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Dr. Martien Lubberink

lines on the record: 83
first: 2023-04-20
most recent: 2023-04-20
sittings or episodes: 1
sources: podcast

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“Yeah, in a way it did. Like the AAA, because of the AAA rating, these assets were deemed to be safe. And as a result of that, they had lower risk weight. And as a result, means that banks had to hold less capital against that to protect themselves from the losses, which makes sense if these AAA ratings were right, then it all makes sense. But in this case, these AAA ratings, and we also saw the movie, what is it?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Right, but sometimes Rarely there can be a difference between an asset that the regulators tell the banks has a low risk and an asset that actually is low risk. And that is where trouble can emerge. Take us back to Basel II. Is it true that banks could hold AAA rated paper that was basically collateralized by subprime mortgages at a somewhat low risk rate? And did that contribute to the great financial crisis?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. So I'm talking about loans. So it depends a bit on the riskiness. Some assets have higher risk. Some assets have lower risk. Residential mortgages have relatively low risk. It depends a bit on where you are and where you live. But I think in New Zealand it's about 35% risk weight assigned to residential mortgages. So it's no surprise that banks will invest in these low risk assets because they don't contribute a lot to the requirement. So the higher the weight, the more capital you have to hold, the lower the weight, the less capital you have to hold. And so banks will tend to move towards or invest into or lend to Borrows of a low risk type.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“So on average, about 70% of the total assets will be translated in risk-weighted assets. So your risk-weighted assets are about two-thirds of total assets. That's for most banks, ballpark figure. More risky industries, then you will see that the risk-weighted assets will increase. Cash, for example, has no risk, and as a result, cash will be given zero risk weight. SME firms, small and medium-sized firms, I think they have 100% risk weight.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“There's tier two, which is another layer of capital which is meant to be used once the bank is gone concern. So that absorbs losses in when the bank is bankrupt or in liquidation. And so these are the most important ones that I know. Big distinction is the one common equity one divided by risk-weighted assets, that ratio, the CET1 ratio versus the leverage ratio, which doesn't rely on risk-weighted assets, but on total assets instead.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“They measure the amount of loss absorbing capital and then the ratio is just to correct for the amount of risk. So the higher the risk, the higher risk weighted assets or assets will be, the more capital you have to haul. So in the risk-weighted ratios. Risk weighted assets will drive the demand or drive the numerator to be higher. So more risky bank will have to hold more equity, and that is to absorb more losses. And so you have Common Equity D1, which has become very popular after the financial crisis. And I think there's tier one, which includes equity plus hybrids. ones that wreaked havoc on Credit Suisse, like additional T1.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I think the most important one is the one the risk weighted one. It depends a bit on where you live. I think in Europe and outside the US, the focus will be on common equity due one, which is the risk weighted, which is Capital of the highest quality, and then that is equity minus, for example, goodwill and other. Items that are deemed not to be very high quality equity. So it's core equity and then divided by risk-weighted assets. That's your common equity tier one ratio. So you have high quality equity divided by risk-weighted assets. In the US, I think there's more focus on tier one or common equity tier one divided by Total acids, which is the leverage ratio that could be, I think, the supplementary leverage ratio. And so what these ratios do is they just”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Oh yeah, and the other one is just diversify your deposit base to make sure that you have diverse depositors and hopefully some sticky depositors. And on the other hand, also make sure that you don't have a large exposure on a single asset class. That's banking 101. Banks are very, you know, in our country we have four banks and their main asset classes residential real estate and so there is a high sensitivity of bank capital with respect to changes in the values of homes in New Zealand. So that's risky and so therefore New Zealand banks have to hold high capital to protect themselves from anything that happens to a single asset class. But if you can diversify or if a bank diversifies in various other asset classes you know not solely focused on residential mortgages but also other small and medium sized firms.