Deutsche Bank’s CEO Josef Ackerman touched off a storm a few weeks ago as chair of the Institute of International Finance when a working paper there suggested revisions to mark-to-market because values in an illiquid market “results in valuations that do not provide a true picture of the financial positions of the firms.” Meanwhile the UK FSA has chimed in, saying it may consider employee compensation plans when judging the risk of an institution. Ouch. More risk, higher capital requirements?
Do large cash bonuses lead to outsized risks? (one prelimary step might be to look at risk adjusted returns which apparently JPMorgan already does. And they also came through the current problems pretty well … hmm) which the ICF seems to be in favour of. The FT thinks the reforms might take hold because ramifications from the banking crisis have extended far beyond the investment banks.
Banks worry that the first change will be that it will lose its best people. Regulation could help there, and coordination among the major financial centers could keep traders from hopping oceans to find a bank that continues to pay big bonuses.

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According to research analyst Monica Schulz, US-based hedge funds are working closely with prime brokers to enter new markets and expand internationally. For TABB Group’s May chart of the month, which draws from and follows on TABB Group Hedge Funds 2008: Perspectives on Prime Brokerage, Volatility and Expansion, its fourth annual benchmark industry study, Schulz says that nearly 40% of hedge funds plan to expand their investments into new regions over the next two years. Many of these funds will support those expansions by opening new offices abroad.

The onslaught of the locusts?

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After lamenting the lowest common denominator approach taken by Sepa and the loss of functionality of its credit transfer and direct debit instruments compared to existing domestic instruments, corporates are taking the matters in their own hands.

Keen to avoid a “mini Sepa”, the French Association of Corporate Treasurers (AFTE) announced in its latest newsletter it had created a pan-European working group on the subject within the European Associations of Corporate Treasurers (EACT), which represents 4,600 companies in 17 countries.

The working group’s purpose is to study and propose “either a new product, or changes to the SCT or SDD, like an Additional Optional Service, in order to cover the needs that are necessary to all and not supported by current versions” of Sepa instruments.

The group includes representatives of all parties involved: corporates, public services, banks and consumers. The idea is to analyse all national instruments to be discontinued and see whether they have common characteristics to avoid the development of strictly national AOS.

According to AFTE, several countries, including Spain, Belgium and Italy, have already expressed interest.

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You’d think it would be easy and affordable to “electronify” business documents. After all, isn’t it much easier, not to mention faster, to email an invoice rather than send a hard copy in the post? Sounds simple enough, except that, in its infinite wisdom, European law demands that electronic invoices be digitally signed, with a third-party issued certificate. Why? To guarantee that the document hasn’t been tampered with and that it came from the person who appears to have sent it.

Such precautions certainly make sense for contract signing, or orders amounting to millions. For invoices, however, it just might be overkill. As this article (in French) in Belgian business daily L’Echo points out, an invoice itself does not create any obligation to pay, the contract (written or not) is where the debt originates.

More amusing is the comparison between paper and electronic invoices in terms of security requirements. How risky indeed to receive an invoice by email when internet communications are so easily intercepted, and emails so easily forged. Receive the same document on a printed sheet of paper in a sealed envelope? Surely it is from whom it claims to be and can’t possibly have been tampered with. And compelling enough to be paid without questions. At least that is what European law seems to assume.

Another major hurdle to widespread adoption is the rather hefty price charged by most certificate authorities for digital certificates. While not a problem for large corporates, many small businesses and professionals may think twice before shelling out several hundreds of dollars for a one-year digital certificate. That kind of money would indeed buy them a lot of stamps and ink. Not exactly an efficient business case.

Banks could play an important role in moving digital signatures down the value chain, by providing affordable signing applications and digital certificates to smaller businesses and individuals. If they can do it for corporates, it can’t be that difficult to extend the same infrastructure to more modest customer segments.

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The Fed is reluctantly thinking that it might consider taking action against asset bubbles in future. Chariman Ben Bernanke still says it is hard to determine a bubble.

Really? When tech stocks were trading at 50-100X earnings? When people in booming states like California were buying houses at 5-6X their income? When mortgage brokers were offering no-doc loans, or mortgages for 125 percent of income?

Alan Greenspan’s Fed looked the other way rather than tighten margin requirements during the dot.com boom and bust. And on mortgages the bank regulators, in the US at least, have a variety of tools at their disposal. The Fed could have spent a few thousand dollars hiring some local newspaper reporters to go talk with people who had taken out unaffordable mortgages. Time to get away from the huge conference table in Washington and look at the impact of the financial system on average people who get talked into the bubbles late and lose retirement savings or their homes.

