Prof. Jeff Atik Launches New Blog Dedicated to International Finance Commentary, Book Reviews

Professor Jeffery Atik, a Sayre Macneil Fellow at Loyola Law School, launched the new blog Attraverso as an online discussion about hotly contested issues in the world of international finance, as well as a depository of his reviews of important books on related topics. From Attraverso's introductory post:

Attraverso means "through" or "across" in Italian; it has both a spatial sense (as crossing a mountain range, or a border) and a temporal sense (as across the centuries). It seemed fitting for a new online journal designed to scratch beneath the surface of global financial issues. More than ever, public debate centers around international economic topics: the financial crisis and the great recession, bank reform, pressure on the Euro, austerity and the future of hope.

Attraverso covers the roots of these issues -- and the ongoing institutional innovations proposed to address them. Attraverso is a journal devoted to commentary and reviews of books on international finance and economics. Formerly published as a series within Loyola's Summary Judgments faculty blog, Attraverso's content proved vast and rich enough to fill its own space.

International finance is an arena for ideas; it is a cultural practice. Attraverso will be the first online resource dedicated to covering books in this space. The blog is designed to be a dialogue; comments are encouraged.

The blog is edited by Jeffery Atik, a widely published lawyer and economist with deep experience in Europe and North America. He teaches International Banking & Finance and related courses at Loyola Law School, Los Angeles.

European Parliament Approves Implementation of Basel III

By Professor Jeffery Atik




On April 16, the European Parliament approved the packet of legislation known as CRD IV, which largely implements the Basel III banking reforms. This completes the political phase of the European legislative process -- formal adoption of CRD IV by the Council of Ministers is expected to occur in June. Assuming the schedule is met, CRD IV will become law effective January 1, 2014. Consultations on the form of detailed regulations ('technical- standards') have now been launched.

CRD IV implements Basel III -- and does more. The term 'CRD IV' signals that this is the fourth generation of the EU's Capital Requirements Directive. The name is no longer precise: CRD IV is comprised of a Regulation (law that is uniformly applied throughout Europe) and a Directive (which requires national implementation and admits a certain degree of variation).

CRD IV increases the quantity and quality of regulatory capital a financial institution must hold. In most cases, transitioning to CRD IV requirements will place pressure on European banks to retain earnings, raise additional equity capital, dispose of assets or change their respective asset mixes. Under the existing version of the Capital Requirements Directive (which were adopted immediately prior to the onset of the 2007/2008 financial crisis), many European banks reduced their capital to extremely low levels. Reportedly some European banks had leverage ratios of over 40 to 1 -- that is, maintaining less than 2 percent of effective capital. Many of these same banks remain in crisis now -- a problem that in turn has infected the balance sheets of several EU Member States. CRD IV acknowledges the insufficiency of bank capital during the financial crisis. The new requirements are complex -- and involve a stack of charges and buffers. A minimum of 8 percent capital will now be mandated, computed with regard to a bank's risk-adjusted assets. Left undetermined for the time being is the overall leverage cap -- it is this simple metric that may prove to be the most meaningful limit on a bank's level of debt.

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

By Professor Jeffery Atik

Neil Irwin's The Alchemists delivers on its promise: the book is a central banker's view of the 2007/2008 Financial Crisis and the more recent (and related) Euro Crisis. Only the subtitle disappoints: The Alchemists isn't quite the story of the three central bankers depicted on its cover (Bernanke, Trichet and Mervyn King). Rather, The Alchemists offers a thorough treatment of Bernanke's crisis-plagued tenure at the Fed and insightful coverage of the ECB's Trichet - until Trichet morphs into Mario Draghi just in time for the worst of the Euro Crisis. Plus the odd bit of Bank of England's Mervyn King thrown in for comic relief. No doubt Irwin's project was inspired by Liaquat Ahamed's Lords of Finance, winner of the 2010 Pulitzer Prize, which treats four central bankers (their philosophies and their quirks) from the 1920s: the UK's Montague Norman, France's Emile Moreau, Germany's Hjalmar Schacht and the Fed's Benjamin Strong. Now these were central bankers: they dominated the monetary policies of their day.

