CONSUMER AFFAIRS: United States In the United States the Federal Aviation Administration concluded in May 1995 that legislative efforts to mandate the use of child safety seats during air travel for children under two would not accomplish its intended goal of saving lives. Strapping children into safety seats--as opposed to the more common practice of allowing them to sit on the lap of a parent--would increase the cost of flying and cause some families to choose less-safe modes of travel. A cost-benefit approach to safety regulations was a central theme in congressional legislation introduced during the year. In July two major bills on regulatory reform--both requiring the federal government to provide evidence that the benefits of proposed regulations justified their costs--were postponed indefinitely. The new Republican-majority Congress effectively changed the tenor of the policy debate concerning a number of food-, drug-, and pesticide-safety regulations. In February new meat-inspection regulations proposed by the U.S. Department of Agriculture recommended instituting Hazard Analysis and Critical Control Points, an inspection procedure in which key stages of meat production would be targeted to prevent the spread of pathogens. Although the procedure was considered an important advance in food inspection, critics in the industry charged that imposing it without dismantling the traditional system would raise costs without bringing about a commensurate improvement in safety. At the state level, a groundswell of consumer and physician complaints prompted lawmakers in New Jersey and Maryland to pass the first state legislation requiring minimum maternity stays in hospitals. In some states women were routinely discharged 12 hours after giving birth, down from the typical 2 and 3 days of recovery time traditionally paid for by insurers. Groups such as the American College of Obstetricians and Gynecologists warned that early discharges presented a health hazard, especially when women and infants went home before complications could be observed or child-care guidance provided. Health insurers and managed-care groups maintained that one-day stays with follow-up home-care visits met the needs of most maternity patients. The laws guaranteed women 48-hour stays after delivery and 4 days of hospitalization for deliveries by cesarean section. Action against fraudulent and misleading auto-leasing deals took place in Florida, Maryland, Washington, and New York. Each state passed a law aimed at increasing dealer disclosure of the various costs incurred by consumers in leasing. The Federal Reserve Board also drafted new disclosure standards under the federal law that governed leasing. Law-enforcement officials who were tracking the recent upward growth of auto leasing reported widespread deceptive leasing practices. Frequently, consumers were persuaded to sign leasing agreements that apparently carried low monthly payments, but lessees were not furnished with important basic information such as the amount of principal upon which payments were based. The U.S. General Accounting Office (GAO) questioned the reliability of the government's automobile crash-test scores as a source of consumer information. The results of the New Car Assessment Program--undertaken by the National Highway Traffic Safety Administration and widely disseminated by the news media and consumer publications--improved the overall crashworthiness of cars. But the GAO determined that individual car scores were not reliable and could mislead consumers to purchase less-safe cars. (PETER L. SPENCER) See also Business and Industry Review: Advertising; Retailing; The Environment. BANKING International. The biggest story in international banking in 1995 was the collapse of the London-based merchant bank Barings PLC in late February. Nicholas Leeson, a trader in the 233-year-old bank's Singapore office, had run up losses of more than $1 billion trading futures contracts on the Asian markets. Barings management claimed that Leeson was carrying out unauthorized transactions and then covering up his losses in a secret account. Inspectors in Singapore, however, alleged that bank officials, anxious to participate in the lucrative derivatives market, had allowed the 28-year-old trader to use highly risky instruments without adequate supervision. ( See Special Report.) In March Barings was acquired by a Dutch financial group, Internationale Nederlanden Groep NV. Leeson, who was arrested after fleeing to Germany, was returned to Singapore for trial and sentenced to 6 1/2 years in prison. Unauthorized trading by a single individual was also blamed for the $1.1 billion in losses accumulated by Daiwa Bank Ltd. of Japan. In September Toshihide Iguchi, a U.S. Treasury bond trader based in New York City, was charged with falsifying records to conceal the deficit, which he had incurred through some 30,000 unauthorized trades over an 11-year period. Unlike Barings, Daiwa, one of the world's 25 largest banks, was able to absorb the enormous losses. However, state