Davos 2014: UBS chief fears Europe's banks are still in danger

Bankers and hedge funds split over whether enough has been done since the crisis

Ben Chu
Thursday 23 January 2014 01:00

Davos delegates found themselves at loggerheads yesterday over the health of the banking system.

Speaking at the World Economic Forum, Douglas Flint, the chairman of HSBC, insisted the system was now considerably less risky than before the 2008 global financial crisis. "I don't think there is any doubt that the system is safer," he said, adding that "50 to 80 per cent" of his board's time is spent grappling with new regulation.

Antony Jenkins, the chief executive of Barclays, agreed that banks were in much better shape than six years ago. "Capital is higher and the level of supervision is more favourable," he said. "The emphasis that institutions like ours are placing on conduct reduces the chances that the events of 2008 will be repeated."

However, the chairman of UBS, Axel Weber, issued a stark warning about the health of some eurozone banks, which will be put through a stress test by the European Central Bank this year.

"I expect some of the banks not to pass the stress tests and I am concerned that, as this becomes clear, this will spark a market reaction," he said.

The view that financial system is now safer was also challenged by the founder of the Elliot Management Corporation hedge fund, Paul Singer. "Leverage has not been meaningfully reduced and the opacity [of bank balance sheets] has not been reduced at all," he said. He added: "The thing I most disagree with is that these institutions mostly understand their risks. In 2008, many of these institutions didn't have a clue about some of the inventions of their structuring desks."

The proposition that finance has been rendered safe by a host of reform measures taken in recent years was also rejected by Anat Admati, professor of finance at Stanford University. "Definitely, the system is not safe," she said. "The risk is hiding. These reforms are essentially tweaks." She likened the reform success so far to reducing the speed limit in a residential area from 90mph to just 85mph.

There was also disagreement over whether large banks receive an effective subsidy because they are too large to fail. Analysts estimated that at the height of the crisis this subsidy stretched to tens of billions a year.

"I think the subsidy is intact," Mr Singer said. But Mr Flint questioned this. "If banks are getting a subsidy, that is being passed on to their customers" he said.

Asked about banks' bonuses, which will be capped this year by the EU to twice salary, Mr Jenkins said: "There has been more restraint, a very large part is deferred, there is the ability to claw back, [and] a large part is paid in shares for senior people."

Asked whether banks should be broken up for the public good, something the Labour leader Ed Miliband has suggested, Mr Jenkins said: "Concentration is not the big issue here. The question is: 'Do they manage the risk?'"

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