Our contemporary central bankers lack some of the color of their predecessors (save Mervyn King, who is pretty darn colorful). Moreover, their field of action is much more circumscribed. They can be checked by other personalities within their respective institutions, by intimidating political leaders, and by uncooperative markets. These bankers do manage, at least in this account, to largely have their way in responding to the crises, through will and manipulation, and by playing on the palpable belief that no one else has any better idea of what to do.

Irwin's story begins with the shudders in the market in late 2007, when BNP is the first major institution to admit it had no real idea how much those tricky mortgage-backed securities were worth. The response by Trichet is immediate - and is the precursor of many more ECB interventions. Things get much much worse in the following year with the fall of Lehman Brothers. Lehman's collapse is marked by the surprising non-intervention of the Fed. Irwin's account of the abandonment of Lehman Brothers is thin - but he suggests that the Fed may have felt it had no clear legal basis to act. Bernanke no doubt learned many things from the Lehman Brothers fiasco, including (perhaps) the advantages of being a bit less scrupulous in respecting the limits of the Fed's authority.

Attraverso Commentary - Tarullo on Basel III and Short Term Wholesale Funding

By Professor Jeffery Atik

The Federal Reserve's Dan Tarullo has been a key player in post-Crisis U.S. bank reform and in the negotiation of Basel III, the set of international banking rules that guides regulation in major financial centers. In a speech made last Friday (May 3, 2013) Tarullo expressed some satisfaction with the U.S. and Basel III reforms -- and identified a risk needing further regulatory attention: runs on short-term wholesale funding.

Short-term funding has always constituted a vulnerability to the banking system. The traditional magic of banking involves the transformation of maturities -- banks borrow on a short-term basis and lend for the medium- or long-term. In ordinary times this works out splendidly -- as the short-term rates banks pay tend to be lower (over the long term) than the long-term rates they earn. And in ordinary times, short term funding is quite stable.

The dominant form of short-term funding was traditionally bank deposits. Deposits are essentially loans made to a bank by its depositors. Deposits are legally short-term, but practically rest in the hands of banks for substantial periods. Short-term funding becomes problematic, of course, when depositors systematically demand repayment: this is the old-style bank run. Post-Depression era deposit insurance has largely eliminated bank runs, at least in the United States, and so the ordinary insured bank deposit is (from the perspective of the bank) a trusty source of short-term funding.

The bank deposit no longer forms the core of short-term funding for many banks (particularly larger banks) -- and other systematically important financial institutions (hedge funds, money-market funds, broker-dealers) lack the ability to take insured deposits. The mix of short-term funding has changed -- and with this change, there are new vulnerabilities.

Attraverso Review: Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb

By Professor Jeffery Atik

Nassim Nicholas Taleb is back, and in his new book he asserts that his signature idea was not The Black Swan (that was so last book), but rather Antifragility. This second idea shares a viral quality with the first; like the Black Swan, once you catch the notion of antifragility, it's hard to get rid of it.

Antifragility is the characteristic of certain systems to grow stronger when stressed; it is the mirror concept to fragility (where stress destroys). Exercise stresses our muscles, and so renders us stronger. As Taleb insists, antifragility is not robustness -- robustness is merely resistance to stress. Stress improves the antifragile. And in a world where stresses cannot be avoided, it is better to be antifragile.

I admit to being a Taleb fan -- and not everyone is. Most all -- critics and admirers -- agree he is an engaging and imaginative thinker. But he does seem to go out of his way to be, shall we say, difficult. Antifragile is an odd book -- it is a collection of personal essays mixed with some rather formal decision theory. That said, the personal (and the fictional) do serve the argument.

Taleb sees antifragility everywhere. Indeed, he is an avid antifragility spotter -- which results in no small amount of quirkiness in his personal life. At times Taleb convinces, at times he doesn't -- as his examples (or speculations) range from finance to picking bar fights to drinking too much wine. And so we get views of Taleb's various cantankerous postures. Physicians by and large do more harm than good (as they are compelled to do something) -- and so should be avoided outside of dire emergency. Universities are dangerous -- better to wander in a library.