and federal bank regulators discovered that Iguchi had confessed to Daiwa executives two months before U.S. authorities were notified. In November the authorities ordered Daiwa to close its operations in the U.S. within three months, while the Japanese Finance Ministry demanded that the bank cut back all of its international operations. In August the Bank of Japan announced that it would liquidate the Hyogo Bank, which had built up $6 billion in debts through unwise property speculation, rather than arrange a bailout, as had been expected. It was the first time since World War II that the Japanese government had allowed a commercial bank to fail. The government of Fiji approved a taxpayer-financed bailout of the National Bank of Fiji (NBF). Critics accused politicians of having benefited from the NBF's questionable loan practices. In the United Arab Emirates, the emirs of Ajman and al-Fujayrah agreed to pay $10 million to settle claims against them resulting from the 1991 collapse of the Bank of Credit and Commerce International. In June the Chinese government agreed to allow five foreign banks to open branches in Beijing, including the Bank of Tokyo and Citibank of the U.S. The British banking industry saw several mergers and acquisitions in 1995. In May S.G. Warburg accepted a bid from Swiss Bank Corp. for its investment banking arm. In September the Bank of Scotland paid $A 900 million to acquire 100% ownership of the Bank of Western Australia. The merger of Lloyds Bank PLC and TSB Group PLC, announced in October, was completed at year's end. The new institution, called Lloyds-TSB Group PLC, would form the largest retail bank in the U.K., with assets of 150 billion. (MELINDA C. SHEPHERD) United States. They called it the "Goldilocks economy" in the banking industry--not too hot, not too cold, just the right temperature. U.S. banks made very good profits in 1995 as loan losses remained low, borrowing picked up at a modest pace, and their huge bond portfolios increased in value. The big news for banks was a tidal wave of mergers and takeovers. About $73 billion worth of mergers and acquisitions were announced in the U.S. banking community. Fifteen deals exceeded $1.1 billion in value, including the three largest takeovers of all time. There were two forces driving the takeover movement: the high stock prices of the acquiring banks, which made it relatively cheap for them to offer stock to the shareholders of the banks being taken over, and the realization that the good times of 1995 were unlikely to last forever. Increasingly, big banks were merging in hopes of cutting costs by reducing payrolls and closing buildings. In a flurry of activity, deals were announced between First Union Corp. of Charlotte, N.C., and First Fidelity Bancorp of Newark, N.J., and First Chicago Corp. and NBD Bancorp Inc. of Detroit, Mich., among others. The biggest example of this phenomenon in 1995 was the merger of Chase Manhattan Corp. and Chemical Banking Corp., both of New York. The combined bank, which would surpass Citicorp as the nation's largest, with assets of nearly $300 million, would retain the Chase name. There was no question, however, that the transaction was a takeover by Chemical, which paid Chase stockholders about $10 billion worth of Chemical Bank stock in exchange for all their shares. While Wall Street cheered the Chase/Chemical merger, it was clear that thousands of employees soon would be laid off. Loans to individuals at commercial banks, which had been growing at around 15% a year in 1993 and 1994, increased at a much slower pace in the last part of 1995 and were heading down to an annual rate of 5% to 6% as the year closed. Americans, who had seen little if any growth in income in 1995, were maintaining their standard of living by borrowing more on their credit cards. This effect had to slow down and reverse, and this "reliquification" process was already in sight at the end of 1995. Bankers and the Wall Street investment community were expecting a big increase in loan losses on those credit cards in 1996. In an economic slowdown, the losses could rise from about 3.25% of the credit card loans outstanding to 4% or higher, a significant increase in an industry where net interest margins were only a little over 4% before taxes and other expenses. The growth of bank loans to commerce and industry was also declining. "C & I" loans peaked in May 1995 at an annual rate of 17.7% and by the end of 1995 were about 12% over the year-earlier level. The other mainstay of bank earnings, the bond market, performed extremely well in 1995. The decline in interest rates led to a rise in the price of bonds. Since U.S. Treasury bonds represented around 20% of the total loans and securities held by banks, this was a good source of profit. If interest rates rose in 1996, however, bond prices could fall, and there was a risk that any inflationary threat in 1996 could turn bond profits into losses. U.S. banks may have made good profits in 1995, but they still faced an uncertain future. The record