Coming up for half a decade on from the worst of the financial crisis, efforts at strengthening the regulation of banks are still moving at a snail's pace, not least because the bankers are fighting the regulators at every turn. The Toronto Star's David Olive has a column in today's paper that tries to argue that the entire basis of most regulatory reform proposals is fundamentally misguided. Most of Olive's arguments are lifted wholesale from this much more tightly-reasoned piece by Matt Yglesias on Slate, which is in turn based on a recent book, The bankers' new clothes, by Anat Admati and Martin Hellwig*.
Rather than busting up excessively large banks or separating "utility" banking from more speculative activities, Admati and Hellwig (and hence Yglesias and Olive) believe that the real solution involves forcing banks to maintain much more capital as a cushion against losses. They suggest a capital ratio of 20-30%, which is about twice as much as even the best-capitalised banks currently maintain, and much higher than the target capital ratios that the Basel III guidelines aim to achieve by the end of the current decade.
I haven't read Admati and Hellwig's book, but I strongly suspect that David Olive's take on their ideas does not do them justice. Olive seems to believe that it would be very simple to get bank shareholders to pony up more cash, even while curbing dividend payouts (he appears to think that retained earnings are free money) and curbing the banks' riskier (but also more profitable) activities.
It seems highly unlikely that this would be true. Nobody has to own bank shares; skewing the risk/reward ratio so markedly against the equity holders would make it difficult and expensive to attract the extra capital that the banks would be required to hold. Olive doesn't seem to see this at all; Yglesias does, and acknowledges that it would "give a different shape to the real economy" by making borrowing more expensive for some (consumers, small businesses) but cheaper for others (governments, corporates). Yglesias may well be right about this, but the dislocation involved in getting from here to there, so to speak, may well be enough to deter regulators from adopting Admati and Hellwig's ideas.
I found myself a bit puzzled when reading David Olive's take on all this, because Canada avoided the worst of the financial crisis, and its banking system is seen as one of the safest in the world. I became even more puzzled when I started to look at some of the numbers Olive tosses about regarding banks' current capitalisation, numbers which seem to be the product of his own "research".
Olive says that banks maintain "microscopic" capital ratios of only 3%, and that rather than retaining earnings, they blow them out to shareholders, mainly in order to boost the share price, on which (he asserts) management's compensation is based. They then make up for the lack of capital by borrowing too much.
I just took a look at the 2012 annual report and Q1 quarterly statement for my old alma mater, TD Bank Group. Admittedly TD is an exceptionally well-run bank, but it's not atypical within the Canadian financial system -- and its numbers bear no resemblance whatever to those Olive is throwing around. Capital ratios? TD's Tier 1 ratio is 10.9% and its total capital ratio is 14.2%, far above the 3% that Olive seems to have grabbed out of thin air. Retained earnings? Well, of the C$ 6.4 billion in "income attributable to shareholders" earned by TD in 2012, only $2.6 billion was paid out in dividends. The rest, $3.8 billion or 60% of the total, was added to capital as retained earnings. Too much debt? TD's equity at book value stood at $47.5 billion at the end of fiscal 2012, against $11.3 billion in subordinated notes and debentures -- and that debt total, by the way, has been falling steadily in recent years.
There's a strong case to be made for tighter regulation of banks, but it's not helped by columnists inventing numbers in a crazed effort to show how bad the current situation is. That just makes it easier for the banks to push back. I'd be very surprised if David Olive doesn't find a stack of messages on his Blackberry from the CFOs of the big Canadian banks, looking to set him straight on a few things.
* I'm not accusing anyone of plagiarism -- credit is given where credit is due by both Olive and Yglesias.
Saturday, 16 March 2013
Friday, 15 March 2013
David Cameron disses the Pope
Egged on by who else but The Daily Mail, British PM David Cameron has renewed his tilt towards populism by taking issue with Pope Francis's views on the Falklands/Malvinas. While he was still Archbishop of Buenos Aires, His Holiness opined that the UK had "usurped" the islands. Cameron says that the Pope is wrong about this. Hey Dave, don't you know the Pope is infallible?*
Cameron cracked a laboured white smoke joke while referring to the recent referendum in which the islanders were asked whether they wished to remain a UK protectorate. In the kind of result not usually seen outside North Korea, 99.8% responded in the affirmative. Take that, Francis!
