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Interfaith investor group surveys bank risk

Wed, Jan 2, 2013

Whether it’s losses of up to $9 billion in derivatives at JP Morgan Chase or the Massachusetts attorney general suing five major banks for fraudulent foreclosure practices, “with each new banking scandal, the public figures ‘maybe this time they will get it,’” Rev. Seamus Finn says of the US financial system.

“Then you open the morning paper and see we still have work to do,” added Finn, who is director of faith-consistent investing at the Missionary Oblates of Mary Immaculate and a board member of the Interfaith Center for Corporate Responsibility (ICCR).

The frustration for advocates is that normal safeguards could have prevented many of these financial losses, Finn said in the latest annual report for ICCR, which has more than 300 institutional investors representing $100 billion+ in assets. That’s why the investor group seeks to avert the next financial meltdown with an analysis of seven major US banks in four key governance areas:

* risk management
* pay day lending
* executive compensation
* lobbying and political contributions

The major banks being studied include Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo. They received questionnaires in August and were asked to return them in September.

“We’re digesting the data at the moment,” Finn said in an interview with StreetWise. Publication is likely in February or March, right before the banks’ annual meetings. “It’s a good platform for us to have conversations and it’s likely to get more attention.”

Risk management over derivatives, credit swaps and shadow banking in general is the largest sector of the analysis, he said. As an example, if a bank wanted to hedge a 50-point stock market loss, it might sell off pieces successively to other parties like a hot potato.

“The question is, for a single institution, how do they account for that on their balance sheet and how does the system as a whole account for it,” Finn said.

Shadow banking led to the bank run that preceded the 2008-09 global financial crisis, Bloomberg Businessweek.com noted November 18. “Creditors accumulated chits that were unpayable by debtors, and the lack of government deposit insurance meant there was nothing to stop the creditors from panicking when the chits hit the fan.”

Shadow banking worldwide amounted to $67 trillion last year, compared to $62 trillion in 2007, Businessweek.com noted, citing a report by international financial regulators. The US accounts for 35 percent.

The ICCR survey asks the banks what safeguards they have put in place voluntarily since 2008 or because of the Dodd-Frank bill in the US and other legislation in Europe. “Is Main Street’s, or the public confidence in your institution, going to be restored?”

Payday lending is the second facet of the study. “We can understand people who are in a pinch need to get some money against their check or their last check but we want banks to be more transparent about their interest rates and the collateral they are using [liens] when they are taking advantage of people in a tough situation,” Finn said.

The third facet, executive compensation, covers bonuses and incentives rather than base pay. The group would like to see them calculated over three to five years rather than annually.
“Yeah, you did a great job this year but what if the deals go south next year; how do we get some of that back?” Finn said. The answer is “claw-back” provisions, which would return some bonus pay amid bank losses.

It was excessive bonuses to bank presidents “while the rest of the nation bore the brunt of the economic crisis,” that spurred the Occupy Wall Street movement, noted Sr. Nora Nash of the Sisters St. Francis of Philadelphia in the ICCR annual report.

Finn himself became interested in banking nearly 30 years ago, when colleagues were working in Latin America and Africa. Dictators and military juntas there received money they promptly put into personal accounts — out of the country — while leaving the nations with the debt. He sees the “social purpose” of a bank as helping people access credit at a reasonable rate of interest so they can keep economies flowing.

Finally, ICCR’s survey seeks transparency regarding the amount financial institutions spent on lobbying and political contributions. “Collectively, the banks spent an awful lot of money lobbying against provisions of Dodd-Frank,” whose goals were to make them more accountable, more transparent and less speculative, Finn said.

“The core question is, have we been able to restore confidence of the general public in Wall Street?” Finn said. “That does not happen overnight. It is a work in progress that bears watching.”

By Suzanne Hanney,
StreetWise Editor-In-Chief

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