Monday, August 7, 2000

Local banks and global regulations

"The saddest part of the whole issue of bank regulations is that in truth all risk persist and so, when there are bank fusions, these could multiply, since the bigger they are the harder they fall”

"A local bank has a serious compromise with its sphere of influence, mostly because it has nowhere else to go. Speculating on that the globalization of our local banks started when Banco de los Llanos, from Valle La Pascua morphed into the Banco Principal of Caracas-we observed that did not prove to be very useful (Banco Principal disappeared in the bank crisis of 1994). Are we now to suppose the process that takes our banks to be managed from Madrid is better?"

In El Universal of Caracas

Friday, February 18, 2000

Kafka and global banking

My partner had a problem with identity theft which forced him to “negotiate” with his bank. During his ordeal I remember thinking "thank God we still have several banks to work with". Imagine if we would have had to discuss this issue with an official of the One and Only World Bank. Without a doubt this would present us with a future full of horrendous Kafkaesque possibilities.

This led me to think about the consolidation currently going on among banks. With every day that passes we have fewer and fewer banking institutions worldwide with which to work. This trend has been marketed as one of the seven wonders of globalization. .. and I believe the trend introduces other risks which have either not been sufficiently commented on or which have simply been ignored. Among these I can identify the following:

A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.

The risk of regulation. In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.

Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basle, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.

I remember that John K. Galbraith once wrote that the economic development of the west of USA was helped by the fact that in the eastern part of the United States, banks were big and solid but that in the west, banks tended to work with much greater flexibility. The fact that some of these banks went bankrupt from time to time was simply taken as a normal cost inherent in development. Today, Venezuela's economy might be in dire need of some Wild West banks.

The cost of global assistance. When Venezuela’s banking system went down the drain, there is no doubt that the cost of the crisis was paid integrally by the country itself. In today’s world, when we see that a series of international banks are investing in our country’s institutions, I often wonder what will happen when one of these behemoths runs into serious trouble in its own country. Will we have to pay for our part of the crisis, less than our part of the crisis or more than our part of the crisis?

As bank mergers and acquisitions increase and stock exchanges worldwide call for more consolidations, I have my doubts. Should we not be imposing the creation of special reserves for especially large banks? The larger they are, the harder they fall, and so the greater the need to avoid disaster.

Abridged version of an article published February 2000 in the Daily Journal of Caracas.