I've written about the Falklands/Malvinas before. Argentina's claim is based solely on geography, as its peoples have never inhabited the islands on a continuous basis. Even the name is French rather than Spanish in origin: it was imparted by fishermen from St Malo. The UK's claim is based on continuous occupation, but that occupation, whether Cameron likes it or not, initially took place in the era of colonialism. Now the UK attitude echoes that of Ronald Reagan when he talked about the Panama Canal: "It's ours. we stole it fair and square."
Here's the thing about that referendum result. If you take a bunch of your citizens, plunk them in a faraway place, turn that place into an armed camp and pump in prodigious amounts of taxpayers' money, how else would you expect them to vote? Before Argentina attempted to invade the islands back in 1981, the Thatcher government had actually been considering ways of accommodating Buenos Aires's demands. The invasion served to harden British attitudes, and they have shown no sign of softening even slightly in the past three decades. With UK politics starting to move into pre-election mode, it's going to take a lot more than a pronouncement from the Pope to change that.
* I'm joking. Catholic doctrine is that the Pope is only infallible when speaking ex cathedra on doctrinal matters. His opinions on the weather or on politics are no better or worse than anyone else's. Since the doctrine of infallibility was promulgated in the mid-19th century, the cumulative number of infallible pronouncements made by all subsequent Pontiffs is....one.
Cameron cracked a laboured white smoke joke while referring to the recent referendum in which the islanders were asked whether they wished to remain a UK protectorate. In the kind of result not usually seen outside North Korea, 99.8% responded in the affirmative. Take that, Francis!
I've written about the Falklands/Malvinas before. Argentina's claim is based solely on geography, as its peoples have never inhabited the islands on a continuous basis. Even the name is French rather than Spanish in origin: it was imparted by fishermen from St Malo. The UK's claim is based on continuous occupation, but that occupation, whether Cameron likes it or not, initially took place in the era of colonialism. Now the UK attitude echoes that of Ronald Reagan when he talked about the Panama Canal: "It's ours. we stole it fair and square."
Here's the thing about that referendum result. If you take a bunch of your citizens, plunk them in a faraway place, turn that place into an armed camp and pump in prodigious amounts of taxpayers' money, how else would you expect them to vote? Before Argentina attempted to invade the islands back in 1981, the Thatcher government had actually been considering ways of accommodating Buenos Aires's demands. The invasion served to harden British attitudes, and they have shown no sign of softening even slightly in the past three decades. With UK politics starting to move into pre-election mode, it's going to take a lot more than a pronouncement from the Pope to change that.
* I'm joking. Catholic doctrine is that the Pope is only infallible when speaking ex cathedra on doctrinal matters. His opinions on the weather or on politics are no better or worse than anyone else's. Since the doctrine of infallibility was promulgated in the mid-19th century, the cumulative number of infallible pronouncements made by all subsequent Pontiffs is....one.
Wednesday, 13 March 2013
Vatican's got talent
As a so-called "cradle Catholic" I've been bemused by the wall-to-wall media coverage of the current Papal Conclave. Hasn't the Church supposedly spiralled down into irrelevance in recent decades? Many of the TV channels have a little pop-up screen in the corner of their programmes, with a camera focussed on the Sistine Chapel chimney; amazingly, at least one channel (CNN) is keeping this pop-up in place even during ad breaks. The CBC's venerable Peter Mansbridge, enjoying a jolly in the Eternal City while covering the event, told his audience that he has never in his long career seen so many cameras and reporters gathered in one place.
At first I though that the interest was all down to the unusual circumstances of Pope Benedict's resignation. There has been speculation that he quit as a result of some sort of looming scandal, involving either sex or money (very Downton Abbey!), so people may be hoping to hear all the gory details once a new Pontiff is in place.
From my reading of the media, though, I now think there's a simpler and more trite explanation: the Conclave, for most people, is no more than the latest reality show. That seems a bit unbecoming for so solemn an event, but as reality shows go, the Conclave has at least two real pluses: (1) it actually is real; and (2) there's no sign of either Simon Cowell or Nicki Minaj.
