Saturday, May 07, 2005
Greenspan on HF Regulation
Greenspan: Giving Hedge Funds New Rules Won't Work
Friday, May 6, 2005
By Barbara A. Rehm and Rob Blackwell
CHICAGO - Federal Reserve Board Chairman Alan Greenspan warned bankers Thursday to demand more of their hedge fund customers, while U.S. Bancorp chairman Jerry Grundhofer warned against following nonbanks down a slippery slope to a pile of problem credits.
Mr. Grundhofer said competition for commercial credits is fierce, with hedge funds and other nonbank lenders making pricing irrational.
"There is margin compression everywhere," he said in a luncheon speech at the Federal Reserve Bank of Chicago's annual Conference on Bank Structure and Competition.
U.S. Bancorp accepts that and attempts to make up for lower rates with higher volume, he said, but that's "a tough call, a tough line to walk." U.S. Bancorp is trying not to "reach too far for marginal credit." But some nonbank rivals, including hedge funds, are not as disciplined, he said.
"Overall credit standards have deteriorated. Certainly pricing has, and we're starting to see problems with structure as well," he said in an interview after his speech. "They may be the smartest underwriters on Earth," he said of hedge funds. "We'll see who's right and who is wrong."
U.S. Bancorp is "trying to be aggressive on pricing, and get new business, but not fool around with" changes in loan terms and conditions, he said.
Mr. Greenspan said that banks had made "considerable progress" in strengthening oversight of their relationships with hedge funds since the fall of Long-Term Capital Management in 1998.
But he said a recent central bank study of banks' management of hedge fund credit risk found several "weaknesses."
"Competitive pressures may be eroding the protection that banks achieve through collateral requirements by reducing the initial margins that they obtain from hedge funds," Mr. Greenspan said. "The review suggests that banks and their supervisors need to be alert to the possibility that further slippage of credit terms could result in material increases in credit risk to banks, a material loss of market discipline on hedge funds, and a material increase in the potential for hedge fund leverage to adversely affect market dynamics."
Mr. Greenspan urged bankers to persuade hedge fund managers to provide more information about their portfolios, including "forward-looking measures of the risks that the funds are assuming."
"Most banks' policies," he said, "could be improved by the establishment of clearer and firmer links between credit terms and transparency."
Mr. Greenspan also urged bankers to aggregate stress-test results across hedge fund counterparties "to assess concentrations of exposures in volatile and illiquid markets."
However, Mr. Greenspan said he opposes ramping up regulation of hedge funds. Any additional disclosure requirements would be fruitless. "Most of the data would tell you their strategy of last night. This morning they would have a new one. It's their very nature to be innovative and ever-changing," he said during a question-and-answer session.
Speaking on other risks to the financial system, Mr. Greenspan said concerns that credit derivatives have transferred too much risk outside the banking system appear to be overblown.
There were $4.5 trillion of the derivatives as of June, and some experts have become concerned that losses to nonbank risk-takers could force them to liquidate their positions if credit spreads widen appreciably.
But Mr. Greenspan cited a study conducted last year by the Joint Forum that said the notional values of derivatives had "significantly overstated the amount of credit risk that had been transferred outside the banking system."
Mr. Greenspan also reiterated his position that the mortgage portfolios of Fannie Mae and Freddie Mac should be reduced.
But instead of recommending specific caps, as he has done in the past, Mr. Greenspan said he agreed with Treasury Secretary John Snow's recommendation that a proposed new regulator for the GSEs have power over the portfolios and get specific guidance from Congress on how to treat them.
"Specifically, the GSE should hold only the minimum level of assets needed to accomplish the primary missions mandated by their charter," Mr. Greenspan said.
© 2005 American Banker and SourceMedia, Inc. All rights reserved.
Friday, May 6, 2005
By Barbara A. Rehm and Rob Blackwell
CHICAGO - Federal Reserve Board Chairman Alan Greenspan warned bankers Thursday to demand more of their hedge fund customers, while U.S. Bancorp chairman Jerry Grundhofer warned against following nonbanks down a slippery slope to a pile of problem credits.
Mr. Grundhofer said competition for commercial credits is fierce, with hedge funds and other nonbank lenders making pricing irrational.
"There is margin compression everywhere," he said in a luncheon speech at the Federal Reserve Bank of Chicago's annual Conference on Bank Structure and Competition.
U.S. Bancorp accepts that and attempts to make up for lower rates with higher volume, he said, but that's "a tough call, a tough line to walk." U.S. Bancorp is trying not to "reach too far for marginal credit." But some nonbank rivals, including hedge funds, are not as disciplined, he said.
"Overall credit standards have deteriorated. Certainly pricing has, and we're starting to see problems with structure as well," he said in an interview after his speech. "They may be the smartest underwriters on Earth," he said of hedge funds. "We'll see who's right and who is wrong."
U.S. Bancorp is "trying to be aggressive on pricing, and get new business, but not fool around with" changes in loan terms and conditions, he said.
Mr. Greenspan said that banks had made "considerable progress" in strengthening oversight of their relationships with hedge funds since the fall of Long-Term Capital Management in 1998.
But he said a recent central bank study of banks' management of hedge fund credit risk found several "weaknesses."
"Competitive pressures may be eroding the protection that banks achieve through collateral requirements by reducing the initial margins that they obtain from hedge funds," Mr. Greenspan said. "The review suggests that banks and their supervisors need to be alert to the possibility that further slippage of credit terms could result in material increases in credit risk to banks, a material loss of market discipline on hedge funds, and a material increase in the potential for hedge fund leverage to adversely affect market dynamics."
Mr. Greenspan urged bankers to persuade hedge fund managers to provide more information about their portfolios, including "forward-looking measures of the risks that the funds are assuming."
"Most banks' policies," he said, "could be improved by the establishment of clearer and firmer links between credit terms and transparency."
Mr. Greenspan also urged bankers to aggregate stress-test results across hedge fund counterparties "to assess concentrations of exposures in volatile and illiquid markets."
However, Mr. Greenspan said he opposes ramping up regulation of hedge funds. Any additional disclosure requirements would be fruitless. "Most of the data would tell you their strategy of last night. This morning they would have a new one. It's their very nature to be innovative and ever-changing," he said during a question-and-answer session.
Speaking on other risks to the financial system, Mr. Greenspan said concerns that credit derivatives have transferred too much risk outside the banking system appear to be overblown.
There were $4.5 trillion of the derivatives as of June, and some experts have become concerned that losses to nonbank risk-takers could force them to liquidate their positions if credit spreads widen appreciably.
But Mr. Greenspan cited a study conducted last year by the Joint Forum that said the notional values of derivatives had "significantly overstated the amount of credit risk that had been transferred outside the banking system."
Mr. Greenspan also reiterated his position that the mortgage portfolios of Fannie Mae and Freddie Mac should be reduced.
But instead of recommending specific caps, as he has done in the past, Mr. Greenspan said he agreed with Treasury Secretary John Snow's recommendation that a proposed new regulator for the GSEs have power over the portfolios and get specific guidance from Congress on how to treat them.
"Specifically, the GSE should hold only the minimum level of assets needed to accomplish the primary missions mandated by their charter," Mr. Greenspan said.
© 2005 American Banker and SourceMedia, Inc. All rights reserved.
# posted by Tom @ 11:00 AM 
