Law, Banks and the World Economy

What’s wrong with the economy?  Why is the US in such a sorry state?  Why don’t banks lend more freely?  What is the prognosis?  These matters, as well as principles of corporate governance, were explored at this morning’s meeting of the New England Chapter of the National Association of Corporate Directors.

Now, the slant of this group is not hard to guess; they are for business, against regulation, want sound banks and want responsive government.  These are not evil goals and, indeed, many would say they are noble as these goals represent the road out of where we are.  (Disclosure: I am on the chapter board of NACD.)

In any event, this morning’s panel, headed by Jay Hooley, CEO of State Street Bank and a member of major DC-based advisory groups that meet regularly with Bernanke and Obama, made some sobering observations, which included the following:

*Regulation of business in the US is excessive, and costs US business between One Trillion and One-and-a-Half Trillion Dollars a year.  Just monitoring Dodd Frank compliance at State Street takes 200 employees and an annual budget of $50-75 Million.

*Increased demand for capital from banks is substantial; larger banks under the Basel III accords will need to maintain capital of 10-13% (compared to 3.5% today under Basel I).  The result is, simply, decreased lending capacity.

*We will have a protracted recovery with economic uncertainty well into the future, resulting in “massive structural changes” in business and government.

*The deadlock in Washington is “probably worse than it appears” and politics interferes with “good decisions.”  Idealogues on both sides are to blame.  But “if you want to feel good about the US, just look at Europe….”

*Europe is going through our 2008 right now.  What sinks banks is not lack of capital, it is lack of liquidity, observed Hooley, and he noted a recent growing liquidity crunch in Europe.  Further, at least here we had TARP to help us but Europe is 27 countries and some banks owned by governments, and “all roads lead to Germany” and that presents its own political problems.  “Europe is the rock in the road of global recovery.”

*What will restart the world economy?  In the long run, the US which is the country with the greatest ability to reinvent itself and thus drive growth.  Just remember this is a long-term observation.

*What does all this mean for corporate governance?  Two emphases: board focus on strategy and on enterprise risk must be robust and continuous.  Two-thirds of directors believe that strategy is the board’s top priority.  It is discussed often at every board meeting, at length, as the day to day jobs of the board devolve more to the committees.

* A quarter of larger public companies (twice that percentage of large financial service companies) have Risk Committees.  The State Street Risk Committee reports to the compensation committee quarterly on corporate performance on a risk-weighted basis (indicating at least some traction for the SEC efforts to link comp with risk management).

*IT risk is the next wave.  Given the fact that now the attacks are sophisticated, hit companies in so many functions, and are sponsored by other companies and indeed by other governments (not just random hackers), more and more attention must be paid to protect company secrets and personal data.  One director predicted that the next trend would be establishment of IT Committees of Boards to monitor this technical area.

*Demands of strategic thinking, audit committee needs, excessive US reporting that has made the US an unfriendly business venue, and IT issues have changed the game in board succession planning.  Now many skills are needed and yet we still need diversity and people with current practical experience in the business of the company.  Fewer CEOs have the band-width to serve as directors of other companies.  Boards are increasing mandatory retirement age for directors to facilitate succession planning.

Sobering thoughts in sobering times….

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