Footnote, March 14: the Canadian papabile, Marc Ouellet, didn't get the job, but the ever-parochial Toronto Star has still managed to find a local angle: a Toronto businessman called Francis Pope! Who is, of course, listed in the phone book as "Pope, Francis".
At first I though that the interest was all down to the unusual circumstances of Pope Benedict's resignation. There has been speculation that he quit as a result of some sort of looming scandal, involving either sex or money (very Downton Abbey!), so people may be hoping to hear all the gory details once a new Pontiff is in place.
From my reading of the media, though, I now think there's a simpler and more trite explanation: the Conclave, for most people, is no more than the latest reality show. That seems a bit unbecoming for so solemn an event, but as reality shows go, the Conclave has at least two real pluses: (1) it actually is real; and (2) there's no sign of either Simon Cowell or Nicki Minaj.
Footnote, March 14: the Canadian papabile, Marc Ouellet, didn't get the job, but the ever-parochial Toronto Star has still managed to find a local angle: a Toronto businessman called Francis Pope! Who is, of course, listed in the phone book as "Pope, Francis".
Monday, 11 March 2013
Employment mysteries
For much of 2011 and 2012, there was a surprising disconnect between UK economic growth data and developments in the labour market. Although GDP was stagnant or even falling slightly, the economy was creating jobs quarter after quarter, with a good proportion of the new positions arising in the private sector. There was a lot of criticism at the time of the ONS's estimation methods, and suggestions that the GDP data would eventually be revised higher.
This is indeed what has happened: it now transpires that the UK never really experienced a double-dip recession, though this hasn't deterred parts of the media from continuing to talk of a potential triple dip. The growth data are particularly interesting in light of last week's estimate from the Office of Budget Responsibility, the government's "independent" forecasting body, that the Coalition's clumsy and ineffective attempt to impose fiscal austerity since 2010 has cut almost 1.5 percentage points from GDP.
Remarkably, something similar now seems to be happening here in Canada. Job creation was reasonably robust for most of 2012, yet when GDP data for the final quarter of the year were released late last month, they showed an annual growth rate of only 0.6%. Always quick to react to a single data reading, the nation's economists promptly downgraded their employment forecasts, only to be blindsided by the official employment data for February, which showed a 51,000 increase in the number employed. Employment has risen by 1.9% in the past year.
As was the case earlier in the UK, most of the new jobs in the latest Canadian data were full time, and more than half were in the private sector. Economists are fond of describing employment as a lagging indicator: for a variety of reasons*, changes in employment tend to come some months after changes in growth. That being the case, a strong increase in employment coming just a few months after a sharp slowdown in growth is surprising. As in the UK, there must be a strong likelihood that the Canadian GDP growth numbers will be revised higher in due course.
The really interesting question, of course, is why these discrepancies between growth and jobs are happening. Someone with a lot more analytical firepower than I will have to work on that one, but I strongly suspect that the techniques used by the official statistical agencies to estimate output are failing to keep up with the increasing involvement of the internet in all aspects of the modern economy.
* Companies don't fire people at the first sign of a downturn in business, in case the downturn proves temporary and they have to hire them back at higher wages later. Similarly, when demand starts to grow, companies initially try to get more output from their existing employees, and only add staff when they think the upturn is reasonably permanent.
This is indeed what has happened: it now transpires that the UK never really experienced a double-dip recession, though this hasn't deterred parts of the media from continuing to talk of a potential triple dip. The growth data are particularly interesting in light of last week's estimate from the Office of Budget Responsibility, the government's "independent" forecasting body, that the Coalition's clumsy and ineffective attempt to impose fiscal austerity since 2010 has cut almost 1.5 percentage points from GDP.
Remarkably, something similar now seems to be happening here in Canada. Job creation was reasonably robust for most of 2012, yet when GDP data for the final quarter of the year were released late last month, they showed an annual growth rate of only 0.6%. Always quick to react to a single data reading, the nation's economists promptly downgraded their employment forecasts, only to be blindsided by the official employment data for February, which showed a 51,000 increase in the number employed. Employment has risen by 1.9% in the past year.
