Do you close your curtains and arm your fence and trip alarms to keep any danger out at night?
Is this not like hiding behind the sofa when you where very young and closing your eyes assuming as you could see nobody, no one can see you.
Yet, we also do that at our companies every day. We institute risk protocols, we have security cards and ID badges to only let the right person in. Customers have to sign in and provide a reference or have an invitation.
When our house’s defenses are breached we loose some valuables, could sustain an injury or at worst loose our lives. But usually the house will still stand afterwards.
When the corporate is breached from the outside the direct loss is higher but usually relatively small in relation to the corporate’s total assets.
BUT when the corporate is breached from the inside, the losses can be catastrophic. Just watching ABIL over the last 2 weeks shows that somebody called the dogs back and told them to stop barking. The governance defences were not strong enough. Who then, as shareholder, debtholder, the individual owing loans, and the general public should one hold accountable if the regulators outside overseeing the corporate watchdogs do not feel responsible as well? This will be a serious test to the integrity of the system as a whole.
Azar Jammine (Econometrix) on Carte Blanche (17th August 2014, http://bit.ly/1AxpGFz Minute 18:20) said that “investment is driven by greed and if you think you have hit a winner, you will carry on getting more out of it”. When greed takes over the risks are ignored. Yet the key individuals only do what they are rewarded to do. Performance system reward more returns for the shareholders and one would be ignorant to assume one can sustainably grow faster than competitors without taking risks.
The unsecured debt market is crucial to any developing economy. Banks and other parties participate in this market with varying degrees of success. It is in public domain that the quantum of unsecured personal loans debt of households has grown at multiples of the underlying GDP growth for around 10 years and for ABIL for 16 years. To some extent that is a matter of a developing market segment.
However, the cumulative impact is similar to playing musical chairs and one player has already lost his seat in the game. Yet the game is still on. When Moody’s rating agency downgraded the major banks a couple of days later (19th August 2014) http://bit.ly/XzDHVo it was official i.e. it is a cat that is out of the bag. It seems though that, at this stage, the regulator and Banks argue for an exception in ABIL. Is this kicking the ball into touch?
Have you ever tried to get a cat back into a bag without receiving serious bruising and scratches? And where does that leave our internal and external corporate watchdogs?
Stating problems clearly without thinking about solutions and change that is required, does not help. Simon Mantell suggests “From the government’s side, a first requirement would be to register employers that actively manage employees’ debt and applications for credit as “responsible credit-managing employers” on a national database” http://bit.ly/1w85Z8B with enabling legislation and employers becoming responsible for collecting repayments.
If one were to create transparency and rule to:
i) Have one national ‘credit’ database (say with BankServ) and regulates that only debts registered with such are legally enforceable;
ii) Limit the total exposure a person/household may have both in total debt to total assets (e.g. 70%) and monthly debt repayment (incl all charges, insurance etc) to income (e.g. 35%); making excess amounts not enforceable; [the ‘right’ percentage would have to be considered in relation to the of term of the debt and type of asset as well as the individual]
iii) Support regulatory requirement that credit provider of any kind (retailers, credit cards providers, banks etc) have to check (which is recorded on the database) before any new credit is extended through confidential sharing of data thereby excluding any claims by providers that (i) and (ii) are not met.
The question would then be one of #capability of #enforcement of existing regulations and #responsible lending ‘as defined’ and not new institutions.
What are your thoughts?