Standard Chartered's Next Worry: A $1 Billion Indonesian Loan - NYTimes.com

This is a tendentious article from today's New York Times, and undoubtedly covers only a piece of what is really going on.  Unfortunate for the bank, who probably are constrained about correcting any misperceptions here.  But also bad news in general for SCB and tough luck for fans of the bank's EM focus and strategy.

--Jan Cherim

Standard Chartered's Next Worry: A $1 Billion Indonesian Loan - NYTimes.com

The Hazard of Second Best | Het Financieele Dagblad

I want to applaud and draw attention to an opinion piece by Mohamed El-Erian which appeared (amongst other places) on FD.nl.  El-Erian points out, in the second part of the article, that the Nigerian Ngozi Okonjo-Iweala a (female) former Finance Minister and senior World Bank executive is far and away the most qualified candidate for the World Bank presidency.  If El-Erian is correct, even the US administration are embarrassed by the fact that Okonjo is head and shoulders more appropriate as a new WB President than the Obama nominee, Dartmouth President Jim Yong Kim.  The question is whether European countries have the guts and good sense to back the current groundswell swinging to Mrs Okonjo.

--Jan Cherim

The Hazard of Second Best | Het Financieele Dagblad

Beijing Considers Legalizing Informal SME Lending System

The article below appears in today's WSJ, Asian edition and online.  It reflects the Chinese government's preoccupation with boosting -safely- the flow of investment and lending to the vast SME sector across the country.  China has the world's largest "informal banking" sector, and they now are trying to get some of this activity out into the daylight, with the prospect of (light) regulation and perhaps some consumer/client protection.  Interesting stuff of significant relevance to other countries.

--Jan Cherim

14 Mar 2012 23:42 CST WSJ: Beijing Considers Legalizing Informal Lending System

   By Dinny McMahon
   Of THE WALL STREET JOURNAL

BEIJING (Dow Jones)--In a potentially major shift in how Beijing regulates the world's No. 2 economy, China's premier said officials are looking for a way to bring the nation's underground lending system into the light.

China's informal-lending system--a collection of small firms, wealthy individuals, loan sharks and others--has been crucial for the small businesses and rural areas often eschewed by the nation's major state-owned banks, which focus on lending money to big state-owned enterprises. Figures are hard to come by because such lending is unregulated and can be illegal depending on the terms. But UBS AG (UBS, UBS.VX) in October estimated it could be between two trillion yuan and four trillion yuan in total, or $316 billion to $632 billion, or as much as one-tenth of the country's gross domestic product.

Premier Wen Jiabao said Wednesday that authorities are looking at ways to make the informal-lending sector legitimate. His comments come as officials increasingly realize that despite repeated hectoring of state banks to lend more to small borrowers, the formal financial sector is ill-structured to fully plug the funding gap.

Wen said that China's central bank and the China Banking Regulatory Commission are considering launching trial reforms of informal lending in the Chinese city of Wenzhou, a city with a reputation as a center of private enterprise and informal lending.

"We should guide and permit informal capital into the financial arena, standardizing it and bringing it into the open, encouraging its development and strengthening its supervision," said Wen, who was speaking at a news conference marking the conclusion of the annual meeting of China's legislature, the National People's Congress. He also said that informal loans should have clear legal safeguards.

Wenzhou, in Zhejiang province, brought the funding pressures of China's private sector into sharp relief late last year when Beijing tightened monetary conditions, making it even more difficult for the city's small manufacturers to access credit or repay high rates of interest. More than a dozen business owners shut their factories and skipped town leaving their creditors behind, according to state media reports.

Wen's comments were in response to a question about Wu Ying, an entrepreneur in Zhejiang who was sentenced to death for "fraudulent fund-raising."

Wu, at one time China's sixth-richest woman according to Shanghai-based research firm Hurun Report, was found guilty after borrowing as much as 770 million yuan from private lenders whom she promised to pay an interest rate of up to 80%.

Sympathy for Wu has been widespread, partly in response to the extreme sentence meted out for an economic crime. "This incident reflects how the development of informal finance has still not adapted to the development of our economy and society," said Wen.

He added that the Supreme Court had issued a notice on the "careful" handling of informal-lending disputes and was "taking an extremely cautious attitude toward the Wu Ying case."