As was the case earlier in the UK, most of the new jobs in the latest Canadian data were full time, and more than half were in the private sector. Economists are fond of describing employment as a lagging indicator: for a variety of reasons*, changes in employment tend to come some months after changes in growth. That being the case, a strong increase in employment coming just a few months after a sharp slowdown in growth is surprising. As in the UK, there must be a strong likelihood that the Canadian GDP growth numbers will be revised higher in due course.
The really interesting question, of course, is why these discrepancies between growth and jobs are happening. Someone with a lot more analytical firepower than I will have to work on that one, but I strongly suspect that the techniques used by the official statistical agencies to estimate output are failing to keep up with the increasing involvement of the internet in all aspects of the modern economy.
* Companies don't fire people at the first sign of a downturn in business, in case the downturn proves temporary and they have to hire them back at higher wages later. Similarly, when demand starts to grow, companies initially try to get more output from their existing employees, and only add staff when they think the upturn is reasonably permanent.
Friday, 8 March 2013
Spending our children's inheritance
The baby boom generation, of which your blogger is a member, shows no signs of amending its profligate ways. A study last month by TD Economics (disclosure: I worked there about 30 years ago) revealed that while younger Canadians were reining in their debts in response to dire warnings from policymakers and others, the older generation was continuing to get further into hock. Although the average level of debt among seniors is lower than for the population as a whole, the entirely predictable is starting to happen: bankruptcies among seniors are on the rise, according to official data.
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
Tuesday, 5 March 2013
Practice what you preach
The Toronto Star is a remarkable newspaper. For one thing, it's tremendously parochial -- no story is likely to receive front page coverage unless the paper can dig out a Toronto angle, however tenuous. And it's unapologetically left/liberal, constantly editorialising against unbridled capitalism, deficit reduction, the hollowing out of the Canadian economy as a result of globalisation, the erosion of workers' rights and so on. A friend of mine used to call it "Pravda", which sometimes doesn't seem like too much of an exaggeration.
So you'd think that yesterday's announcement of the loss of 55 skilled jobs in Toronto, as a result of a corporate decision to outsource, would be just the kind of story that the Star would pounce on and splash on the front page. The Star's main rival, the Globe and Mail, certainly thought so, giving the story prominence on its website.
Thing is, though, the corporation doing this dastardly deed was none other than the Star itself, which is contracting out a lot of its compositing functions in order to save money. The Star only found room to print the story in a small column at the bottom of the back page of its business section -- and in today's paper, that whole section, which is normally free-standing, was tucked in after the hockey scores, at the back of the sports section. How strange.
So you'd think that yesterday's announcement of the loss of 55 skilled jobs in Toronto, as a result of a corporate decision to outsource, would be just the kind of story that the Star would pounce on and splash on the front page. The Star's main rival, the Globe and Mail, certainly thought so, giving the story prominence on its website.
Thing is, though, the corporation doing this dastardly deed was none other than the Star itself, which is contracting out a lot of its compositing functions in order to save money. The Star only found room to print the story in a small column at the bottom of the back page of its business section -- and in today's paper, that whole section, which is normally free-standing, was tucked in after the hockey scores, at the back of the sports section. How strange.
Saturday, 2 March 2013
Clouds over Canada
What with the endless problems in the Eurozone, the UK's ham-fisted attempts at austerity and the fiscal woes in the US, the state of Canada's economy hasn't been getting much attention in the international media in recent times. After all, good news is no news, right? Canada's banks made it through the financial crisis unscathed, and energy development in the western provinces is making up for slackness elsewhere, so what's to worry about?
Quite a bit, as it happens:
* All is not well in the energy patch. Rising shale oil production in the US is cutting into demand for Alberta oil sands crude, which is relatively heavy. As a result, producers are being forced to sell their product at hefty discounts to prevailing world prices. This has pushed the Province of Alberta, where the phrase "saving for a rainy day" seems never to have been heard, into a budget deficit.
* The Keystone XL pipeline, which would provide an improved outlet for oil sands product, remains in doubt, even though the most recent State Department assessment seems to suggest it would not add to pollution levels. Alternative schemes to move Alberta oil to Eastern Canada through existing pipelines are facing equally determined opposition from environmentalists.
