Slides accompanying Adair Turner's 16/3/2011 speech
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Transcript of Slides accompanying Adair Turner's 16/3/2011 speech
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8/7/2019 Slides accompanying Adair Turner's 16/3/2011 speech
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Ideal equity ratios higher than Basel III
TBTF: making banks resolvable; necessary but notsufficient
Markets as important as institutions; shadow banking asimportant as banks
The fundamental issues
Debt/equity balance How much maturity transformation
Four implications
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IMF estimates of public support costs in 2008-2009financial crisis
Source:IMF: A fair and substantial contribution by the financial sector, June 2010
Advanced
economies
Emerging
economies
Pledged Utilised Recovery Net directcost
6.2 3.5 0.8 2.8
0.8 0.3 - 0.3
% of GDP
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Growth in lending and nominal income:UK 2005 2010
-6
-4
-2
0
2
4
6
8
10
12
14
Q1
2005
Q3
2005
Q1
2006
Q3
2006
Q1
2007
Q3
2007
Q1
2008
Q3
2008
Q1
2009
Q3
2009
Q1
2010
Q3
2010
Q1
2011
Q3
2011
Q1
2012
%changeyear-on-yea
Nominal GDP (%YoY)
Private debt stock (%YoY)
Leverage increased
through the boom
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Credit and asset price cycles
Expectation offuture asset price
increases
Increased creditextended
Low credit losses: high
bank profits Confidence reinforced Increased capital base
Increased assetprices
Increased lendersupply of credit
Favourableassessments of
credit risk
Increasedborrower demand
for credit
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Minimum bank equity ratios: Basel II to Basel III
2% 7%
Riskweighted
assets
Total assets
Estimatedriskiness, e.g.
SME 100%Mortgages 15%
Riskweighted
assets
Requiredequity
Basel II Basel III
2%
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Costs and benefits of higher bank equity capital
Increased cost ofcredit intermediation
Reduced likelihoodof financial crises
David Miles et al: Optimal Bank Capital
Martin Hellwig et al: Fallacies, IrrelevantFacts and Myths in the Discussion of Capital
Regulation
Distinguish social from private costs
Consider low probability extreme events
Focus on total systems not specificinstitutions
Costs:
Benefits:
Vs
Key insights from:
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UK banks leverage and real GDP growth
Source: David Miles, Jing Yang and Gilberto Marcheggiano, Optimal Bank Capital, External MPC Unit, DiscussionPaper No. 31
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1880 1900 1920 1940 1960 1980 2000
5
10
15
20
25
30
35
40
Real GDP growth
(10 year m.a.)
Leverage (rhs)
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Mechanisms to increase loss absorption capacityand market discipline
Capital surchargeand/or sub debtconvertibility
Resolvability &statutory bail-in
Increase role ofloss-absorbingcapital
Resolutionprocedures whichcan rapidlyimposelosses/conversionon all liabilities (toextent required)
Insureddepositors
Non-insureddepositors
Interbank & othercounterparties
Senior debt
instruments
Subordinateddebt & Preferred
stock
Commonequity
Insureddepositors
Non-insureddepositors
Interbank & othercounterparties
Senior debt
instruments
Subordinateddebt & Preferred
stock
Commonequity
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Mechanisms to increase loss absorption capacityand market discipline
Bail-inable seniordebt
Capitalsurchargeand/or sub debtconvertibility
Resolvability &statutory bail-in
Increase role ofloss-absorbingcapital
Smooth resolutionwithout disruption
Resolutionprocedures whichcan rapidlyimposelosses/conversionon all liabilities (toextent required)
Insureddepositors
Non-insureddepositors
Interbank & othercounterparties
Senior debt
instruments
Subordinateddebt & Preferred
stock
Commonequity
Insureddepositors
Non-insureddepositors
Interbank & othercounterparties
Senior debt
instruments
Subordinateddebt & Preferred
stock
Commonequity
Reserve army of capitalto cover extreme events
OR
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Current initial investor base for UK bank senior debt
12%
12%
25%
50%Insurance
Other
Other banks
Fund Manager
Source: Broad estimates from firm information
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Frequency distribution of bank bond payouts
100% of principaland due interest
Observed in good times100%
Not observed ingood times
0
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Financial firms CDS and share prices
Exhibit 1.27: Composite Time Series of Select Financial Firms' CDS and share prices
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Dec02
Apr03
Aug03
Dec03
Apr04
Aug04
Dec04
Apr05
Aug05
Dec05
Apr06
Aug06
Dec06
Apr07
Aug07
Dec07
Apr08
Aug08
Dec08
AverageC
DSSpreadinPe
rcent
-
0.50
1.00
1.50
2.00
2.50
MarketCapIndex
CDS SHARE-PRICE-ADJUSTED
Firms included: Ambac, Aviva, Banco Santander, Barclays, Berkshire Hathaway,Bradford & Bingley, Citigroup, Deutsche Bank, Fortis, HBOS, Lehman Brothers, MerrillLynch, Morgan Stanley, National Australia Bank, Royal Bank of Scotland and UBS.
