Making Banks Save – US-FOREX.US
“Bonuses are back” may be the buzz term in London’s financial district, but among regulators the more clunky “dynamic provisioning” is the watch word of the day.The system by which banks have to put aside rainy-day reserves in the good times was the norm at Spanish banks, which weathered the global credit crisis better than most, with none of the big banks needing government bailouts. BBVA and Bankinter might be much smaller than Citigroup or Bank of America, but both emerged from the crisis without having to rely on billions in taxpayer support. The regulations that kept Spain’s banks safe were mentioned several times at the British Bankers Association annual conference in the heart of London’s financial district.Adair Turner, the chairman of Britain’s Financial Service Authority said that among the “radical” changes needed for banking regulation was for capital to be made “countercyclical”-so buffers had to be “built up in good times to be drawn down in bad.”It’s an issue already being considered by the Basel Committee on Banking Supervision that sets international standards on capital adequacy and banking supervision.Spain’s system of dynamic provisioning has been touted as one of the reasons why, despite the huge rise in household and corporate defaults, its bigger banks have managed to survive without a government bailout.Reserves Saved Spanish Banks.”)Speaking at the conference, Antorio Horta-Osorio, the chief executive of Banco Santander
’s British lender, Abbey, said that this prudent approach to risk had helped the bank avoid the “follies” plaguing the rest of the banking sector: It had a capital buffer of 6 billion euros, which would allow it to absorb losses for at least the next couple of years.
Dynamic provisioning would run against the current pro-cyclical approach advocated under international banking regulations–which penalizes banks by requiring more capital or risk-weighted assets in difficult times.However, a buffer isn’t without its costs, and the pressures of having to build capital will limit the return on equity at banks. In Spain, the banks were forced to build the reserves. Unless Europe’s regulators issue a similar decree, it’s unlikely that any one bank would like to lead the pack. In better times,investors turn to quarterly results, and bankers who are compensated largely by stock returns won’t want to disappoint them.