Economists say the scale of informal lending has recently expanded. Government efforts to tighten monetary conditions since 2010 spurred demand for loans. Meanwhile, many of China's savers and wealthy individuals saw lending out their money as a better investment than banks--which have long offered interest rates lower than the pace of inflation, meaning savers lose money by keeping their cash in deposits--and the stock market, which has been stagnant in recent years.

Now with the economy slowing, the government worries that investors in this unregulated area might lose their savings as borrowers default.

The process of legitimizing informal finance could involve giving existing underground lenders a license to operate as small-loans companies while imposing deposit collection and capital requirements. However, how that works in practice is likely to vary between areas.

Beijing, in efforts in recent years to get credit flowing to those parts of the economy that need it, allowed new types of financial institution to proliferate, including credit guarantee companies, pawn shops, small-loan companies, and microfinancing companies.

Technically informal finance refers to loans without the involvement of such institutions, such as lending between family and friends, between companies, by consortiums of people with excess cash, or underground banks.

But it can also include some of these new-style financial companies who often exceed their charter by collecting deposits and making loans.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

Hug your hairdresser

The Financiële Dagblad published an unfortunate league table earlier this week, naming and shaming the 100 worst-performing Dutch pension funds, as published by the Central Bank.  Pity your poor hairdresser: the Hairdressers Pension Fund came in dead last, underperforming the regulator’s benchmark by a hefty 24%, meaning that the fund, without repair, is only capable of covering some four-fifths of its pension obligations over time. 

What does this imply for your average 30-year-old girl with a tattoo, who washes your hair, listens to your issues with the kids, chats happily about the last vacation, and moans about their love life?  It is bad news, the more so as many of today’s young hairdressers probably don’t participate in the professional group pension scheme and, if they do, probably don’t realise in what dire straits the fund has landed.  Like most young people, ideas about retirement are infinitely distant: old folks’ problems. 

OK, most hairdressers (why?) seem to be young.  They have time to deal with their futures.  But still something bothers me about this.  The hairdressers seem to me a particularly vulnerable vocational group.  They don’t strike me as particularly financially literate, and neither it seems are their professional pension providers.  Is this a case for state intervention?  Maybe so, I’m not sure.  But in the meantime, do an extra colour shot, have a touch-up, a blow-dry, whatever.  Bring your spaniel in for a trim. The idea of an old-age hairdresser with neither her clients’ laments nor a basic pension as comfort does not strike me as fair.

-Jan Cherim

Amsterdam, February 2012

The lengthening road to Basel III

Speaking at a seminar organised by Financial Access for senior Indonesian bankers last month in Amsterdam, a Director of DNB (the Dutch Central Bank) argued that implementing the more stringent capital, liquidity, and risk management requirements agreed in the context of "Basel III" was an urgent business.  But not so urgent that a weak but quick and "politically achievable" deal should be agreed fast, just for the sake of showing rapid action.  The markets and analysts would see through this, and real progress in improving systemic stability would be hollowed-out in the process.  Much better, Paul Hilbers argued, to take a couple more years about implementing a set of measures with real bite.

Judging by what is now emerging, the MerKozy axis is listening.  Germany and France are apparently preparing a proposal that would phase compliance with Basel III over a longer period than initially mooted, allowing substantial breathing room to Euro-banks out to 2018 for the nastiest bits of the new rules (on ALM and funding/asset structures).  Isn't this introducing so much delay that the effects of the new initiatives are effectively killed?  The argument advanced is that the effect of the new regulation on bank lending and the "real economy" must be taken into consideration.  But by 2018 we could easily see a full credit cycle, a commodity boom and bust, or a European real estate slump that is only just starting to recover by then.  Surely the new rules make sense, and deserve real implementation pressure, or they are simply wrong, and don't?  Banking will always have risk; that's inherent in the function and healthy for the economy.  Does Basel III go too far?

The French and German banks clearly think so, and have raised sufficient noise in the right circles to get some heavyweight support.  The Dutch banks probably agree, but as usual have no grip on their regulators, who are trying to play 'best kid in the class'.

