “The Federal Reserve refused to set lending standards as it didn’t want to restrain the market,” Bair added. The regulation of derivatives – or lack thereof – was a further contributing factor as it concentrated and magnified the losses that eventually resulted.
Had the problems that led to the crisis been solved five years on? Banks were better capitalised and their risk-based ratios had certainly improved. However, the tremendous complexities of the risk-based model approach made it “almost impossible” to calculate capital ratios and an appropriate figure. “It’s difficult for regulators to assess what’s risky and what isn’t,” she suggested.
Worryingly, Bair detects signs that the seeds of a further boom to bust are being sown. Regulators are again succumbing to pressure and making borrowing easier without the necessary safeguards and investors are desperate for yield, thanks to the prolonged period of low interest rates. The approach to derivatives was faulty, with insufficient regulation of the clearing houses.
Confucius also had an apt saying for current policy, she suggested: “If a man takes no thought about what is distant, he will find sorrow close at hand.” Bair believes that an accommodative monetary policy that was timely and appropriate in 2008-09 has now been maintained for far too long and penalises savers while rewarding borrowers.
“Both our bond market and stock market are inflated-indeed the stock market goes up when the news is bad as it means the tapering off of quantitative easing [QE] will be put back further. The result is that income inequality in the US has worsened since the crisis as it’s the rich who benefit from the inflated value of stocks and bonds.”
It also results in a quest for yield, as evidenced by pension funds abandoning traditional investments and moving into alternative, riskier classes. “Corporate investment is also put on hold as it’s difficult to tell how genuinely healthy the economy is and how much is owed to QE.”
Bair ended by saying that her political sympathies remained Republican, but nonetheless: “Congress get your act together and let’s have a proper fiscal policy that includes fundamental tax reforms.
“We still have a dysfunctional political system. Washington needs to hear not only from the financial sector, but also the non-financial sector – and the users of credit as well as the providers.” Regulators should also ease back on their efforts to micromanage financial institutions, which in future means allowing any of them unable to manage their risk to fail rather than being bailed out again.
Repercussions of Basel III
One of the best-attended conference sessions earlier in the day was entitled ‘Basel III: What Does it Mean for You?” Moderator Lisa Rossi, global head – structured liquidity products at Deutsche Bank admitted that there had been doubts expressed about whether the topic would attract many delegates.
The latest version of the capital adequacy regime, developed by the Basel Committee on Banking Supervision (BCBS) to strengthen the regulation, supervision and risk management of the banking sector, is developing into a bewildering complex beast however. Rossi noted that the Glass-Steagall Act of 1933 had amounted in total to 33 pages of regulations, while 55 years later Basel I was slightly shorter at 30 pages. By contrast, Basel II in 2004 had swelled to 347 pages and Basel III is already at 616 pages and is still evolving.
Three years ago, BCBS secretary general Stefan Walter acknowledged that the new global liquidity standard would raise the cost of funding in normal times and among the effects of Basel III are a change in the value of deposits as well as in access to and pricing of bank credit. It also creates a need to tighten cash forecasting and enhance risk management.
David Tademaru, executive director and assistant treasurer for Ingram Micro, examined the impact of Basel III on corporates, which so far has been relatively muted. However, legislation typically affected treasury priorities and more demanding leverage ratios required of banks would be felt by their corporate customers. He made the following recommendations to corporate treasurers:
- Review your banking relationships: What progress have your banks made in meeting Basel II’s metrics? Do you have the right bank group to meet your organisation’s needs?
- Consider your industry: How do your specific credit needs fit within the bank’s balance sheet?
- Start negotiations early with your bank: Where do you stand – and where do you need to be?
- Be prepared to be flexible in adapting to regulatory impacts: The requirements of Basel III might take a long time to be finalised, making the ultimate costs difficult to ascertain in the near term.
The FP&A remit
Among the day’s other sessions was a look at the evolution of the financial planning and analysis (FP&A) individual within the organisation.
Introducing the session, Carmen Turner, financial analysts in the sales and finance team at McGraw Hill Education, said that the FP&A role encompassed a number of titles, including financial analyst, budget analyst and business analyst. In each case their role was to provide essential information to the organisation that allowed for the taking of sound business decisions.
Co-presenter John Fruin, business analysis manager and agricultural co-operative Growmark, offered his own definition: “An effective FP&A analyst develops and presents analyses, takes initiatives on projects and contributes both as a team member and leader.”
The overall theme of the session was how much the FP&A role has developed. Originally one where much time was spent on non or low-value added activities, routine and simple duties with no real decision making and typically located in a back office it has steadily grown, in line with General Electric’s legendary chief Jack Welch’s observation: “An organisation’s ability to learn and translate that learning into action rapidly is the ultimate competitive advantage.”
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