level of mergers and acquisitions was a symptom of competitive pressures and the need to reduce costs, and bankers knew that "Goldilocks" was, in the end, a fairy tale. (JOHN W. DIZARD) This updates the article bank. LABOUR-MANAGEMENT RELATIONS In 1995 the economic environment improved in most of the industrialized countries, the main exception being Japan, which had another lacklustre year. There was healthy growth in world trade, and inflation was low. Unemployment tended to fall, but it was still high in many countries. Special Report The Concern over Derivatives BY PATRICIA TEHAN Derivatives had been acquiring a bad name even before the collapse of the London-based merchant bank Barings PLC in February 1995 rocked the world's banking community. But the failure of Barings brought derivatives into the public spotlight after Nicholas Leeson, a 28-year-old trader in Singapore, accumulated losses of over $1 billion by trading futures contracts on Asian markets. Derivatives are contracts that have value that is linked to, or derived from, another asset (known as the underlying asset), which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers are essentially wagering on the future performance of that asset. The economic rationale of derivatives is that they provide a means of transferring and spreading risk and of accommodating risk-management needs more accurately and economically than conventional financial instruments. Though they can offer substantial advantages to those seeking to reduce financial exposure to a fall in prices, derivatives also can be very risky. Initial reaction to the Barings debacle was that given the growing use of such products, it would have been only a matter of time before they led to such a disaster. In the 1980s the case of some U.K. local authorities' involvements in options-based derivatives contracts first brought them into bad repute. The highest profile was London's Hammersmith and Fulham council, which suffered huge losses on derivatives contracts as interest rates moved against it. The contracts proved to be unenforceable, however, when the House of Lords ruled that local authorities did not have the power to enter into swaps contracts. There had been some high-profile corporate losses involving derivatives in 1994, involving Procter & Gamble (P&G), the U.S. consumer-products company, Metallgesellschaft AG of Germany, and Orange county in southern California. In early 1995 U.S. regulators started to raise concerns about the way derivative products were being sold to investors. This was the issue behind the argument between P&G and Bankers Trust, which designed its investments, and between Orange county and its broker, Merrill Lynch & Co. Despite the bad name that derivatives were beginning to acquire, the collapse of Barings was due to losses caused by a lack of adequate internal controls over an employee's proprietary trading activities. The highly publicized corporate disasters were caused by different circumstances. Ironically, it was the collapse of Barings, caused by trading in the tightly controlled futures market, that served as a means to focus attention on the products and prompted market participants to consider certain national and cross-border issues related to the structure and operation of the international markets for derivatives trading. Derivatives are not a new concept, but growth in their use has been dramatic over the past 20 years. This growth reflected a globalization of--and an increase in volatility in--financial markets, as well as a reduction in foreign-exchange controls. Volatility in interest rates, exchange rates, and asset prices created a climate of uncertainty. By using derivatives, corporations, foreign-exchange traders, and other investors were able to manage, control, and hedge risk. Derivatives include such widely accepted products as futures, options, and swaps. Standard derivatives contracts--those involving standard maturity, contract size, and delivery terms--are traded on exchanges such as the Chicago Board of Trade, the London International Financial Futures and Options Exchange, the March Terme des Instruments Financiers (the French exchange), the Singapore International Monetary Exchange, the Deutsche Terminbrse (the German exchange), and the Tokyo International Financial Futures Exchange. Once the transaction has taken place, the contractual relationship is between each original counterparty and the exchange or clearing house. Customized contracts--those tailored to meet a specific customer's needs--are unregulated and traded in over-the-counter (OTC) arrangements. In OTC contracts the counterparties remain exposed to each other for the life of the contract. Debate in the months preceding the collapse of Barings was over how much derivatives were a tool to be used to provide flexibility in an investment portfolio and to reduce the risks being taken on by investment banks and their customers and how much they were becoming a threat to the stability of markets. The debate after the Barings failure focused