As Taleb would concede, there are many more instances of fragile systems than antifragile ones. So a large part of the book is exploring the roots of fragility -- and possible moves to avoid fragility's dangers. Taleb provides a host of tantalizing heuristics -- take small over large, simple over complex, acute stress over chronic stress, the natural over the artificial. Old technologies are to be prefered over new ones -- as those technologies that have already survived the stresses of experience are more likely to remain viable (this is an example of the Lindy effect). It is no surprise that Taleb writes with a fountain pen. Of course Taleb may be wrong in particular instances. I suppose his cardiologist (if he has one) is horrified by his binging diet and his disdain for statins.

Attraverso Review: The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig

By Professor Jeffery Atik

I have the odd habit, with academic writing, of first reading the notes and then returning to the central text. I like to see the foundation of a work. Would that I had read the notes to The Bankers' New Clothes first!

For The Bankers' New Clothes is really two books which I had read in sequence (slave as I was to the Kindle's primitive formatting). The first book -- the primary text of 228 pages -- seemed simple-minded, sometimes shrill and often tedious. It argues for a significant increase in the amount of 'capital' (a specialized term in banking regulation) banks should maintain. The second book - the 107 pages of dense notes -- reveals a much more subtle, more flexible and more open understanding of the issues. This 'book' is more useful and persuasive. I recently heard co-author Anat Admati speak in Los Angeles. She described her surprise when first viewing the book as published, that it was so 'short' when the notes were stripped away and shuttled to the back of the book. It matters (Kindle take note) how books are presented; I would have had a better impression on my first read had these rich notes been on the page or gathered at the end of each chapter. And perhaps these authors will speak up the next time they write for the broader public.

Admati and Hellwig are on a mission. They fervently believe that banks should be required to hold more capital than present rules require. And by more, they mean much much more. From current rules that require, depending of the measure, 3 to 7 percent of a bank's assets, to something on the order of 20 to 30 percent. They demonstrate that such higher levels of capital (think of this like the ratio of equity to the fair market value of a house) would significantly increase the robustness of the entire banking system, relieving the state from facing new rounds of bailouts. Moreover, as the leverage of bank's decrease, banks will be less likely to attract the risk-seeking buccaneers that have managed our great financial institutions into the ground.

Most of the argument here is negative -- Admati and Hellwig counter the various claims promoted by bankers to justify the maintenance of low pre-Crisis levels of mandatory capital. Leverage is good, of course, for bankers -- they quickly harvest a good deal of the upside (through compensation) and, together with depositors and bondholders, largely escape the downside due to government supports, including ex post bailouts. In such a topsy-turvy world, management would be dim to resist gambling wildly on high risk, high yield plays.

Attraverso Review: Bull by the Horns: Trying to Save Main Street from Wall Street and Wall Street from Itself by Sheila Bair

By Professor Jeffery Atik

Bull by the Horns is part defense of past action, part call-to-action. Sheila Bair served as chairman of the Federal Deposit Insurance Corporation, one of the chief federal bank regulators, from 2006 through 2011 -- and thus rode the entire wave of the Financial Crisis. By her own account, she clashed with officials of both the Bush and Obama Administrations (in important cases, these were the same individuals). And throughout these times she was the most prominent woman in United States financial regulation.

Bair becomes the FDIC in this story -- she absorbs its mission and makes it her own. The FDIC has a peculiar mission -- and it has never been the only law in banking. Bair believes in deposit insurance but not bailouts. Deposit insurance is paid to depositors in the event of bank failure; bailouts are payouts to shareholders, bondholders and management in the same circumstances. There is a distinction here -- but perhaps not as self-evident a one as Bair imagines. Both deposit insurance and bailouts (under the Too Big to Fail doctrine or otherwise) create moral hazard. Bair though sees banking policy through the FDIC lens -- depositors (up to the FDIC limits) are to be given continuous access to their funds in the event of failure; shareholders and bondholders are to be wiped out and -- at least in most cases -- bank management is to be fired. All very by the book. Which is to say, Bair wants the bank resolution system to work as it is promised to work -- which of course is not at all what happened following the Financial Crisis.