Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘banking’ Category

American banks: Contagion? What contagion?

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American banks have been strangely immune to Europe’s crisis

[Greg Ip] Dec 3rd 2011 | WASHINGTON, DC | from the print edition

THE financial crisis of 2008 mowed down banks in America and Europe with equal abandon. Not so this year’s upheaval. European banks, struggling to fund themselves, are tightening credit. American banks are eager to lend, albeit not to Europe. Their loan growth this quarter will the fastest since mid-2008, reckons Nomura, a bank.

This is partly because America’s banks are reasonably healthy. They have significantly bolstered capital since 2008 and now boast core capital of 9% of assets, well above regulatory requirements. While many European banks held dangerous quantities of American mortgages in 2008, American banks today have relatively little exposure to Europe’s troubled sovereigns. For the five biggest, total exposure to Greece, Ireland, Italy, Portugal and Spain (net of hedges) ranges from $16 billion at Citigroup, or 14% of core capital, to $2.5 billion at Goldman Sachs, or less than 5%, according to Peter Nerby of Moody’s, a credit-rating agency. (But if France gets into trouble, that would be a far bigger problem.)

Yet the least appreciated virtue of America’s banking system is that it is drowning in dollars, the byproduct of the Federal Reserve’s efforts to kickstart the economy through “quantitative easing”. Read the rest of this entry »


Written by gregip

December 1, 2011 at 1:36 pm

Posted in banking

Financial reform in America: A decent start

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A somewhat clumsy bill is hardly a panacea, though it fixes some important things

Jul 1st 2010

IT IS touted as the biggest overhaul of American finance since the Great Depression. The 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act, now nearing the end of its odyssey through Congress, tackles almost every aspect of American finance from municipal bonds to executive pay. Its success, however, rests on a simple question: does it make another crisis significantly less likely?

  Read the rest of this entry »

Written by gregip

July 1, 2010 at 2:52 pm

The Senate financial-reform bill: Maul street

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May 13th 2010 | WASHINGTON, DC
From The Economist print edition

Bit by bit, things worsen for the financial industry

Lincoln smiles, banks blanch

[Greg Ip] THE American Senate is supposed to bathe radical proposals in a breeze of moderation and reason. The opposite seems to be happening with the financial-reform bill. As it makes its way through the legislative process the bill has become progressively more hostile to Wall Street. Among the hundreds of amendments being proposed on the Senate floor are an even stricter ban on proprietary trading than originally envisaged, caps on debit- and credit-card “interchange” fees, higher deposit-insurance fees for big banks, and (potentially most serious of all) the imposition of fiduciary duties on marketmakers. Read the rest of this entry »

Written by gregip

May 13, 2010 at 4:00 pm

America’s economy: Time to rebalance.

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A special report on America’s economy

Time to rebalance America’s economy is set to shift away from consumption and debt and towards exports and saving. It will be its biggest transformation in decades, says Greg Ip

Note: This is a nine-part, 14 page report. You can read the entire thing at this blog post or on The Economist’s web site here.

Mar 31st 2010 | From The Economist print edition 

STEVE HILTON remembers months of despair after the collapse of Lehman Brothers in 2008. Customers rushed to the sales offices of Meritage Homes, the property firm Mr Hilton runs, not to buy houses but to cancel contracts they had already signed. “I thought for a moment the world was coming to an end,” he recalls. 

In the following months Mr Hilton stepped up efforts to save his company. He gave up options to buy thousands of lots that the firm had snapped up across Arizona, Florida, Nevada and California during the boom, taking massive losses. He eventually laid off three-quarters of its 2,300 employees. He also had its houses completely redesigned to cut construction cost almost in half: simpler roofs, standardised window sizes, fewer options. Gone were the 12-foot ceilings, sweeping staircases and granite countertops everyone wanted when money was free. Meritage is now catering to the only customers able to get credit: first-time buyers with federally guaranteed loans. It is clawing its way back to health as a leaner, humbler company. 

The same could be said for America. Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return. 

Instead, America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.  Read the rest of this entry »

Reregulating finance: In praise of Doddery

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At last a decent effort to tackle the problem of “too big to fail”

Mar 18th 2010 | From The Economist print edition

[Greg Ip] IN LATE 2008 the American government threw its weight behind its biggest financial institutions to avert a systemic meltdown. It worked. The banking crisis has largely passed, but the guarantees (many of them implicit ones) remain—and therein may lie the seeds of another crisis. America’s financial system is now dominated by a few dozen firms that are assumed to be too big to fail. The danger is that they will in the coming years exploit that assumption to add leverage, girth and risk, leading to another collapse and more bail-outs.

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Written by gregip

March 18, 2010 at 4:00 pm

Financial reform in America: The hand of Dodd

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The Senate bill is finally published

Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition

 Dodd bandages things up

[Greg Ip] CHRIS DODD, the soon-to-retire chairman of the Senate Banking Committee, has staked his legacy on overhauling America’s financial regulations. If he fails, it won’t be for lack of trying.