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Philippe Carrel, SVP at Thomson Reuters, has been rounding up bankers, quants and technologists in New York and London to gauge the satisfaction with existing information on structured assets (very low) and create some standards that market participants can agree upon. Everyone knows Black-Scholes has some underlying problems but it provides an accepted way to value options, he notes, hoping that something similar may be possible in unstructured instruments which aren’t trading as an alternative to marking them to market.

His venture into financial diplomacy has acquainted him with the scope of European regulation.

“I am surprised to see how many regulatory bodies exist in Europe that I was not aware of. How is this going to work, how long will it take before you get a safe regulation? It took 10 years to implement Basel II and ironically it sort of fails almost on its birthday. I don’t think this is a way forward.”

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Last month at The Forum in London, the MiFID conference sponsored by JWG-IT, David Wright, deputy director general, EU Commission, told bankers they should take the current financial crisis seriously.  “The firms that created this mess have to step up to the plate. This is not the time for firms to seek de minimus solutions or to seek delay,” he warned. “We need some action, and firms need to step up and lead.”

Evidence suggests financial service firms are hoping the regulators just go away. At a Thomson Reuters meeting in New York last week where Philippe Carrel, EVP at Reuters, was championing a plan to develop consensus-based proposals for valuing illiquid securities,

Increased regulation received little support, although some participants thought regulators could play a role in the credit rating oligarchy and perhaps in requiring more disclosure of underling risks in investments.

Paul Volcker, Fed Chairman from 1979 to 1987, yesterday told Congress that as conditions in the markets improve, people are getting complacent about the need to address regulatory failures.

The banking industry doesn’t appear to appreciate the severity of the problem. As people lose their homes, in the US, and can’t buy or refinance in the UK, and as both countries face some interesting political competition in months and years ahead, these problems are not going away, even if the financial markets appear to recover.

One problem – banking doesn’t appear to have any individual leader on either side of the Atlantic who is willing or able to address the issues.

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Fifty-nine percent of tier-one banks are implementing virtualisation in IT, according to KRC Research in a report commissioned by Microsoft.

Curious that Microsoft sponsored such a report – industry experts have long thought the company had a very limited interest in virtualisation because it would reduce the number of Windows licenses an enterprise needs. Microsoft bought Boston-based Softricity in 2006 and more recently it has acquired other virtualisation firms. More than one person has told me Microsoft bought Softricity to get it out of the marketplace. But with VMW taking off, perhaps the company had no choice.

Now Microsoft offers infrastructure virtualisation software as part of the Windows platform, withHyper-V and Terminal Services available within Windows Server 2008, along with a comprehensive management platform, Microsoft System Center, to manage both virtual and physical infrastructure and applications.

The KRC report says virtualisation is used across multiple IT infrastructures, including application (61%), networking (54%), machine operating systems (48%) and presentation (27%).

“Banks realize the impact virtualisation can have on operations, from the data center to the desktop, and how it should be embraced as part of an enterprise-wide infrastructure strategy,” said Rich Feldmann, managing director of the US financial services group at Microsoft. “Virtualisation helps create the foundation for innovative banking applications and channels by producing an agile infrastructure. While banks are known as early adopters of technology, this survey indicates that more than one-third are still on the sidelines waiting for greater value and ease of use before adopting.”

Virtualisation helps make more effective use of existing hardware investments and significantly improve IT agility, said Kathleen Khirallah, managing director and practice leader, Global Banking, TowerGroup. “These emerging technologies are helping today’s bank compete more effectively in an ever-changing market by helping people anticipate and respond to business challenges and opportunities rapidly and effectively.”

Fifty-three percent of those implementing virtualisation reported that it makes it easier to centralise deployment and manage applications, and an equal number reported that it produces cost savings while 51% reported that virtualisation makes it easier to respond to issues such as failures of applications or systems.

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With banks coming under pressure to take better care of customer data, and government organisations losing large amounts of information seemingly ever other day, perhaps the Italian authorities have found the solution.

For reasons of “transparency”, the Italian tax authorities have published the salary details of all tax-payers – not as high a proportion of the working population as the treasury might reasonably hope – on a website, allowing everyone to check on their neighbours, bosses, and relatives.

Simple: don’t lose or leak data, or risk having it stolen – just freely publish it.

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It’s a well-known marketing ploy in banking – offer free checking and then hit customers with outrageous fees when they bounce a check – £40 or so in the UK for what American bankers called non-sufficient funds (NSF). Now the High Court has ruled the fees come under laws on fairness of contracts, governed by the  Office of Fair Trading which has already suggested the fees are unfair. Banks had contended they could set the fees arbitrarily. At stake? Up to £2 billion. Banks may appeal, or they may pay up and replace free checking with a host of fees for services. 

Just one more reason not to trust bankers, in case anyone was looking for another.

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