Dave Matcham

Financial Crisis: Maintaining Stability

I have mentioned before the traditions of the London market and its promotion by the offices of the Lord Mayor. One such occasion was held last week when the Lord Mayor hosted the City Banquet which was timed to coincide with the Chairman of the FSA’s last official function before retirement.

With over 300 senior bankers, lawyers and financiers in the room, not surprisingly the talk was of the week’s dramatic market events. The ongoing stability of AIG and various merchant banks plus the FSA’s ruling on short selling were much discussed. I admit that I had to ask what was “short selling”! Many people work in the financial instrument business, eg. derivatives, credit swaps etc but many more people working in London, me included, don’t really understand these terms nor their effect on the economy.

There was much talk of careful handling of the situation to enable London to retain its global position. There was a plea for no legislative or regulatory overkill but an expectation of changes. The events were global and London needed to be in the midst of the global solution.

The FSA chairman stated the need for greater realism about one’s risk management capability, greater openness on market position with counter parties and the need for deeper and more intensive supervision.

As always the event was well organised and enjoyable. A timely opportunity for wise words from financial leaders – now is the time to put them into practice.

Financial Markets Hit the Headlines

What a last few days for financial news! AIG’s falling share price and subsequent Government rescue, the demise of Lehmann Brothers and Bank of America looking to buy Merrill Lynch – all big names in the ever-merging insurance and capital markets industries. Add to that around $6bn - $10bn losses from Hurricane Ike, one has to pinch oneself to believe its all happening. People often ask what last surprised you in the market – one could almost quote a different thing every 2-3 months.

To reflect the growing linkage between the capital markets and insurance, many national regulators operate co-ordinated regulatory systems. This makes me wonder what changes are in store for the industry as these regulators reflect on the dramatic market developments. I note that EU Finance Ministers met recently to “fireproof Europe’s financial system from the troubles that have brought US lenders close to collapse”. Whilst I assume this is primarily focused on banks, the insurance industry may well be affected by regulatory changes as well as having to react to a growth of Director and Officers claims emanating from the financial institutions. I hope that any regulatory change is balanced between commercial and solvency purposes.

There was also speculation that the US Federal Reserve would not seek to rescue or assist troubled companies this time round. A guaranteed Government back-stop seems unlikely as it could encourage irresponsible behaviour however doing nothing could compound a further growing credit crunch and recession situation. As It turned out AIG obtained substantial support, not to do so could have caused even more problems.

Its hard to take stock and yet on the positive side US insurance regulators should vote next week on new reinsurance regulations which should greatly reduce collateral requirements for non-US reinsurers which in turn demonstrates a level of trust in international regulators and relieve unnecessary liquidity concerns.

As an avid reader of the trade press there seems a lot to digest at the moment. Our industry is very strong and secure and this resilience is certainly being tested at the moment.