On March 15th Mr Dodd unveiled a sweeping proposal to rearrange the duties of America’s financial regulators while creating new powers and authorities to sniff out and squelch the risks that brought on the financial crisis. This is not the first reform blueprint: the House of Representatives has passed its own bill, the Treasury issued proposals last year, and Mr Dodd himself had already unveiled one, aborted draft of the Senate bill. This version, however, is the first to reflect substantial input from Republicans, whose support is necessary to reach the 60-vote margin needed in the Senate for the bill to become law.

The causes of the financial crisis are countless, and the 1,336-page bill takes aim at most of them, from credit-rating agencies to derivatives. But the two most sensitive proposals are its plans to deal with big, risky firms, and the creation of a new body to protect consumers.

To curb risks to the financial system, Mr Dodd would create a Financial Stability Oversight Council composed of regulatory chiefs who can designate any big financial firm as systemically important. That would put it under the eye of the Federal Reserve. Republicans have justifiably worried that designating any firm as systemically important would encourage markets to assume it is too big to fail, making it cheaper for the firm to borrow.

Mr Dodd’s bill seeks to make size unappealing by requiring firms with more than $50 billion in assets to fund a resolution kitty to deal with failing firms, also worth $50 billion. And it opens the door to the adoption of Barack Obama’s “Volcker rule”, which would restrict banks and other Fed-regulated financial companies from proprietary trading and sponsorship of hedge funds and private equity.

More importantly, Mr Dodd has also made the resolution process deeply unpleasant. If a failing firm were deemed a threat to the system, the Fed, the Federal Deposit Insurance Corporation and the Treasury, with the agreement of three bankruptcy judges, could impose an “orderly liquidation” on the firm, forcing shareholders and unsecured creditors to take losses. Such a resolution mechanism has long existed for banks but not for other big financial companies or for bank-holding companies.

It may prove unworkable, of course. The threat of being wiped out in bankruptcy could cause creditors to flee both the troubled firm and any firms like it, precisely the sort of panic the resolution regime is meant to avoid. “In a severe financial crisis it will be too terrifying for politicians and bureaucrats to use” the new process, predicts Douglas Elliott of the Brookings Institution. Instead, he says, they will resort to ad hoc measures as they did in 2008.

Less important but much more controversial is the issue of consumer protection. Democrats want to take that job away from bank regulators and give it to an independent agency. Republicans fear such an agency would kill off legitimate products and circumscribe banks’ financial health. Mr Dodd’s clunking compromise is to place a Consumer Financial Protection Bureau inside the Fed (where it gets a chunk of the Fed’s budget), make its director a presidential appointee and allow the oversight council to overrule its decisions.

There are other compromises, too. Mr Dodd had originally planned to merge America’s four overlapping bank regulators into one. He has given up that laudable fight. Just the hapless Office of Thrift Supervision will disappear. The Fed will lose authority over smaller banks—a move it opposes—while retaining it over large bank-holding companies. The bill also includes politically motivated loopholes: banks with less than $10 billion in assets will be spared the attention of the new consumer-protection bureau, though they are hardly paragons of virtue. They have some of the highest overdraft fees, says Michael Calhoun of the Centre for Responsible Lending, a consumer-advocacy group.

Despite Mr Dodd’s contortions, no Republicans have yet said they will support the bill. Modest concessions may entice Bob Corker of Tennessee and Judd Gregg of New Hampshire to vote for it. But the final product could then be unacceptable to liberal Democrats. And if Mr Dodd shifts left to bridge the gaps between his bill and the House’s, any Republican support could quickly melt away. With time running out before attention turns to mid-term elections in November, Mr Dodd’s place in history is still in the balance.

Written by gregip

March 18, 2010 at 1:55 pm

The Federal Reserve: Back from the Fed

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The central bank loses a vice-chairman but starts to regain its standing

Mar 4th 2010 | WASHINGTON, DC | From The Economist print edition

 Kohn and Bernanke, no mugs

[Greg Ip] THE Federal Reserve, accused by critics of monetary and regulatory malpractice, has seen its standing plummet. The House of Representatives has passed one bill to audit its monetary decisions and proposed others to strip it of regulatory duties. Almost a third of the Senate voted against confirming Ben Bernanke to a second term as chairman.

It appears, however, that its rehabilitation has begun. As part of negotiations on a financial-reform bill, Chris Dodd, chairman of the Senate Banking Committee, is considering a proposal that would let the Fed retain most of its regulatory duties. Mr Dodd originally wanted to take oversight of banks away from the Fed and other regulators and give it to a new body. He wanted to hand oversight of consumer protection to another new creation, the Consumer Financial Protection Agency. Read the rest of this entry »

Written by gregip

March 4, 2010 at 4:00 pm