Better Banking (eBook)

Adrian Docherty and Franck Viort have, in aggregate, 40 years of experience serving and advising the financial services sector on strategic issues, in a variety of economic conditions and in many different countries around the world. Their professional focus is on helping to improve the financial management and risk performance of banks and insurance companies. Better Banking is their first book, though their views are regularly quoted in the press and they are frequent presenters at industry conferences. Adrian holds a master's degree from Cambridge University and lives with his wife, son and daughter in Kent. Franck has a degree from Sciences-Po in Paris and an MBA from the University of Chicago and lives in London with his wife and three daughters.

Acknowledgements xi

1 Introduction 1

1.1 Overview and Objectives 1

1.2 Quick Start Guide to Banking Concepts and Regulation 4

2 The Global Financial Crisis 7

2.1 From Deregulation to dotcom Crash 7

2.2 The Seeds of a Crisis 9

2.3 "Why Didn't Anyone See This Coming?"
14

2.4 The Beginnings of a Crisis 17

2.5 The Crisis Intensifies 20

2.6 Meltdown: The Lehman Bankruptcy 21

2.7 Massive Intervention Internationally 23

2.8 Sovereign Crises 29

2.9 Aftershocks and Skeletons in the Cupboard 32

2.10 Who is to Blame? 34

3 Methodologies and Foundations 37

3.1 How do Banks Make or Lose Money? 37

3.2 What's a Bank Worth? Key Issues in Accounting for
Banks 41

3.3 What is Risk? 47

3.4 What is an RWA? 55

3.5 What is Capital? 61

3.6 What are Liquidity and Funding? 68

3.7 What is a Derivative? 84

3.8 Mark-to-Market and Procyclicality 90

3.9 Role of Regulation, Supervision and Support 96

3.10 Ratings Agencies and Credit Ratings 101

3.11 Analysts, Investors and Financial Communication 109

4 Regulation of the Banking Industry 113

4.1 The Relevance of Bank Regulation and Supervision 113

4.2 Regulation and Supervision of the Banking Industry Prior to
"Basel I" 113

4.3 The Basel Capital Accord aka "Basel I" 117

4.4 Basel II 122

4.5 Basel III 141

4.6 Resolution Regimes 163

4.7 Other Current Regulatory Workstreams 171

5 Case Studies 175

5.1 RBS 176

5.2 Dexia 179

5.3 HBOS 184

5.4 HSBC 189

5.5 Bear Stearns 192

5.6 Merrill Lynch 196

5.7 AIG 200

5.8 JP Morgan 207

5.9 Barclays 213

5.10 UBS 217

5.11 Northern Rock 221

5.12 Bankia-BFA 223

5.13 Australia 228

5.14 Canada 233

5.15 Summary of "Lessons Learned" from the Case
Studies 236

6 Objectives and Design Principles 239

6.1 Free Market versus State Capitalism 240

6.2 Are There Alternatives to Banks? 242

6.3 Benefi ts and Limitations of Finance 250

6.4 How Much Risk Can We Tolerate? 251

6.5 The Role of Regulation and Supervision 254

6.6 The Role of "the Market" 256

6.7 Conclusions: Proposed Objectives and Design Criteria 258

7 A Blueprint for "Basel IV" 259

7.1 Risk Management 261

7.2 The Guardian Angel 269

7.3 Human Capital 275

7.4 Governance 287

7.5 Capital 291

7.6 Liquidity and Funding 299

7.7 The "Pillar 2" Mindset 303

7.8 Glasnost: Market Discipline and "Pillar 3"
311

7.9 Industry Structure 313

8 Challenges 327

8.1 Industry Entrenchment 327

8.2 Human Behaviour 329

8.3 Performance Management for Good Risk Management 332

8.4 Timing 333

8.5 A Positive Challenge: Technological and Social Progress
333

9 What Next? A Call to Arms 335

Glossary & Jargon Lookup 339

Disclaimer Regarding Excerpts from S&P Materials 349

Index 351