Challenges of security in financial instituions

Bangladesh’s central bank governor resigned over the theft of $81 million from the bank’s U.S. account, as details emerged in the Philippines that $30 million of the money was delivered in cash to a casino junket operator in Manila.

The rest of the money hackers stole from the Bangladesh Bank’s account at the New York Federal Reserve, one of the largest cyber heists in history, went to two casinos.

They said a mix of dollars and Philippine pesos was sent by a foreign exchange broker to the ethnic Chinese junket operator over several days, a haul that would have been made up of at least 780,000 banknotes.

Bangladesh Bank officials have said there is little hope of apprehending the perpetrators and recovering the money would be difficult and could take months.

Under the former development economics professor, the country’s foreign exchange reserves have increased four-fold to $28 billion and he also sought to ensure farmers and women entrepreneurs had better access to banking services and credit.

Rahman defended his record at the central bank, saying he was proud of his achievements there.

He described the heist as an “earthquake” and said the bank had promptly informed intelligence agencies in Bangladesh and abroad and also brought in international experts to investigate.

CCTV cameras at the branch were not functioning when the money was withdrawn.

Salud Bautista said that her firm was instructed by the bank branch to transfer the funds to a man named Weikang Xu and two casinos.

She said that $30 million went to Xu in cash. Guingona has said Xu was ethnic Chinese and a foreigner, but he was not sure if he was a Chinese national.

A tranche of $29 million ended up in an account of Solaire, a casino resort owned and operated by Bloomberry Resorts Corp. Bloomberry is controlled by Enrique Razon, the Philippines’ fifth-richest man in 2015, according to Forbes.

Silverio Benny Tan, corporate secretary of Bloomberry Resorts, told the hearing that the $29 million was transferred into a casino account under Xu’s name in exchange for ‘dead chips’ that can only be cashed in from winnings.

Casinos are not covered by the country’s anti-money laundering laws so it was not clear if the stolen funds could ever be recovered.

“The paper trail ends there. That is the problem,” he said. “Right now we are at a dead end.”

Conclusion of the US Financial Crisis Inquiry:  We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. The large investment banks and bank holding companies focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun. Many of these institutions grew aggressively through poorly executed acquisition and integration strategies that made effective management more challenging.

Too big to fail meant too big to manage. Financial institutions and credit rating agencies embraced mathematical models as reliable predictors of risks, replacing judgment in too many instances. Too often, risk management became risk justification. Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the downside limited. This was the case up and down the line—from the corporate boardroom to the mortgage broker on the street.

Our examination revealed stunning instances of governance breakdowns and irresponsibility. Five major investment banks—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with extraordinarily thin capital.

Too many of them were thinking alike. And the leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through “window dressing” of financial reports available to the investing public. The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs)..

Recently we permitted the growth of a shadow banking system—opaque and laden with shortterm debt—that rivaled the size of the traditional banking system. Key components of the market—for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives—were hidden from view, without the protections we had constructed to prevent financial meltdowns.  When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans, and the risky assets all came home to roost. What resulted was panic. We had reaped what we had sown.

German savings banks warn ECB on monetary ‘activism’

Hortense Goulard writes: Two days ahead of a key meeting of the European Central Bank, the chief economists of the German Savings Banks Association warned Tuesday that more expansionary monetary policy from the ECB “would barely have a positive impact on the economy” but could create problems in the long run.

“With hasty monetary policy, the ECB mainly achieves a crisis atmosphere and fosters a lack of trust in the eurozone,” economists from the association (Deutscher Sparkassen und Giroverband) stated in a press release. Most analysts expect Mario Draghi and the ECB board to take the Bank’s interest rates deeper into negative territory on Thursday.

Further lowering of key interest rates would harm financial stability, because of new risks and “huge side effects for the banks and the financial markets,” said Gertrud Traud, chief economist at the Landesbank Hessen-Thüringen.

The ECB instead should drop its goal of achieving an inflation rate close to 2 percent, according to the association’s economists.

“In a time of marked economic weakness as today, this goal is difficult to reach anyway,” said Michael Wolgast, chief economist of the DSGV, adding that the credibility of the central bank could be damaged if it kept missing its inflation goal in spite of its monetary measures.

Contrary to the ECB, the DSGV chief economists see little danger of deflation in the eurozone. They believe the inflation rates “should be near the goal of 2 percent in 2018 at the latest” without any additional monetary measures.

Capital Requirements for Banks Hotly Debated

Ben Chu writes:  A senior official at the Bank of England has been accused of misleading the public about the safety of UK banks.

He cited Bank of England estimates that a 1 percentage point increase in capital requirements across the board could knock around 0.6 per cent off GDP. “The costs will be borne by real borrowers in higher costs of funds and real savers in lower returns,” he warned. But Mr Brazier’s remarks drew a strong rebuttal from Professor Anat Admati of Stanford University, a widely acknowledged expert on the banking sector.