-Jan Cherim

Here is today's Financial Times scoop on the Franco-German initiative:
http://www.ft.com/intl/cms/s/0/7f8485a8-4500-11e1-a719-00144feabdc0.html#axzz1kH2YF4XU

Lazy Greeks and deja vu

As the Greek debt negotiations wheeze towards a (temporary) resolution with the banks, the former Greek finance minister and current energy minister George Papaconstantinou was in Holland plugging some Greek energy and export projects, as well as shoring-up support with the Dutch government for EU assistance. The Netherlands may not be big, he told the FD in an interview summarised in today's edition, but it is influential in EU financial circles particularly, and Holland is an important trading partner anyhow. Reason enough to drop by. But he had some other interesting observations about the current Greek problems which have wider relevance.

Credit crunch

Papaconstantinou notes that perfectly capable Greek exporters and domestic producers are being killed at the moment by the banking system's lack of liquidity and highly restrictive lending policies. Where have we heard this before? All through central and eastern Europe since 2009 the banks have not been doing their jobs, and the EU and multilateral DFIs see this (see the 'Vienna Initiative' as a response) but are not doing enough. The domestic Central Banks are not responding sufficiently (some can't) in these countries, and the already overreaching ECB's mandate is restricted to Euroland.

In the discussion about disappointing Greek economic performance this doesn't get enough play. Stimulus is needed, and the banking sector should be central to the efforts.

Lazy Greeks

The minister regrets that even mainstream European political parties seem to dabble now and again in national stereotyping -- e.g., the lazy, tax-avoiding, malingering Greek who doesn't deserve help. Seeking explanations for economic non-performance in cultural profiling is an old and long-discredited line of analysis. It reminds me of early development studies blaming African and Asian cultures and social structures for their 'backwardness'. The so-called 'Amoral Familism' of southern Italians was a famous academic version of this from the 1950s.

Papaconstantinou puts his finger on it when he points out that, statistically, the Greeks work at least as hard as anyone else. But the institutional structure of the country has failed, and if it can be reformed sufficiently actually to enable growth and production, then the current crisis may yet have a salutary impact. I am not sure how convinced he is this is achievable, but at least a lot of energy is going in this direction at the moment.

Rational debate?

The last point our visitor makes is that 'the debate in Europe could be a bit more rational.' He points to the large German and Dutch export surpluses with Greece, and other factors which undermine the dominant theme of one-way benefits traffic North-to-South. Rational public debate? This may be asking for too much. Although compared with the US Republican primaries, the debate here is serene and academic in tone!

-Jan Cherim

Read the FD article here:

‘Beeld van luie Griek klopt van geen kant’ | Het Financieele Dagblad

The “Vienna” Initiative 2.0 - serious business

When we read about bureaucrats, Eurocrats and Central Bankers getting together to discuss vague 'co-ordination' of banking oversight and regulation across Europe, the reflex reaction is a massive yawn. But there are truly serious things afoot. The Vienna Initiative was launched at the height of the credit crisis in order to avoid meltdown in emerging Europe's banking systems. Multilateral and European financing institutions co-operated with international banking groups present in the West and East/Central Europe to ensure adequate liquidity was available, to avoid a stampede for the exits, and generally to try to keep some credit flowing. While credit flows to the real economy in most of CEE were drastically run-down in the crunch period, the system didn't crash, and multinational banking groups like Italy's Unicredit and the Austrians were encouraged to support their CEE subs and branches in a period of genuine stress for those banks.

Two years on, we are hearing about Vienna 2.0 -- the Eurocrisis has spooked the markets sufficiently that, again, banking systems in CEE are suffering from seriously reduced cross-border funding access, and a new credit crunch threatens in emerging Europe (let alone the West), even before bank lending had really recovered from round one. In the Balkans, for example, credit growth was still positively anemic, with high levels of non-performing loans and difficult funding. This has taken another hit recently.

The role of the multilateral DFIs is critical in helping to ensure that Eurozone regulators and CEE regulators do not take measures so driven by local interest that life is made impossible for the cross-border banking groups still active in the region. It may be grey and obscure - but the wonks meeting in Vienna have serious work to do, and it deserves wider attention.

-Jan Cherim

Here is the World Bank's press release with full detail:

Europe and Central Asia - Special Meeting of the European Bank Coordination “Vienna” Initiative