Stability in global banking: Part 2

With a financial crisis raging in Europe and continued uncertainty in the US, we asked our Zintro experts if the global banking system is any safer three years after the financial crisis.

Miguel SdePedro, a financial advisor, says that the global banking system is far from being safe. “Regulators of the leading economies need to agree on a number of key standards: capital adequacy, liquidity risks, trading books, and derivatives. Banks taking deposits from households and private individuals must be kept in line to avoid risks that may compromise their deposits base,” he says. “The banking industry must require more transparency in disclosing their financial positions and valuation of assets where periodic stress tests are carried out under stringent and agreed upon methodologies amongst global regulators, or at least the G20. These results must be disclosed on banks’ websites and be a component of their ratings. In my opinion, households, private individuals, and the SME sectors are most exposed to the risks that banks undertake as these sectors are the ones with lower bargaining power versus the banks.”

Jose Linares Fontela, a consultant and market researcher, observed three patterns of behavior in many financial institutions of the developed countries:

(a) They assumed that the risk would be lower if loans were accumulated in bigger portfolios so that applicant’s qualification were not important because default could be compensated by a higher rate of interest; therefore, the lending could be done using tools like credit scoring with a low risk;

(b) They took authority away from loan officials to approve or reject loan applicants and passed this authority to an automatic qualification system for applicants and a risk department to approve the bigger loans; and

(c) Greediness brought on high rates of interest to compensate for defaults, forgetting that all loan portfolios have a critical mass.

“Banking is a prudential issue, and those countries and institutions that avoided the financial engineering and other fancy issues and based lending on traditional prudential issues are in good shape,” he says. “The microlending sector, one of the best lending models, is moving though the crisis and has not stepped up delinquencies.”

Fontela points out that underdeveloped countries’ financial industries that are based on strict regulation (Bank Superintendencies in Latin America: Chile, Colombia, and El Salvador) are not in crisis and have been able to cope with the crises. “In Sweden, the bank Svenska Handelsbanken, a retail bank, applied the bell tower principle: you should only lend to people who are within the sight of the bell tower in the town. This bank gave full authority to loan officers and did not suffer during the crises. Canadian regulators also tended to avoid the crisis,” says Fontela.

The big question is: Have financial institutions adjusted and changed to meet the demands of the new financial world? Fontela says no, they are operating with the same mentality and greediness. “They are trying to recover loans in an aggressive manner, creating a caustic situation,” he says. “You cannot collect in the same way from an worker as you do with a small or medium size enterprise. The attitude of the financial institutions is that the debtor should not have asked for the loan, putting all the responsibility on the delinquents when everyone knows that the last word on lending is on the lender’s side.”

The traditional financial sector forgets that new competitors are created by crises, points out Fontela, such as Internet banks and informal group lending. “We could see a situation where once countries overcome the financial crisis, people will not come back to the financial institutions that treated them badly. This will weaken the traditional global banking industry,” he says.

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