CDS series peaks at 6.54% in September 2008.Source: Moodys KMV, FSA Calculations
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Development of the crisis: 2007 2008
Bear Stearns hedge funds
Major losses by market neutral hedge funds
Carlyle Capital and Peloton Hedge Funds closed
Liquidity and solvency problems at off-balance sheet SIVs
Stresses at MMMFs: Reserve Primary Fund breaks the buck
Liquidity run in repo and other secured funding markets
Hedge fund deleveraging and asset sales exacerbate
downward spiral of asset values
June 2007:
August 2007:
February 2008:
Autumn 2007 toMid 2008:
Summer 2008:
August toOctober 2008:
Late autumn
2008:
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US financial sector assets
0%
50%
100%
150%
200%
250%
300%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Banks MMMFs
GSE Agency and GSE- Mortgage Pools
Issuers of ABS Finance Companies
Security Broker-Dealer Funding Corporation
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Traditional non-bank credit intermediation
Corporates
Households
Households
Corporates
Government
Banks
InsurancePensionsOther
DirectNon-intermediated
Leverage
Maturitytransformation
Not leveraged
Little maturitytransformation
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Credit intermediation via the shadow banking system
Corporates
Households
Households
Corporates
Government
InvestmentBanking /
Prime brokers
SIVs &Conduits
MMMFs
Multi-stage
leverage andmaturity
transformation
Securitisation
HedgeFunds
Corporates
Households
Households
Corporates
Government
InvestmentBanking /
Prime brokers
SIVs &Conduits
MMMFs
Multi-stage
leverage andmaturity
transformation
Multi-stage
leverage andmaturity
transformation
Securitisation
HedgeFunds
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Credit intermediation via the shadow banking system
Extensivelyinterconnected via repo
market
Investmentbanks
SIVs &ConduitsMMMFs
Securitisation
HedgeFunds
Banks
Corporates
Households
Households
Corporates
Government
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NASDAQ: 1995 2002
0
1000
2000
3000
4000
5000
6000
02/01/95
02/07/95
02/01/96
02/07/96
02/01/97
02/07/97
02/01/98
02/07/98
02/01/99
02/07/99
02/01/00
02/07/00
02/01/01
02/07/01
02/01/02
02/07/02
1995 1996 1997 1998 1999 2000 2001 2002
Source:Datastream
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Greek sovereign debt and cost of borrowing
Greek 10-year spread to bunds
0
200
400
600
800
1000
2005
2006
2007
2008
2009
2010
2011
Source:
Greek general government gross debt as % of GDP
80
90
100
110
120
130
140
150
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Forecast
Source: IMF World EconomicSource: Datastream
% GDPBasis points
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Maturity transformation
Liquid Assets
Equity/debtcapital
LoansDeposits&
shorttermdebt
Bank based
Market based
Corporates
Households
Corporates
Deposits
Government
Debt markets
Equity markets
Liabilities Assets
Corporates
Deposits
Government
Corporates
Households
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Household deposits and loans: 1964 2009
Source:Bank of England, Tables A4.3, A4.1
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
%of
GDP
Securitisations and loan transfers Deposits Loans
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Holdings of US MMMF Shares by Sector
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980 1985 1990 1995 2000 2005 2010
Other
Rest of the World
Insurance Companies
Pension FundsFunding Corps
Non-Financial Business
H'Hold
Source:US Flow of Funds
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Financial institutions, corporate bond and CPissuance
1991-1994 1995-1999 2000-2004 2005-2010
10 years
36%48%
63% 61%
28%
26%
22% 24%26%19%
11% 10%10% 7% 4% 4%
Total issuances$ billion 768 2823 6410 16281
Source:McKinsey Global Institute: Farewell to Cheap Capital? The Implications of long-term shifts in global investment andsaving, December 2010
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A capital adequacy and liquidity trade-off?
Liquid
assets
Debt ofaverage
maturity 6months
Equity
Loansof
averagematurity1 year
95 90
10
5
Liabilities Assets
80 95
20
5
Loans ofaverage
maturity1 year
Liquid
assets
Debt ofaverage
maturity1 month
Equity
Liabilities Assets
Which is riskier?
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Typical haircuts on term securities financing% for prime counterparties
June 2007 June 2009
Prime MBS:
AAA rated
AA and A rated
4
8
10
~ 100
Asset backed securities
10 25Structured products
(AAA)10 ~ 100
Investment Grade Bonds
AAA and AA rated
A and BBB rated
1
4
8
10
Source:CGFS Paper No. 36 The role of margin requirements and haircuts in pro-cyclicality, March 2010
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Measures of increasing financial intensity
1
929
1
935
1
941
1
947
1
953
1
959
1
971
1
977
1
983
1
990
1
996
2
002
2
007
10%
50%
100%
150%
200%
250%
300%
1
929
1
935
1
941
1
947
1
953
1
959
1
965
1
971
1
977
1
983
1
990
1
996
2
002
2
007
10%
50%
100%
150%
200%
250%
300%
1
929
1
935
1
941
1
947
1
953
1
959
1
971
1
977
1
983
1
990
1
996
2
002
2
007
10%
50%
100%
150%
200%
250%
300%
1
929
1
935
1
941
1
947
1
953
1
959
1
965
1
971
1
977
1
983
1
990
1
996
2
002
2
007
10%
50%
100%
150%
200%
250%
300%
Hous
ehold
Corpo
rate
Fina
ncial
0
50
100
150
200
250
300
350
400
450
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
$T
r
OTC interest rate contracts, notional amount outstanding
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1977
1982
1987
1992
1997
2002
2007
$bn
Global nominal GDP, $bn Global FX turnover, annual, $bn Global exports, $bn
US debt as a % of GDP byborrower type
Growth of interest ratederivatives values, 1987-2009
FX Trading values & world GDP1977-2007
Global issuance of asset-backed securities
$Tr
n
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Share of the financial industry in US GDP
%
Source: Andrew Haldane, What is the contribution of the financial sector: Miracle or mirage?, Chapter 2, The Future ofBanking, LSE Report 2010
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Historical excess wage in the US financial sector
Source: Andrew Haldane, What is the contribution of the financial sector: Miracle or mirage?, Chapter 2, The Future ofBanking, LSE Report 2010