By GRAHAM FROST 13/11/2009
This week I was at the Houses of Parliament for a presentation by Eric Rosengren, President of the Federal Reserve Banks of Boston, USA. The meeting was kindly organised by the European Economics and Financial Centre. I was keen to hear his views on the likely shape and timing of the Federal Reserve’s exit strategy from quantitative easing (QE) and future oversight of the banks. Although there was no clear answer to those questions, there were some interesting points made;
The crisis was at least partially due to globalisation and an increased size of multi-national banks coupled with greater complexity of their operations. A big bank in trouble in its home country inevitably reduces activities in another, thereby transmitting the problem internationally. There simply was no robust infrastructure in place to deal with this.
Rosengren pointed out that by 2008 the three largest US banks’ assets represented over 40%of GDP. If you think that was scary, then he points out that the three biggest banks in the UK-they had grown to over 400% of GDP! Of course, these numbers may be distorted by international activities but size is a big issue because if one of these goliaths gets into trouble, the host nation (or taxpayer) simply cannot afford to bail it out. His personal view is that banks need ‘living wills’, automatic dividend cuts, fatter capital buffers in future.
Our view
One thing is certain-banks will be shrinking their balance sheets or raising capital for a long time. The more shaky the bank, the faster it will shrink its balance sheet. That means reduced lending rather than the expansion that we actually need right now.
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