问答题

Questions 7～10
It is with a queasy feeling that the world"s bankers enter 2008. Within 12 months, they have seen record profits crumble, once-booming debt businesses blighted by write—owns, and the troubles of some former high-flyers in the mortgage industry threaten the soundness of the financial system. Fresh obstacles loom in 2008, including a new regulatory regime, known as Basel 2, whose shortcomings have emerged even before it has been officially born. More worrying still would be a slowdown in the world economy.
That is not all. The maelstrom in credit markets in 2007 exposed flaws in a banking model that has transformed the finance industry: the banks" ability to sell loans that they don"t want to keep to investors hungry for high-yielding assets. This "U-Haul" model of distributed risk had been widely considered one of the marvels of modern finance, until trouble hit.
The ability of American banks to turn their loans, via Wall Street"s alchemists, into packages of high-yielding securities and sell them to investors was supposed to have enabled banks to diversify their exposure to credit risk. Bank failures had for years been minimal, even during the Asian and Russian debt crises of 1997 and 1998 and the dotcom collapse. By keeping fewer loans on their balance sheets, banks reported stronger returns on their assets, helping to generate bumper earnings.
The coming year will test how much of that risk has indeed been spread, and how much of the diversification was illusory. Did banks simply replace the risk of lending on their own doorstep with exposures from outside their sphere of expertise Some lenders appear to have bamboozled naive borrowers into taking on mortgages they couldn"t afford, knowing they could sell the unsound loans into the market with few questions asked. Others made themselves vulnerable by financing long- term loans in the short-term money markets, rather than from depositors or through issuance of bonds. They were strangled when the money markets seized up.
Taking such risks will be far harder in 2008, because everyone has been sharply reminded of the maturity mismatch between assets and liabilities that is at the heart of banking. So banks will have to court depositors, not the capital markets. When they make loans, they will have to keep them, monitor them and ensure repayment, rather than passing them on like hot potatoes. "There will be a mad rush back to traditional banking," predicts Dick Bove, banking analyst at Punk Ziegel.
The process will not be smooth. Politicians, especially in the American Congress, may tie up lenders with red tape. And Basel 2, with its new capital-adequacy framework for banks, will be roiled out across the European Union from January (it will affect some American banks in 2009). At least for less sophisticated banks, it leans heavily on rating agencies as arbiters of credit quality. But their credibility has been damaged by the over-optimistic assessments they made of some of the riskier debt instruments. Basel 2 also focuses on credit risk, and largely skates over the fickleness of liquidity that bedevilled markets in 2007.
It has been a long time since banks have faced such torments, but their business has always been a cyclical one and only the foolish will have forgotten that. (As the saying goes, a banker is someone who lends you an umbrella when it is sunny, and asks for it back when it rains.) To tide them over, all those profits have left banks with plenty of capital in the vaults. Should that run out, central bankers in America and Europe have also shown a remarkable willingness to provide liquidity to the financial system to prevent panic.
Tougher conditions are also reducing competition from non-bank financial players, which had flourished in the easy-money era. Aggressive mortgage banks, such as Countrywide in America and Northern Rock in Britain, have revealed their frailties. The big American banks—such as Citigroup and JPMorgan Chase—have retail-banking franchises that may expand by acquiring stricken competitors. The same holds true for well-capitalised retail banks in Europe. Investment banks that falter may find nationwide American banks offering to buy them; or European banks such as Italy"s UniCredit taking audacious advantage of their hour of need.
Lurking in the background is another potential source of support, deep-pocketed governments in China and the Middle East, keen to invest part of their wealth in Western banks" assets and expertise. According to Morgan Stanley, sovereign-wealth funds spent $ 26 billion in the six months to October 2007 on big financial firms such as Barclays, a British bank, Blackstone, a private-equity group, and the London Stock Exchange. Banks, for their part, covet access to big emerging markets, and a strategic stake sold to the Chinese government, say, may ease the way to a strategic stake in a Chinese bank.
But government ownership of banks is always tricky. That should not be forgotten just because an injection of yuan, roubles or petrodollars might provide a quick and easy way to keep a bad bank on life support. Give a brief explanation of Basel 2.