* Although it's been weakening in recent weeks, the Canadian dollar has been at or above par with the US dollar for several years, which has put renewed pressure on the manufacturing sector. That sector was dramatically "hollowed out" years ago as a result of free trade and globalisation, and the strong exchange rate seems to be finishing the job. This is particularly significant for Ontario, the most populous province in the country, which is now bizarrely regarded as a "have not" jurisdiction!
*Despite low interest rates, the housing market in most parts of the country is going nowhere, although Vancouver remains an exception. One thing low rates have done is to encourage frenzied condominium building in Toronto, which has more skyscrapers under construction than any city in the world apart from Shanghai. It bears all the hallmarks of a disaster waiting to happen, especially when interest rates eventually start to rise.
*Lastly, the imminent departure of global central banking superstar Mark Carney from the Bank of Canada for the bigger job at the Bank of England adds a fresh layer of uncertainty at an inopportune moment. It looks as though an internal candidate, deputy governor Tiff Macklem, will get Carney's job, but a search firm is currently looking around for suitable outside candidates for the government to consider.
Given these headwinds, it's no surprise to learn that the Canadian economy grew at only a 0.6% annualised rate in the final quarter of 2012, with particular weakness evident in the month of December. It all adds up to a challenging backdrop for the Federal budget in a few weeks time. You might think that the government would want to avoid making the economy's problems any worse at such a juncture, but it seems you'd be wrong. Cheerful, potato-faced Federal Finance Minister Jim Flaherty says that because the slowdown in the economy has reduced revenues, he's going to have to look at further spending cuts in order to get the government's deficit reduction plans back on track. He can hardly have failed to notice how that approach has backfired badly in the UK, but then, nobody ever learns from other people's mistakes, do they?
Quite a bit, as it happens:
* All is not well in the energy patch. Rising shale oil production in the US is cutting into demand for Alberta oil sands crude, which is relatively heavy. As a result, producers are being forced to sell their product at hefty discounts to prevailing world prices. This has pushed the Province of Alberta, where the phrase "saving for a rainy day" seems never to have been heard, into a budget deficit.
* The Keystone XL pipeline, which would provide an improved outlet for oil sands product, remains in doubt, even though the most recent State Department assessment seems to suggest it would not add to pollution levels. Alternative schemes to move Alberta oil to Eastern Canada through existing pipelines are facing equally determined opposition from environmentalists.
* Although it's been weakening in recent weeks, the Canadian dollar has been at or above par with the US dollar for several years, which has put renewed pressure on the manufacturing sector. That sector was dramatically "hollowed out" years ago as a result of free trade and globalisation, and the strong exchange rate seems to be finishing the job. This is particularly significant for Ontario, the most populous province in the country, which is now bizarrely regarded as a "have not" jurisdiction!
*Despite low interest rates, the housing market in most parts of the country is going nowhere, although Vancouver remains an exception. One thing low rates have done is to encourage frenzied condominium building in Toronto, which has more skyscrapers under construction than any city in the world apart from Shanghai. It bears all the hallmarks of a disaster waiting to happen, especially when interest rates eventually start to rise.
*Lastly, the imminent departure of global central banking superstar Mark Carney from the Bank of Canada for the bigger job at the Bank of England adds a fresh layer of uncertainty at an inopportune moment. It looks as though an internal candidate, deputy governor Tiff Macklem, will get Carney's job, but a search firm is currently looking around for suitable outside candidates for the government to consider.
Given these headwinds, it's no surprise to learn that the Canadian economy grew at only a 0.6% annualised rate in the final quarter of 2012, with particular weakness evident in the month of December. It all adds up to a challenging backdrop for the Federal budget in a few weeks time. You might think that the government would want to avoid making the economy's problems any worse at such a juncture, but it seems you'd be wrong. Cheerful, potato-faced Federal Finance Minister Jim Flaherty says that because the slowdown in the economy has reduced revenues, he's going to have to look at further spending cuts in order to get the government's deficit reduction plans back on track. He can hardly have failed to notice how that approach has backfired badly in the UK, but then, nobody ever learns from other people's mistakes, do they?
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