No bank’s too big to fail, there should be bankruptcy for all: Mike Cavanagh, JPMorgan--Economic times
he world is a better place for business than a year ago, says Mike Cavanagh, JPMorgan . In an interview with ET, Cavanagh says that Cyprus kind of approach to a banking problem may be more realistic in future. Edited excerpts:
How is the sentiment among investors and corporate leaders?
The global economy is a better place than what it was a year ago. I spent some time recently with Indian clients, and for whatever reasons, they tend to have a dimmer view of their own market than foreigners. But, I'm always interested to hear how corporate leaders in India feel. There are those whose businesses seem to be facing acute near-term pressure, but when they talk about the long term, there's a sense of optimism.
Is the worst over?
The US economy is starting to show signs of progress. One of the big factors is housing, and the numbers are showing a turn for the better. That's a good sign for banks and consumers, but it is also a psychological lift, which leads to jobs and economic growth. Away from the housing story, the consumer is driving the economy. Consumer debt levels have returned to reasonable levels, corporate balance sheets are in great shape and companies have adjusted their businesses and improved margins. Companies have cash on their balance sheets and with rates being so low, a lot of refinancing is happening.
Have the Europeans solved their problems?
The structural change that needs to happen in Europe to harmonise various policies will take a long time. There's good reason for Europe to get the work done, though. No nation would be in good shape exiting the European Union due to the high costs of revaluation and potential recession. However, it probably means that growth will be meagre for quite some time, and situations like Cyprus can create short-term headline risk.
What are the challenges to building business in India?
India is a great place to operate. JP Morgan is different from its competitors. Our strategic advantage is serving global companies and investors. It is less about being a local player in a market and more about making sure we can provide a global network for India's major corporations and growing companies. There is tremendous value in being a global partner.
How is the sentiment among investors and corporate leaders?
The global economy is a better place than what it was a year ago. I spent some time recently with Indian clients, and for whatever reasons, they tend to have a dimmer view of their own market than foreigners. But, I'm always interested to hear how corporate leaders in India feel. There are those whose businesses seem to be facing acute near-term pressure, but when they talk about the long term, there's a sense of optimism.
Is the worst over?
The US economy is starting to show signs of progress. One of the big factors is housing, and the numbers are showing a turn for the better. That's a good sign for banks and consumers, but it is also a psychological lift, which leads to jobs and economic growth. Away from the housing story, the consumer is driving the economy. Consumer debt levels have returned to reasonable levels, corporate balance sheets are in great shape and companies have adjusted their businesses and improved margins. Companies have cash on their balance sheets and with rates being so low, a lot of refinancing is happening.
Have the Europeans solved their problems?
The structural change that needs to happen in Europe to harmonise various policies will take a long time. There's good reason for Europe to get the work done, though. No nation would be in good shape exiting the European Union due to the high costs of revaluation and potential recession. However, it probably means that growth will be meagre for quite some time, and situations like Cyprus can create short-term headline risk.
What are the challenges to building business in India?
India is a great place to operate. JP Morgan is different from its competitors. Our strategic advantage is serving global companies and investors. It is less about being a local player in a market and more about making sure we can provide a global network for India's major corporations and growing companies. There is tremendous value in being a global partner.
Does higher capital requirement solve the problems of the global banking system?
Following the financial crisis, higher levels of capital are appropriate. At JP Morgan, we have always held much higher levels of capital than what Basel-I rules required. We understood the nature of our business and operated with the philosophy that we should determine what the appropriate level of capital is, even if those levels were higher than what was required. For the broader banking sector, pushing up the minimum levels was a necessary and good thing to do to set higher standards. That said, when you look at the collective effect of the new Basel rules versus the old, you are talking about triple the amount of capital in the financial system. That level of capital is ample and most of the banks are on a path to reach those capital targets much sooner than 2019.
Do we need bankruptcy laws for banks?
The more important issue to resolve is the notion that banking institutions are too big to fail. We firmly believe that we have to end that notion - in practice and in perception. There needs to be bankruptcy for banks of all sizes that actually works. US regulators are working with global regulators and making good strides. It should be clear that if a bank of any size makes bad decisions and gets into trouble, it can be seized and shut down with no loss to a government or taxpayers. It should go bankrupt, and equity and debt holders should pay the price.
The name and company should be declared dead and the board and management should be fired and held accountable. That is the way market discipline should work. If we don't understand as a community that this is the way the world should function, it's going to be unhealthy for the banking system. To the extent if there are any losses after that process, those losses should be charged back to the banking industry, which is the way the Federal Deposit Insurance Corporation works in the United States. JP Morgan has paid billions over the past several years to replenish the FDIC, which has shut down local banks all over the country. That kind of concept could be applied globally.
What are the lessons financial markets can learn from Cyprus?
Cyprus ended up with a solution that probably made the most sense, although it was a messy process getting there. It is important that insured depositors are protected in any form of resolution. Penalising insured depositors would change the game and insured depositors across the world could start to say: let me take my money and put it under my mattress. If that had been the outcome in Cyprus, you would have to worry about the potential run on banks in other countries facing economic difficulties.
How did the risk management practice in a large bank like yours fail?
We made mistakes. It was an isolated incident that cost us $6 billion, mainly because a series of risk management processes failed us.
Following the financial crisis, higher levels of capital are appropriate. At JP Morgan, we have always held much higher levels of capital than what Basel-I rules required. We understood the nature of our business and operated with the philosophy that we should determine what the appropriate level of capital is, even if those levels were higher than what was required. For the broader banking sector, pushing up the minimum levels was a necessary and good thing to do to set higher standards. That said, when you look at the collective effect of the new Basel rules versus the old, you are talking about triple the amount of capital in the financial system. That level of capital is ample and most of the banks are on a path to reach those capital targets much sooner than 2019.
Do we need bankruptcy laws for banks?
The more important issue to resolve is the notion that banking institutions are too big to fail. We firmly believe that we have to end that notion - in practice and in perception. There needs to be bankruptcy for banks of all sizes that actually works. US regulators are working with global regulators and making good strides. It should be clear that if a bank of any size makes bad decisions and gets into trouble, it can be seized and shut down with no loss to a government or taxpayers. It should go bankrupt, and equity and debt holders should pay the price.
The name and company should be declared dead and the board and management should be fired and held accountable. That is the way market discipline should work. If we don't understand as a community that this is the way the world should function, it's going to be unhealthy for the banking system. To the extent if there are any losses after that process, those losses should be charged back to the banking industry, which is the way the Federal Deposit Insurance Corporation works in the United States. JP Morgan has paid billions over the past several years to replenish the FDIC, which has shut down local banks all over the country. That kind of concept could be applied globally.
What are the lessons financial markets can learn from Cyprus?
Cyprus ended up with a solution that probably made the most sense, although it was a messy process getting there. It is important that insured depositors are protected in any form of resolution. Penalising insured depositors would change the game and insured depositors across the world could start to say: let me take my money and put it under my mattress. If that had been the outcome in Cyprus, you would have to worry about the potential run on banks in other countries facing economic difficulties.
How did the risk management practice in a large bank like yours fail?
We made mistakes. It was an isolated incident that cost us $6 billion, mainly because a series of risk management processes failed us.
No comments:
Post a Comment