The Economist: Banking

• Economics focus: Banks need more capital
  

  In a guest article, Alan Greenspan says banks will need much thicker capital cushions than they had before the bust

  GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis.

  For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.” ...

• Bank regulation: Save yourselves
  

  National regulators are looking after number one

  THE casualty list from the credit crisis does not stop at investment banks and Iceland. The idea of the international bank is also coming under pressure. The argument that being in lots of countries diversifies risk looks thinner now that the downturn has the world economy in its grip. A brace of regulatory initiatives also suggests that national authorities have become much more focused on their own interests.

  The Swiss Federal Banking Commission has released details of its beefed-up capital regime, which will help to restrain growth in assets when times are good. The biggest Swiss banks, UBS and Credit Suisse, will be subject to higher risk-weighted capital requirements and to a new leverage ratio of at least 3%, which caps the amount of total assets that a bank can hold regardless of the risk they entail. ...

• Investment banking: Wall Street's annus horribilis
  

  Next year will be little better than this one for investment bankers. Their long-term future is none too bright either

  IT IS scant consolation to the thousands who have lost their jobs in finance, but the next generation wants to be better prepared. Some 200,000 students have signed up to play “Wall Street Survivor”, an online stockmarket-simulation game.

  Investment bankers are also focused on survival, but in the real world. Of Wall Street’s five big securities firms, only Goldman Sachs and Morgan Stanley remain. After an infusion of government capital they have become banks and are now trying to work out how—even whether—they will make money again. ...

• Iceland: Cracks in the crust
  

  Iceland’s banking collapse is the biggest, relative to the size of an economy, that any country has ever suffered. There are lessons to be learnt beyond its shores

  ATOP a hill near Reykjavik’s old harbour is a bronze statue of Ingolfur Arnarson, the first Nordic settler of inhospitable Iceland. It overlooks a bunker-like building: the central bank, headed by David Oddsson, a man who more than 1,100 years later has shown similar survival skills. Before chairing the central bank’s board of governors, Mr Oddsson was prime minister for more than 13 years, a record, during which time Iceland became one of the richest countries in the world. For years he was Iceland’s most popular politician, privatising most of the banking system with a Thatcherite zeal and floating the currency, the krona.

  But the collapse of the krona and nationalisation of the country’s three largest banks in early October, which forced the country to secure help from the IMF, have left Iceland’s economic miracle and Mr Oddsson’s reputation in tatters. For weeks, protesters have gathered in Reykjavik’s main square each Saturday calling for his removal from office. On the chilly afternoon of December 1st a few hundred of them, shouting “David out, David out”, gathered at the Arnarson statue and marched down the hill to the central bank. In the lobby, they were met by riot police, who eventually defused the situation. ...

• Year-end funding: Wall Street's pawnbrokers
  

  For bankers, it is just as well Christmas comes but once a year

  MONEYMEN may be hoping for some rest as an atrocious 2008 draws to a close, but for bank treasurers the “turn” is the most fretful time of year. They are often holed up in the office, frantically trying to balance the books as their colleagues head off to New Year’s Eve parties. This year is likely to be especially nerve-racking.

  Liquidity always tightens in late December, when markets are closed and banks tidy up their balance-sheets. This year they will be more determined than ever to be well-groomed when the year-end accounting snapshot is taken. ...

• Corporate lending: Waiving or drowning?
  

  Even big firms are finding it tough to secure credit from the banks

  CONVENTIONAL wisdom says that it is better to be a large company than a small one when credit is tight. Bigger firms have more room for manoeuvre: they have access to more types of funding, they have more fat to cut, and they have greater bargaining power with lenders. Even so, life is getting ever more uncomfortable for the bigger beasts of the corporate jungle.

  According to the Federal Reserve’s most recent lending survey, American banks are tightening terms more aggressively for bigger firms than for tiddlier ones (see chart). Lenders are more cautious than they have been at least since 1990. The story among European banks is similar. Lenders in emerging markets can be more suspicious of multinational firms than they are of locals. “We just don’t know what they’ve got on their balance-sheets back home,” says one bank boss in Africa. ...

• Community banking: Filling the gap
  

  Between high street and skid row there is work to be done

  CONSUMERS and small traders fed up with their high-street banks tend to despise the humble credit unions—financial clubs owned and run by their members—as an alternative, dismissing them as little more than a leg-up for the very poor. Many unions were started in people’s homes, and a decade ago a quarter of them were still run from there.

  But times are changing. The credit crunch has vividly exposed the gap in the financial infrastructure between the dominant high-street banks and bottom-feeding pawnbrokers and loan sharks. The government has tried to address the problem by asking big banks—especially those such as Royal Bank of Scotland (RBS), Lloyds TSB and HBOS in which it has (or will soon have) a hefty shareholding—to be nicer to small businesses and mortgage borrowers. On December 3rd Gordon Brown snatched headlines when he announced that eight big lenders had agreed to let struggling borrowers (those made redundant, for instance) defer part of their mortgage payments for up to two years, thus reducing the likelihood of repossession. The Treasury will underwrite the risk. ...

• Interest rates: Scissors and stone
  

  The banking crisis is blunting the effect of rate cuts

  THE Bank of England, established in 1694, has never set the official interest rate below 2%. On December 4th it tumbled to that historic floor, last seen in 1951, as the bank cut the base rate by a full percentage point, from 3% to 2%.

  The step had been widely expected in the City, but it still marked another extraordinary reduction in the official interest rate, which as recently as early October stood at 5%. Yet though the decision brings hope it also conveys fear. The Bank of England is doing its utmost to cushion the economy from a bumpy downturn. But the scale of its action also shows how worried it is about a pernicious recession stemming from a traumatised banking system. ...

• Banks and the real economy: Arm's length
  

  How hard should the state lean on banks to lend?

  “OUR advice to members is don’t go to your bank,” says Stephen Alambritis at the Federation of Small Businesses. “They’ll assume you’re in trouble” and reduce your credit line, he cautions. In a poll by the F