“I am alarmed by Mr Brazier’s speech because it confirms that important policy regarding financial stability is based on flawed claims and flawed research,” she said.

Ms Admati rejected the Bank’s estimate of the wider economic cost of banks using more capital and said one reason banks might find it more expensive to fund their balance sheets with more equity and less debt was because their de facto public subsidies from the taxpayer, such as being “too big to fail” and the tax deductability of debt, would have been eroded.

“It is disturbing that the Bank’s head of financial stability seems to be more concerned with supporting the banks by making flawed assertions that contradict fundamental principles of corporate funding,” she said.

The row comes at a time when the Bank is under serious pressure to reconsider its capital rules. The position of Mr Brazier, who was appointed to his current position last year, seems to be in line with those of the Bank’s Governor, Mark Carney. Mr Carney has repeatedly sought to assure bankers that there will be no additional capital requirements made on them in the coming years. Referring to the international “Basel” agreements on capital standards sealed in 2011, Mr Carney insisted in Shanghai last month: “There will be no Basel IV”.

In his new book The Age of Alchemy, Lord King takes a tough line on capital, saying it would be “a good start” for banks to have a minimum ratio of equity to total assets of 10 per cent. The Bank is currently planning to require them to have equity worth only between 3 and 4 per cent of total assets. For her part, Ms Admati says banks should have 20 per cent buffers.

“Their hatred of equity only confirms that the subsidies are substantial to their business model – but the subsidies come from the public,” said Ms Admati.

Focus on Finance

“The world has largely exhausted the scope for central bank improvisation as a growth strategy,” says Larry Summers, Harvard economist and advisor to Presidents. 

The new normal is low growth, rising inequality, political dysfunction and sometimes social tension.  Central banks have intervened.  Technical innovation has been transformative. And yet we are at a fork in the road.  Great New York Yankees baseball catcher Yogi Berra was fond of saying, “When you come to a fork in the road, take it.” 

Unfortunately we can’t have both forks.  Either we will get higher inclusive growth and genuine financial stability.  r we will get mired in lower growth with periodic recessions and the return of financial instability. 

We need to make better choices as households, companies, and governments.

WHen other policy makers were paralyzed by the world economic crisis in 2008-9, central banks stepped up.  The created a largely artificial growth path but the underlying engine of economic prosperity was not re-vamped. 

Central banks’ ability to pull new rabbits out of a hat is shrinking. 

The 17th century saw the creation of the first central banks in Sweden and then England.

Today the US Federal Reserve is the most powerful central bank in the world, but it was only created following a financial crisis in 1913.   The Fed’s mission is to “provide the nation with a safe, flexible, stable monetary ans financial system.”

The European Central Bank, representing 19 nations, is the second most powerful. It began to operate in 1999. 

We will present a series of articles on central banks.  They are based on Mohammed El Erian’s recent book, “The Only Game in Town: Central Banks, Instability and the Next Collapse.”

International Women’s Day

Women have seen only “marginal improvements” in the world of work in the past 20 years, according to a global study.

The International Labour Organization (ILO) said the difference in the employment rate between men and women had decreased by 0.6% since 1995.

In countries where women access work more easily, the quality of their jobs “remains a matter of concern”.

The findings come as events take place to mark International Women’s Day.

The board of governors of the European Bank for Reconstruction and Development (EBRD) approved China’s application for membership. China is, of course, already a shareholder in several global and regional development institutions, but the EBRD is different in its focus on private sector development and explicit promotion of democracy and a market economy. Membership is part of much more ambitions engagement of China in global finance.

The European Union will likely struggle to find a balance in relations with China this year, after initiatives such as participating in the Beijing-sponsored Asian Infrastructure Investment Bank contributed to a warming of ties last year with the world’s second-largest economy. On Feb. 15, the head office of the EU in Brussels was surrounded by about 5,000 demonstrators wearing hard hats and carrying banners and signs, who accused China of dumping steel and demanded the protection of jobs in Europe.

the US Dollar is close to printing 2016 lows. We have a scenario on our hands that is uniquely different to 2015 at the same time of year. Last year, the US Dollar was a run-away train into the Ides of March, and then the Fed came out to tell markets that the Fed would not harm the world with a Strong Dollar on their own accord.

The future-bearing potential of the rapprochement of Europe and the BRICS as a spearhead of global governance reform in a multipolar world. However, given the current global political setup the Euro-BRICS connection does not live up to its full potential.

Britain’s membership of the European Union reinforces the country’s economic “dynamism” but leaves it more exposed to financial shocks, Bank of England governor Mark Carney said.  Carney expressed the view in a letter to the head of the Treasury Select Committee before facing questions from the cross-party panel of lawmakers on Britain’s relationship with the EU ahead of June’s referendum on whether the country should remain part of the EU.

