The Euro Crisis—How it could happen and why it would be horrible p16Computers changing the world of Cancer p32James Murdoch comes up empty, again p36
Issue number 1 November 2011Edited by Henry Black—08066412
Since the financial crisis of August2007 there have been a number ofproposals to regulate and reformfinancial systems across the globe.But do these this proposals indicatea convergence of financial systemsinternationally? One suspects not.Although there is very much a globalmarket in the twenty-first century,the makeup of one financial systemstill varies from the next. To investi-gate further this article will look atthe latest regulatory proposals of theUK, USA and EU, as these three fi-nancial systems embody the westernworld economy that is currentlyexperiencing one of its worst de-clines in history.
It makes sense to start at home withthe UK. There has been much media,and therefore public, furore regard-ing the operations of the UK’s mar-ket based financial system. Thebanks have suffered the majority ofthis focus through pressure to imple-ment strategies such as ‘ring fencing’and more vehemently, restrictions ofthe pay-outs of bonuses (the latterappearing more of a political rebut-tal than an actual proposal). Thesubject of ring-fencing is investigatedin the ICB’s (Independent Commis-sion on Banking) ‘Final Report’ re-leased in September this year. Ithighlights how ring-fencing could beimplemented. The proposal is toseparate the retail and investmentarms of the banks which should en-sure that the banks retail customersare protected from the riskier, in-vestment activities such as deriva-tives and securities trading.The ICB report goes into detail aboutwhat is and isn’t allowed inside thering-fence whilst also leaving it up tothe banks to decide where certainareas sit. For this it has created threeprinciples describing the types ofservices. The ‘mandated services’ areservices that ‘must be provided byring-fenced banks’ and the‘prohibited services’ are services thatmust not be provided.The third principle is that of ‘ancillaryservices’. This is designed to encap-sulate the activities a ring-fencedbank ‘would need to do in order todeliver those services that theywould be permitted to pro-vide’ (Vickers 2011). The report pro-vides a good example of this. A ring-fenced bank would have to hedgeits interest rate risk but it is not al-lowed to provide this hedge as aservice to its retail customers.(Vickers 2011).Such reform should offer more secu-rity to retail and SME aspects ofbanking, but there are downsides tosuch an approach. A proposed im-plementation date is expected fromthe treasury by the end of the year.The significance of such a proposalindicates a UK inclination towardsthe protection of people’s money.Furthermore, the ICB report pro-poses high equity to RWAs ratios forthe ring-fenced banks (7-10% de-pendant on their RWA to UK GDPratio), reinforcing this need for sta-bility.
Since the crisis of 2007 the DoddFrank Reform has been the onlyproposal approved by Congress(Tropeano, 2011). It has been metwith a lot of criticism from those inthe financial sector, due to the shearsize of it (some 2600 pages). Themain, and most controversial, ele-ments of it are the newly modifiedVolcker Rule on proprietary tradingand the derivatives reform.The Volcker Rule has been put inplace to stop the banks making in-vestments that do not provide bene-fits to their customers i.e. using theirdeposits to create profits only en- joyed by the bank. This has largelybeen translated as a ban on proprie-tary trading for commercial banks.Before the Volker Rule these activi-ties where often shown on the samebalance sheets as their commercialactivities (Tropeano, 2011). In suchinstances, when proprietary tradesmade profits, they went to the bank,but when they made losses, thebanks fell back on the deposit insur-
Contemporary Issues in Finance—U52080With all this talk of regulation, do the proposals signify a convergence of financial systems?
Italian President GiorgioNapolitano was holdingtalks Sunday aimed atforming a new govern-ment following the resig-nation of Italy's PrimeMinister Silvio Berlusconi.Ex-European commis-sioner Mario Monti wasfavourite to replaceBerlusconi in a bid tostave off bankruptcy forEurozone's third-largesteconomy. Last week Foreign Minister FrancoFrattini said he sup-ported an emergencygovernment of nationalunity led by Monti."He has an internationalprofile that no one candeny," Frattini said,according to his pressoffice.The departure of Berlus-coni seemingly brings toan end to a long careerplayed out on center-stage in the country'svolatile political arena.The thrice-elected 75-year-old business mag-nate has said he doesnot intend to stand againif new elections arecalled. Berlusconistepped down just hoursafter the lower house of parliament approvedausterity measuresaimed at restoring confi-dence in Italy's economy.Crowds that had gath-ered outside the presi-dential palace erupted incheers --waving theItalian flag, dancing andsinging the nationalanthem --when news of his resignation broke.Since entering politicsnearly two decades ago,Berlusconi has been oneof his country's greatsurvivors, hanging on...Continued on page 8
Eurozone Crisis -4 page special
From late 2009, fears of asovereign debt crisisdevelopedamonginvestorsconcerning some European states, intensify-ing inearly 2010.
This includedEurozonemembersGreece, Ireland, Italy, Spain and Portugal, and also somenon-EurozoneEuropean Union(EU) countries. Iceland, thecountry which experienced the largestfinancial crisis in2008when its entire international banking system collapsed,has emerged less affected by the sovereign debt crisis. In theEU, especially in countries where sovereign debts have in-creased sharply owing to bank bailouts, a crisis of confidencehas emerged with the widening ofbondyield spreadsandrisk insurance oncredit default swaps…Continued page 42