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And also, you have to be aware of the fact that in this case, governance and operational risk played an important role. And that is one area, as I said before, that's an area that wasn't well covered after the global financial crisis, because operational risks are so diverse that it's very hard to model them. And the modeling in the Basel regulations on credit risk are in a way kind of primitive. Capital requirements for operational risk are based on sales values, for example, or margins that are created in some business lines, like the more margin you earn in business line X, the higher your requirement will be for operational risk. That doesn't really deal with operational risk like anti-money laundering, fraud, theft, fire, and all sorts of other things. So it's hard to model, and as a result, you will see that mistakes may”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“But it's also based on trusts. So you have, yeah. On the one hand, it's a risky setup if you lend long and borrow short. Of course, there's always risks. And the best thing a bank can do, which many banks do successfully, is to manage these risks. And there's so many, as I said, there's regulatory tools, there's capital, there's hedges, there's... But if you chop away most, if you just ignore all these tools, yeah, that may lead to the outcome that we've seen in Silicon Valley Bank. In a way, it's an exceptional situation. The case of Silicon Valley is probably exceptional. That said, it doesn't mean that it won't happen to other banks. In my case, what I learned from that is that bank runs even with high capital are possible.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and when I learned just about how the duration of nomaturi deposits, how that plays such a key role in the duration of their liabilities, it's an assumption that you have no idea. The banks have no idea there's going to be a bank run or they could, the duration could be 20. It could be one day. And it's just kind of a little scary.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“What do you think? I think there's a limit to what bank capital can protect a bank. This case was clearly the result of depositors running and then forcing the bank to sell these held to maturity assets and as a result of that they had to sell assets that had a low value that had a high book value for a very low price which then resulted in losses and took away the the equity so yeah if you have an unpredictable run and runs are unpredictable they can recavoc and so you know good risk management should be prepared for that And as I said, there's so many tools that banks can use to do that. And yet, if I look at my understanding of SVB is that they ignore that, because in the end, I think, and that's probably back to your previous question, it is tempting to make money like that and then not protect. And I mean, you can overinsure, but then you pay a lot of premiums for insurance and that takes away part of the profits that you want to make.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Oh, yeah, okay, yeah. Yeah, well, that's Gosha. That's a good question. So they... actually beyond my expertise actually yeah like how do they make money then because then if everything's hatched they you know the the banking aspect of the transaction then disappears because then you know it's not really banking any longer if you move all the risk of your balance sheet the only thing that you then have is income from what is fees or so yes you're right so so probably there will be an imperfection in the hedges And the other thing is the other question that is that may be a bit of an issue is do the central counterparties or the center, what is it, the CCPs, will they be sufficiently well capitalized to deal with the in case there is a demand on the protection of these hedges? But yeah, it's a bit beyond my field of”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“That instance where a bank is facilitating a swap, and that would be an investment bank doing that. But let's say if Silicon Valley Bank, they had a huge influx of deposits, their deposits basically tripled in a little over a year, maybe two years. And with that, they bought. Securities that had interest rate risk 10 year treasury. A mortgage backed security by hedging those risks. You know, if I buy a 10 year treasury and then hedge it, what am I earning there? You get what I'm saying? Why not just hold it in cash? It's like buying Apple and then selling Apple.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“They do is they hedge it, and so they transfer the risk to other parties off balance, and that's what we've seen happening in particular, I think there were some cases in Holland and New Zealand and in the UK where just before the crisis, farmers were locked into a swap to protect them from interest rates going up turned out that these interest rates went down so a lot of farmers and SME or small and medium-sized firms were more or less painted into a corner by the swaps that they purchased. The banks, they go free because they're intermediating the swaps. On the one hand, they sell swaps to their borrowers. On the other hand, they transferred the other counterparties then are pension funds and insurance or insurance companies and pension funds that are at the other side of the swap. And as a result, all the risks are of balance. And I think that the banks then keep for themselves the fee of”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“The only risk you're really taking is interest rate risk. So if you enter into a swap to hedge that risk, now you have swap spread risk and you know someone thinks short another like you know there's a saying of there's no the only perfect hedge is in a Japanese garden like if you want to hedge your apple holdings by selling S&P 500 futures you know it's an imperfect hedge and what income do you make as a bank if you're treasuries but you're your short swap spreads i mean that it's because the only risk you're taking is interest rate risk so so”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. You said earlier that New Zealand banks hedge and all of the US globally systemically important banks have very sophisticated hedging programs. The degree to which those hedges offset the losses, unrealized losses on HTM portfolios, that's another side. But my question for you is what does a hedge mean if you buy a 10-year US treasury?