What I Learned from a South African Banker
Every year that passes, politicians, bankers and even some financial regulators forget how illiquidity helped the 2008 financial crisis spread like wildfire.January 7
Global central bank chiefs gave lenders four more years to meet international liquidity requirements and watered down the measures in a bid to stave off another credit crunch.January 7
With the American Bankers Association being a charter member of the International Banking Federation, I get the frequent opportunity to talk with bankers from all over the world.
I have learned a lot from these exchanges; most significantly that beneath the national customs and idiosyncrasies, banking is fundamentally similar in the role it plays for its customers and communities.
Last fall, I had the pleasure of talking with a South African banker during the IBFed meetings in Johannesburg. South Africa has an interesting economic situation, straddling both developed and emerging markets and this banker had important things to say.
South Africans emphasize that with regard to banking rules, they are "rule-takers" not "rule-makers." In their view, international markets allow them little discretion when it comes to adopting the latest formulas from Basel and other Sees of financial standards. The rules set in Switzerland are applied in Soweto.
When I raised concerns that Basel capital rules would contract bank services, my South African colleague recast the issue in starker terms. Authorities could encourage growth or they could repress the banking industry, but not both. As he saw it, the authorities have, for now, chosen repression.
This was from an insightful and resourceful banker. He explained to me how the past history of racial discrimination had left many unmet lending opportunities where he grew up, in the black suburbs of Johannesburg. He knew how to work there, how to identify the good risks and had successfully led his bank into abundant good business opportunities – good for his bank and good for the customers – unlocking significant economic development with strong loans that performed well. He did not see the flood of new rules, however, as being much help for his bank or his people. Financial resources could not go as far as before, and banking flexibility was degraded.
That is worth keeping in mind as we consider the latest offering from the experts in Basel, the proposed universal rules for measuring short-term liquidity. Coming in the midst of the national debate over the Basel III capital plan, the liquidity rules are an even clearer example that maybe what happens in Basel should stay in Basel.
The idea that bankers must manage their liquidity positions is a good one. The idea that a college of experts in Switzerland can tell bankers around the world how to do it is unreasonable, and dangerous. Liquidity is a chameleon, directly affected by the local environment, which in turn is subject to change in many ways, predictable and otherwise. Just ask financial traders, such as those who were caught exposed to Greek sovereign debt (given "liquid" status under earlier Basel drafts). International experts can set uniform rules to concentrate risk in today's "liquid" instruments, but excuse reality for trumping the rules.
The Basel rules are seriously out of touch with the laws, customs and economic conditions in the U.S., yet the proposition is that banks should follow them anyway for the sake of international regulatory solidarity.
For example, the Basel liquidity plan assumes that banks will lose significant amounts of deposits when the economy becomes shaky, but U.S. banks actually gained deposits during the recession, lots of deposits, overwhelming the opportunities for good new loans. Banks have been criticized for temporarily parking those funds at the Federal Reserve until loan demand picks up. The liquidity rules would say it is a better idea to leave the money at the Fed, especially once loan demand picks up. Under the Basel plan, more liquidity means fewer loans to businesses and people and more short-term loans to the government, because loans to governments are "safer."
Reminding myself of the words of my South African colleague, why is it a good idea to make it harder for banks to serve their customers? There is a true universality in that question, coming from a banker about as far away from Wall Street as you can get.
You might reply that all bankers are alike. I would agree that among the bankers that I have known there is a common theme that draws them to a banking career: the desire to be part of economic growth, to be part of the job that banks do of bringing savings and investment together to build local and national economies.
That is what that banker in South Africa has been trying to do. That is also what bankers are trying to do in South Dakota and South Carolina.
Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.