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The credit crunch and its impact on financial centres Back  
John Coffey analysed the differential impact of the ongoing credit crisis, pulling no punches in a global tour of money and capital markets centres in a paper at the inaugural Fintel Global Financial Centres Conference in the RHK, Dublin, run by the publishers of Finance. He surveys the ongoing impact of the credit crisis on financial markets, and currencies, forecasting, at the conference on June 17th, a bottoming out of the US dollar. He also assessed the reaction of different central banks around the world to the crisis.
Regulators, banks and ratings agencies are three of the culprits to blame for the credit crisis, said John Coffey, head of treasury ALM at BNP Paribas (Dublin) branch.

Alan Greenspan, the US economist and chairman of the US Federal Reserve Board from 1987-2006, could also take a significant portion of the blame: ‘Greenspan was a hero for a long time, but there’s a revisionist view of him that’s coming out which is probably a bit more accurate,’ said Coffey. ‘Greenspan tried to eliminate the economic cycle by cutting rates every time the economy or the stock market looked in difficulty, which was great in the short term but in the long term he was just postponing the difficulties and problems which we’re experiencing now.’

Pre-Greenspan’s arrival, said Coffey, ‘there were wider economic cycles and a wide range of GDP growth, whereas after his arrival volatility reduced considerably. This resulted in significant asset growth, with some becoming so overvalued that they were unaffordable for individuals and institutions alike. That’s the situation we’re in now and to my mind he’s the major culprit and people are slowly beginning to realise that.’
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BNP Paribas' Coffey: 'The Fed did move decisively, but I think it should have moved substantially earlier.'

Greenspan’s successor, Ben Bernanke and Henry Paulson, the US Secretary of the Treasury, also played a part in the proceedings, he said. ‘In 2007 there was the biggest surplus in the US property market for more than 20 years - and you cannot have a surplus like that without a significant impact on the economy. The previous high similar to that was in 1990 when a significant recession took hold, so I would have thought it was fairly clear what was going to happen next.’

He contined, ‘However, it seemed our friends Mr Bernanke and Mr Paulson had a different point of view. Hank Paulson was even quoted as saying that “I don’t think [the sub prime] mess poses any threat to the overall economy” on 26th July 2007 - which is roughly two weeks before the whole house of cards fell down.

‘I know it’s easy to be revisionist, but I feel that given the surplus in the housing market it should have been pretty clear to the regulators that they needed to move much more promptly and to my mind the Fed should have been culling rates from January 2007.’

Nevertheless, Coffey claims that when the Fed did realise the depth of the problem a number of steps were taken to supply liquidity to the market, ‘so it did move decisively, but really I think it should have moved substantially earlier.’

Coffey gave credit to the ECB, claiming that it performed far better in the crisis. ‘Admittedly the ECB had more time to react, but it recognised the depth of the problem and moved decisively and effectively. The ECB could see this was something more serious than anything we’d seen for many years which needed prompt action and that’s what it did.’

Regarding the UK, Coffey claimed that the inadequacies of the system, ‘were manifested and came to bear in the whole Northern Rock problem. I think the fact that there were multiple regulators looking after this area and the power wasn’t with one single regulator, as it used to be with the Bank of England, the reaction time was much slower. I believe that regulators have a lot to learn from this crisis and we may see some changes as a result.’

Turning his attention to the role of banks in the credit crisis, Coffey said that the originate and distribute model which had become popular and profitable in the banking sector ‘was deeply flawed and the situation arose where the banks were so far removed from the credit that their motivation to follow the risk was far less than it had been. I think that model was flawed and is probably going to be thrown in the bin at this stage.’

The Basle II regulations also encouraged the creation of a shadow banking system,he said. ‘Banks were encouraged to optimise their return on capital and any products that they could design that would take capital off their balance sheet were marketed to them by the investment banks,’. ‘And this was the problem - and still is a big problem - in the crisis because in the old days the central banks could just flood the money through the banking system and solve the problem initially. But in this scenario the people who needed the money were not the commercial banks, it was the securities houses and other people in the shadow banking system, so it wasn’t easy to filter the money out to them.’

The role of the rating agencies, said Coffey, is that they were conflicted and were effectively being paid for the rating. ‘One US senator made a comment that it was like a movie studio paying a critic to review a movie and using a quote from his review in
the commercials’.

Modelling errors, where the ratings were four notches too high on some triple A ratings, added further ratings misery, said Coffey, adding that he considers that ‘we’ll see significant changes take place concerning rating agencies and they won’t be in the situation again where they will have voluntary regulation and they’ll probably be restricted from rating issues which they themselves have issued.’

‘At the moment the market seems very complacent - people are saying we’re through the end of it now and I don’t believe this to be the case. I believe there will be more write downs and write issues to come - it cannot possibly be over until the housing market problem in the US is over and I think the risks of recession are still very high.’

In terms of financial centres’ winners and losers, Coffey believes the impact will be played out in various guises. ‘In London, rising taxes and the non-dom issue have reduced its attractiveness,’ he said. ‘In New York, recent figures show that 85,000 jobs will be lost, 25,000 of which will be on Wall Street. Obviously, the downturn in the real estate, airline and retail sectors will have an impact, so New York is certainly going to be a loser in the short term. In Paris, the Societe Generale affair was embarrassing for the French authorities and bank supervision is likely to be increased. In Dublin, the IFSRA liquidity regulation was perfectly timed. Irish banks are relatively unaffected by the sub-prime and SIV problems, but the dependence on property is still a significant weakness. The tax regime is still attractive, but labour costs are still a growing issue.’

Luxembourg is one of the centres that has been hit less, said Coffey, as it concentrates heavily on back office administration. ‘And in Geneva and Zurich, where I know the UBS write down has been a huge issue, but all of its competitors have move very quickly and I think they’re picking up a lot of the business, so I think the financial sector there as a whole has not been affected that much.’

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