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“It seems to be that that was the case. They relied on the stickiness of deposits, which then more or less cancels out the downward trajectory of prices when interest rates go up. So if interest rates go up, then the asset values or the values of the investment of Vestb would go down. But that would be compensated by the sticky depositors because it's easier to make money for a bank in high interest times. And given that depositors are sticky, that creates an additional profit for the bank then. So the losses on the assets are then compensated by the stickiness of depositors. However, and that is one of the things that most regulators probably are thinking about, is what do we assume now with respect to the stickiness of depositors? Because what we've seen here is that they were hot depositors who quickly run like in hours instead of in days.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And so the problems are now, I think, transferred off balance sheet to, what is it, central counterparties who absorb these risks now. So, you know, a thing like ensuring yourself against the loss of value, which by the way, most homeowners would do with their own mortgage as well, just by insurance, that was just, I think, not done by SVB. And then other things happen as well. So as a result, you know, of just a very simple banking model which wasn't dealing with all the tools which didn't incorporate the tools that you should use to deal with the fragile balance sheet that it had, the result of that was just a quick demise.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, that's kind of obvious. It's almost like how to show or how to not run a bank. We all know that banks invest in long maturity assets, mortgages of 30 years or 10 years, and they borrow short. And there's a whole lot of tools there to prevent that mismatch from wreaking havoc with the bank, like hedges or diversifying depositors or diversifying assets and so forth. In order to make that fragile banking model work with long assets and short liabilities, there's many supporting tools to prevent the bank from collapsing like SVB did. And yet, you know, what we know is that SVB hardly used any of these tools. Like, for example, if you look at New Zealand banks, they're exposed also to interest rate risk. But they have hedged all these risks using swaps.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yes, you know, temporarily you have these values of some of these long dated instruments or investments, they can diverge because lower market values, but at the end of the term, once these bonds are paid back or redeemed, the value should be back 200%. And then you would never have a problem. The problem was that SVB was forced to sell them during midtime or during the tenure of these instruments and then had to crystallize the losses which then affected the equity negatively. The thing is maybe SVB would have been less problematic if they had held more capital. But if you just do the mass more capital would probably not solve the problem of SVB in the end because the massive losses on the securities were so high that even a higher capital ratio would not help.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And then depositors started running and forced SVB to sell these assets which had a book value of 100%, but they were forced to sell them at a very low price. And that led to losses. And as a result of these losses, equity was stressed and these losses were imposed on the equity value. And as a result, equity ratio, capital ratios of SUB dropped very quickly. So the thing is.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Interest rates, the market values of the assets that SVB held were dropping, and that should affect equity if you had full market-to-market accounting. However, because of the accounting, we see that the effect on equity were or the losses were kind of hidden. And as a result, didn't affect the equity value of SVB. Now, the problem is that, or the point here is that if the bank is well led and ticks all the boxes with respect to governance and diversifying its depositor base and investing in other assets, if that's all fine and well, then there would not really be a problem at SVB. The problem is soon shortly after everybody discovered that these asset values of the long dated investments had a low market value.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“So the thing was the interest rate risk lowers the value of a lot of the assets. However, I think there was a bit of an accounting trick that was playing up here with SVB. Most of the assets that the bank had were at the original 100% value. And that's all fine for many banks. They have these health to maturity assets, which are valued at cost. And they keep their value forever 100% in the books. That's not a problem if the bank is well run, even though the assets may, the market value of these assets are lower. In the end, most banks will be able to pay back these or they get 100% for these assets anyway at some point in time. However, you may have at some point in time like now, because of interest rate risk, that these assets market values are a bit lower than their original values. And so with the increasing...”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Right, but the amount of bank capital, even if it's still large, it can be wiped out completely if the loss is exceeded and then the bank is marked to market insolvent. That's what happened with Silicon Valley, as you say, loaded up on very interest rate long duration securities treasuries, but mainly agency mortgage-backed securities.