Alexander Friedman writes: Central bank policies have moved from supporting the markets to potentially destabilizing them. Now markets are turning to structural reform and fiscal policy for assistance. In this light, current price movements should be viewed through the spectrum of geopolitics. And it is not a nice view.

Nowhere is this more evident than in the oil markets, where prices have collapsed, with both Brent and Crude now hovering around the $30-per-barrel level.  In January, the correlation between crude oil prices and the S&P 500 reached the highest level since 1990.

It has become increasingly clear that supply dynamics, rather than falling demand, explain the drop from $110/barrel since the summer of 2014.

These supply dynamics are shaped by politics. Daily headlines about potential coordinated measures by the key oil-producing countries fuel oil-price volatility and define risk appetite across financial markets. Yet the politics is so confused that coordination appears unlikely, at best; the Iranian oil minister recently described a potential OPEC production freeze as a “joke.”

Currency policy remains confused, while newly introduced (and soon withdrawn) stock-market circuit breakers have accelerated market falls, as investors try to sell shares before liquidity disappears. Moreover, purchases by state-owned financial institutions, together with bans on sales by large institutional shareholders, cannot remain permanent features if the market is to be truly free.

Labile politics are increasingly driving outcomes in other emerging markets as well. In Brazil, the government struggles to balance its populist agenda with lower commodity prices, dwindling growth, and persistent inflation.

In Russia, too, politics has aggravated the negative oil-price shock. Western sanctions have contributed to an already slowing growth trajectory, and are threatening Russia’s ability to raise debt capital in global markets. The ruble has plummeted 130% since 2014 began, and GDP in 2015 contracted by 3.7%.

Yet Russia is a star performer compared to Venezuela, where President Nicolás Maduro’s government has overseen the economy’s total disintegration.

In Europe, the efficacy of the European Central Bank’s monetary policies is waning as the political scene becomes increasingly fragile.

Meanwhile, the migration crisis threatens Germany’s government; splits are now deepening within Chancellor Angela Merkel’s party.

In Southern Europe, Spain’s recent elections were inconclusive, and the absence of a stable government could derail an economic recovery that gained traction in 2015.

Turning to Japan, the strength in equities since Prime Minister Shinzo Abe took office has been founded on his “Abenomics” strategy’s “three arrows”: monetary stimulus, fiscal stimulus, and structural reforms. The Bank of Japan has launched one arrow, expanding the monetary base to ¥80 trillion ($710 billion). But momentum has faded considerably, as investors wait for the structural reforms needed for sustained improvement in economic, and market, fundamentals.

Financial markets, which seek stability and predictability, are struggling to find it in the politics of the world’s largest economy.

History may not repeat itself, but let’s hope it finds its rhyme. Back in the 1990s, the US economy stabilized and then surged forward, driven by accelerating productivity and abetted by sound monetary and fiscal policy. But economies may prove to be easier to mend than today’s dysfunctional politics, which may be part and parcel of the “new normal.”

John Wiliams of the Sa Francisco Federal Reserve comments:The Federal Reserve has a dual mandate: maximum employment and price stability. We want everyone who wants a job to be able to find one and for inflation to average 2% per year.

Unemployment will never be zero, because in any well-functioning economy, people leave jobs and new people enter the workforce. Economists use the term “natural rate of unemployment” to describe the optimal rate for an economy at full health. It’s hard to know exactly what the number is, but I put the natural rate at about 5%.

We dipped just below that, to 4.9%, in January. I expect the unemployment rate to continue to come down a bit further, reaching the mid-4s later this year. This is a reflection of steady improvement in a labor market that has fully recovered from the recession and its aftermath, when we saw a peak of 10%.

A further sign of the health of the labor market is that more people are quitting their jobs – indicating they feel confident that they’ll find another – and they’re probably right: Job vacancies are at the highest levels since they started collecting the data in 2000. We added more than 2½ million jobs in 2015. All in all, we have reached or are close to maximum employment across a broad range of markers.

The Fed sets a target of 2% average inflation. Many people think that Fed policymakers’ concern lies disproportionately with inflation that’s too high. They think we view inflation lower than 2% as sort of “not great,” but see inflation above 2% as catastrophic. That’s not the case. In my view, inflation somewhat above 2% is just as bad as the same amount below.

Despite recent financial volatility, my overall outlook for the U.S. and the global economy remains unchanged. There is plenty of concern about China’s slower pace, but as I said last year, this largely reflects a pivot from a manufacturing-based economy to one driven by domestic consumption and services – the exact engines that are currently powering U.S. growth (Williams 2015).

Despite the Sturm und Drang of international and market developments, the U.S. economy is, all in all, looking pretty good.