the attention of investors on risk. The popularity of more complex derivatives contracts waned, while turnover in simple, less complicated futures and options products increased. After several months of panic, which saw a reduction in the volume of derivatives trading and a subsequent reduction of the number of players on some trading floors, markets settled down by the end of the year. Meanwhile, institutional and corporate derivatives users took a fresh look at their controls and revised their practices. At a 1994 meeting in Windsor, England, securities regulators from 16 countries agreed on measures to strengthen supervision of futures exchanges and improve the flow of information across international markets and to ensure that any problems that did arise could be contained locally to prevent an international domino effect. The initiative, brought about by the Securities and Investments Board of the U.K. and the Commodity Futures Trading Commission of the U.S., recognized that no one market supervisor has the full picture about traders who are operating globally. In a separate move, the Basle Committee of international banking supervisors published proposals designed to help banks avoid losses from adverse market movements. It also joined forces with the International Organization of Securities Commissions to issue new joint guidelines on derivatives for national regulators. The effect has been a gradual tightening of monitoring and enforcement. The horror stories of 1994 and 1995 resulted from imprudent use, lack of understanding, or lack of proper control of derivatives products and activities. In the case of Barings, inappropriate risk exposures were taken without proper guidelines or management controls. There was a complete failure to note the level of derivatives trading. In other cases there was a lack of understanding of the relationship between client and counterparty. All served to identify two issues in using the derivatives markets. The first was that players should examine the legal issues, including the nature of the relationships between the counterparties, ensuring proper documentation of transactions and ensuring that each side has the authority to deal. The second was a management issue, that those running an organization should have an understanding of risks being taken and be satisfied that proper operational controls are in place. Patricia Tehan is banking correspondent for The Times, London. STOCK EXCHANGES The world's stock exchanges in 1995 were characterized by an accelerated rise, following an earlier stagnation or fall. Despite this uneven performance, most investors had a vintage year. The Financial Times/Standard & Poor's (FT/S&P) World Index gained 26%, in dollar terms, over the year, thanks to the strong performance of Wall Street. Europe, led by the U.K., was 18% higher, in dollar terms, while the Pacific Basin made no headway. (See Table I.) Early in the year, European stock markets were held back by two main concerns, uncertainty about the future direction of interest rates and the weakness of the dollar against the Deutsche Mark. In addition to similar concerns, investors' confidence in the Asia-Pacific region was further undermined by Japan's economic weakness, the Great Hanshin Earthquake, and the aftershocks of the Mexican crisis. The latter caused a run on some currencies tied to the dollar and led to a temporary rise in short-term interest rates. The trigger for the recovery and the robust rise from the summer was the investors' perception that global interest rates had peaked. In early 1995 economic indicators in North America, the U.K., Australia, and, to a lesser extent, continental Europe indicated a slowing economy with inflation under control. It was expected that economic policy makers would reduce interest rates to support moderating economic activity. In the event, interest rates came down three times in Germany and twice in Japan and the U.S. In the U.K., after a rise of 0.5% in February, interest rates were held steady until December, when they were eased down by the same amount. Initially, government fixed-income securities (bonds) responded to these developments. Sharp rises in bond prices reduced the yields and made equities look more attractive. Prospects of lower interest rates also reduced the attractions of holding cash deposits. Further stimulation came from a series of corporate takeovers in both the New York and the London stock markets. As in previous cycles, the U.S. led the way, and the positive sentiment spilled over into other markets. Led by technology shares, the Dow Jones industrial average (DJIA) outperformed the rest of the world, setting almost daily new records from June. As the year drew to a close, there was no decline in global investors' enthusiasm for equities, though few expected to see the same superlative gains in the U.S. repeated in 1996. The prospects looked more encouraging in Japan, however, than they had for a long time. (IEIS)

Britannica English vocabulary.      Английский словарь Британика.