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Oh, bank capital is basically its equity, and that's the difference between the assets and the liability. And there's a couple of adjustments. So there's a slight difference between equity and bank capital, but it's basically the difference between the assets on the left-hand side of the balance sheet and the liabilities on the right-hand side of the balance sheet. So that's the gap. And as long as you have more assets or if the value of your assets are higher, then your liabilities, you're in business. And so that is more or less the difference between assets and liabilities, that's bank equity. And it should absorb losses. So that's the whole thing. If these assets start deteriorating in value, that means that the bank is running losses and then equity should absorb these losses. So the concepts of loss absorption is very important in bank capital. I think the most important reason why we have bank capital.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Heavy investment in a single or almost single asset type. It's almost unfathomable of what all the things that contributed to the demise of SVB. But the thing is, I think that's important, is it was well capitalized, but as we've seen with a couple of bank failures, capital is not the end of it. It's not everything, and you have to be aware of other things like liquidity and in this case or these cases like Critique Suisse and SVB, that operational risk is still something to be looked after.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And liquidity risk. And so credit risk and liquidity risk are now more or less. Sort it in terms of regulations. But what is kind of the more problematic one is operational risk. And that can be operational risks are, you know, there's a high variety in the types of risks that contribute to operational risk that could be fraud or that could be money laundering, mismanagement and so forth. So it's far more difficult to manage or to regulate operational risk. In these cases like SVB was probably also a case of operational risk where things were just not working fine in terms of governance, in terms of management, in terms of the interaction between these supervisors and bank management and so forth. So it was more a combination of poor management, which then led to a very poorly diversified set of depositors who were hot depositors and could run quickly that combined with”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Well, it means that they're much more resilient than they were before, so that's a good thing, and I think that's one of the achievements of the Basel Committee and the global rules on banking. Leverage has gone less levered, and that's a good thing across the board, I think, worldwide. And also if you look at European banks in particular, they are much more resilient because of these higher requirements. So that's not a problem. I think you have to be aware of that there's always the possibility of a run or mismanagement. And that, I think, hit in particular SPB Bank and also Critique Suisse. One thing that people may not understand very well or may have not seen on the radar, the banking or the global financial crisis, as a result of that, a lot of work was done on liquidity rules and capital rules. So they addressed credit risk.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Regulators started redefining capital, and I was part of the working groups at the Basel Committee and the European Banking Authority to redefine capital. So that focused my interest on capital alone. And as a result, I learned a lot about capital. And so after years, I think in 2013, I decided to take it a bit easier because it was hectic times, long working weeks and a lot of stress, I think, also. decided to move to New Zealand where I got a fantastic job offer and since then I'm there.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And so I asked him, is it safe? And is this only a US problem? Or I can move to Holland, but it's not really funny if I land in or if I get a job in Holland and then banks in Holland start toppling because it will probably lead to a crisis and so forth. So no, they said the managers were adamant and they were very convinced that this was only a US problem. And I said, well, if that's the case, then what prevents me from going back to Europe? And then in particular, Holland to get in touch again with my parents and see them more frequently and so forth. So they said it's only an American problem. And I arrived there in July 2008. And still it was kind of safe, but we all know that in September 2008, Lehman collapsed and then, you know, it wasn't at all a US problem in its own. And soon after the regulators at the Basel Committee and various other...”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“At some point, I think in February, March, I thought the sabbatical will end, and what's now shall I stay in the US or shall I go to back to the UK or to Holland, where my parents live. And I thought, and then suddenly I saw an advert from the central bank in Holland that they had a position there for somebody who knew something about bank accounting. So I applied. And the interview was kind of interesting because I had a video interview with my future managers and I pointed out that banks in the US were shaky at that moment and it was March 2008.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Okay, it's actually a bit of a longer story, but I worked after my PhD that I obtained in Holland. I thought about moving to Lancaster University in the UK. And after a couple of years, I thought to take a sabbatical for a year. And I ended up in 2008, 7, 8 at the UNC Chapel Hill, which is a wonderful place. And I enjoyed my sabbatical over there. And then suddenly I noticed that banks in the US were toppling and there were problems with Bear Stearns and other Washington, I think Washington Bamo was it. They were all sort of a bit in problems. And then I thought like, okay, so what's going on here? So I started looking into banks and bank debt in particular. And then”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT