The Financial Services Club's Blog

Europe: broken nations borrowing from broke nations?

After the downgrade of Greece led to the Greek crisis and the Germans worried about bailing them out, the crisis continues with the downgrade of Spain at the end of last week by Fitch.

In fact, it looks like many European countries are worried, with the PIGS now the PIIGS – Portugal, Ireland, Italy, Greece and Spain – whilst Hungary, the Czech Republic, Andorra and Montenegro are so hard up they couldn’t even send their national broadcast channels along to Oslo, to cover the Eurovision song contest over the holiday weekend.

So we asked the question: what happens if the euro fails, and the answer was: a great deal economically, politically and nationally, but not much in banking. The EU creations of SEPA and Chi-X would continue.

But what is the real likelihood of the euro failing?

Not much to be honest.

If it were open to failure, there would be far more concern being demonstrated at this week’s G20 meeting, and the truth is the Americans and Chinese – the other two large regions exposed to the EU – are comfortable with the two-pronger approach being taken by the European Commission and member states.

For example, Reuters reports:

“Early this month G20 governments were clearly worried that some European countries might not be able to summon the political will to confront their public debt problems. U.S. President Barack Obama spoke personally to Spanish Prime Minister Jose Luis Rodriguez Zapatero to urge him to implement budget reforms. G20 officials held conference calls to discuss European policy.

“Since then, Europe has come up with a two-pronged strategy. One prong is a string of national austerity schemes designed to bring state budget deficits and public debt down to safe ratios of gross domestic product in the next few years.

“The most heavily indebted states on the periphery of the euro zone, Greece, Portugal, Spain and Italy, have announced austerity drives this month. Even France, a stronger country, has acted, announcing an intention to enshrine deficit-cutting in its constitution.

“The other prong is emergency liquidity support from rich nations to give time for austerity steps to work; this ensures countries retain access to financing even if they lose the ability to fund themselves in the debt market, as Greece has.

“In addition to a 110 billion euro bailout of Greece, European nations are creating a financial safety net for indebted countries that along with support from the International Monetary Fund could total 750 billion euros -- three-quarters of the total public debt of Greece, Portugal, Ireland and Spain.”

So all is well and good in the garden of Europe.

Or is it?

As mentioned before, Germans are pretty unhappy about the Greek situation.

So I was quite interested when Mike Warner, CEO and founder of Quantum4D – a data visualisation firm – sent me this graphic (doubleclick image to see larger version):

Ouch!

What this clearly demonstrates is that:

Germany thought they owned Greece but they don’t – France do;

The total Greek exposure is €120 billion;

Germany and France have far more exposure to Spain (over €450 billion worth); and

By comparison, Britain is getting off lightly ... about the same levels of exposure as the Dutch.

Who wants to be in the euro, you might ask, but the Estonians still do.

Why?

Why would anyone want to be in the Eurozone today?

Because tomorrow it will be better. It will be a region that is as resilient, strong and powerful as China and America ...

... or is it more to do with this lovely little news skit from our friends in Australia?

This is a comic news report from ABC News’ mirthmakers John Clarke and Bryan Dawes, and is based upon a million dollar gameshow format (in the UK, this is Mastermind).

Here’s my slightly edited transcript:

QUIZMASTER: Your name is Roger yes?

CONTESTANT: Roger.

QUIZMASTER: Good. And what do you do Roger?

CONTESTANT: I'm a financial consultant.

QUIZMASTER: Fair enough. Okay, Roger your special subject tonight is the economies of the European community. Your time starts now. Best of luck.

CONTESTANT: Thank you.

QUIZMASTER: How much does Greece owe, Roger?

CONTESTANT: $367 billion.

QUIZMASTER: Correct. And who do they owe it to?

CONTESTANT: Mostly to the other European economies.

QUIZMASTER: Correct. How much does Ireland owe?

CONTESTANT: $865 billion.

QUIZMASTER: Correct. Who do they owe it to?

CONTESTANT: Other European economies mostly.

QUIZMASTER: Correct. How much does Spain and Italy owe?

CONTESTANT: $1 trillion each.

QUIZMASTER: Correct. Who to?

CONTESTANT: Mainly France, Britain and Germany.

QUIZMASTER: Correct. And how are Germany, France, Britain going Roger?

CONTESTANT: Well they're struggling a bit, aren't they?

QUIZMASTER: Correct. Why?

CONTESTANT: Well ‘cause they've lent all the vast amounts of money to other European economies that can't possibly pay them back.

QUIZMASTER: Correct. So what are they going to do?

CONTESTANT: They're going to have to bail them out.

QUIZMASTER: Correct. Where are they getting the money to do that from, Roger?

CONTESTANT: That is a good question. I don't know the answer to that one.

QUIZMASTER: How much does Portugal owe?

CONTESTANT: Hang on a minute, what was the answer to that earlier question?

QUIZMASTER: Just keep answering the questions Roger. Where is Portugal going to get the money it owes to Germany, if Germany can't get back the money that it lent to Italy?

CONTESTANT: Just a minute. What was the answer to the previous question? The question was: How can broke economies lend money to other broke economies, who haven't got any money because they can't pay back the money the broke economy lent to the other broke economy, and shouldn't have lent it to them in the first place because the broke economy can't pay back?

QUIZMASTER: You are wasting valuable time Roger. How much money does Spain owe to Italy?

CONTESTANT: $41 billion. But where are they going to get it?

QUIZMASTER: Correct. What does Italy owe to Spain?

CONTESTANT: $27 billion but they haven't got it - they're broke.

QUIZMASTER: Correct. How can they pay each other if neither of them has any money?

CONTESTANT: They're going to get a bailout, aren't they?

QUIZMASTER: Correct. And where is the money coming from for the bailout?

CONTESTANT: That is what I'm asking you!

QUIZMASTER: Correct. Why are people selling the European currency and buying the US dollar?

CONTESTANT: Because the US economy is so much stronger than the European economy.

QUIZMASTER: Correct. Why is that Roger?

CONTESTANT: Because it's owned by China.

QUIZMASTER: Correct and very well done! And after that round you've lost $1 million.

CONTESTANT: I've lost $1 million? I thought you said well done!

QUIZMASTER: Yes well done - you've only lost $1 million. That's an extraordinary performance Roger.

Thanks to Philip Brady from Oz for the tip-off re Clarke and Dawes.

Things worth reading: 31st May 2010

Things we're reading today include ...

People

Cole out of race for top FSA job - The Independent
Dr Death sued over City fraud - The Times
TIBC banker sues Bahrain after being held for 10 months - The Telegraph

Companies

Lloyds in legal battle with celebrities over golf course - The Telegraph
HSBC pay rises 'unacceptable', says major shareholder Standard Life Investments - The Telegraph
We will review pay, says HSBC's Green - The Independent
Goldman seeks settlement with SEC - Financial Times

Spain

Spain to toughen short selling rules - Financial Times
General strike on the cards as Spain's credit rating falls - The Independent
Spain races to avert banking crisis as euro faces slide - The Times

Regulations

FSA targets big banks for budget increase - The Independent
EU gives insurance firms even more time to get their houses in order - The Independent
Politically motivated attack on CDS trade is misguided - Financial Times

Markets

China postpones CDS launch - Financial Times
Financial crisis has left China stronger, says HSBC head - The Telegraph
Uncertainty and fear overwhelm the good news - The Times

The Finanser's Week: 24th May - 30th May 2010

The biggest news stories of the week include ...

• Buffett subpoenaed by crisis inquiry panel - Financial Times
• Lehman sues JP Morgan - BBC
• IBM acquires Sterling Commerce for $1.4 billion - The Times
• EU bank tax proposals are unveiled - The Independent
• Ackermann defends market's role in eurozone crisis - Financial Times
• Everything you always wanted to know about the euro – but were afraid to ask - The Independent
• Double-dip fears over worldwide credit stress - The Telegraph
• Banks reveal extent of 'dark pool' trading - The Independent
• Italian police eye £4.8bn in HSBC client accounts as part of tax evasion case - The Telegraph

And our biggest stories of the week are ...

What happens to SEPA and Chi-X if the euro fails?

Last week’s surprising comments from German Chancellor Angela Merkel that “the euro is in danger” and “if the euro fails, Europe fails” sent shudders across the world’s markets. As I talk to German colleagues, they refer to Greece as the Golden Fleece and everyone knows the Union and the euro are under the most intense strain ever. So what happens if Europe does fall apart and the euro fails and, specifically, what would it mean for SEPA?

Rating agencies and Greece: who's next?

I picked up a copy of Standard &Poor’s publication Credit Week this week and guess what? Page 38 explains and defends the reasons for the Greek downgrade in a one-page article by David T. Beers. It makes for fascinating reading, particularly in light of the fact that the credit rating agencies will come under a new EU regulatory mandate from 1st January 2011. Will Michel Barnier outlaw credit rating agencies from doing another Greek downgrade in the future, I wonder.

When's the next financial crisis and what will cause it?

I spent the morning with a group of futurists debating the long-term outlook for financial markets. The key question I kept asking myself during the conversation is: when will the next financial crisis take place, what will cause it and is it predictable? And yes, we did come up with some ideas ...

Bank histories reflecting our histories

After looking at the future of banking yesterday, it’s time to look at the history of banking today. Not in depth, that would be dull, but I recently visited the archives of HSBC that go back to the origins of the bank in China and beyond. Here are a few of their very human stories ...

It's not personal, just business

I went to see my bank manager this week to discuss a small irritation in the business accounts. The irritation is that the branch I deal with is for personal customers only, and yet I'm both a personal and business customer and don't expect to have to visit two different bank branches of the same bank for my services.

Sir Win Bischoff on Banking Reform

Another fun evening at the Financial Services Club the other day with Sir Win Bischoff, Chairman of Lloyds Banking Group. We all wanted to know what was happening with Lloyds Banking Group, I’m sure, but the evening was under Chatham House rules so none of that is bloggable. What I will say is that he gave a very good insight into where the industry has come from and is going.

Need money fast?

It's interesting to see the rise in high interest, short term loan sites.  I blogged about Wonga last year, and now there's Quick Quid.  Here's their advert ...

 

 

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Bank histories reflecting our histories

After looking at the future of banking yesterday, it’s time to look at the history of banking today. Not in depth, that would be dull but, being a sad banking nerdo, I’ve got loads of history books about money and banks in my office.

One of my recent favourites came from the British Museum, and is all about the history of London.  The reason I like it is that it has all these facsimiles of original documents inside, such as this gorgeous South Sea Company Share Certificate from 1759 ...

... you may think it’s not worth the paper it’s written on, which it isn’t, as the £200 invested by Anne Loubert would be the equivalent of £27,000 today.  And it all went up in smoke, when the South Sea Bubble burst.

Poor old Anne Loubert.

Or there’s this old cheque from 1764 drawn on Coutts Bank ...

... one of Britain’s oldest banks, the Queen’s Bank, and part of Royal Bank of Scotland today (really interesting news story on RBS Coutts at Bloomberg if interested).

So why all the history today?

‘Cos I recently had a visit to the HSBC archives.

HSBC’s archives are in a run-down converted hospital barracks from the 1950s in the East End of London, in a shared building with Iron Mountain Storage Company.

Through dark and dank corridors you walk into a little room where Tina Staples heads up the archive, with two colleagues who run the place.

 

Behind scenes are filing cabinets, folders, books, double entry records, papers and more documenting the history of the bank from the 1700s through to today, and its visited by lots of people from researchers to descendants of HSBC's managers and staff through the years.

A living and breathing history of society in fact.

The folks who manage the archives are all professional archivists, and the documents held there are fascinating.

Some of my favourite stories were of the Russian branch of HSBC for example. The London City & Midland Bank office, now HSBC, opened its first branch in Petrograd in 1917 ... and closed it in 1918 after the Revolution.  Even so, the manager toiled onwards to try to look after his wealthy clients. For example, here are the details of the holdings of Princess Anna Soltykoff through to June 1919.

The office had to close down then, as the manager feared for his life, and the story is that he trailed through Russia across Sweden with all of his records, in order to get back to blighty with his and the bank’s reputation intact.

Or there’s the story of the Imperial Bank of Persia, created by Baron Julius de Reuter. Baron Julius also founded Reuters news agency and, in 1889, received a sixty year licence to open the bank at the request of the Shah of Persia, now Iran.

In 1959, the bank was called The British Bank of the Middle East and was acquired by HSBC.

There are lots of other stories in the archives, which makes for a grand visit, and I’m sure I’ll come back to some of the stories from the archives later.

In the meantime, does anyone know what this is?

Answer on Monday.

Things worth reading: 28th May 2010

Things we're reading today include ...

People

Buffett subpoenaed by crisis inquiry panel - Financial Times
Ackermann defends market's role in eurozone crisis - Financial Times
Legal & General chief Tim Breedon named as chairman of Association of British Insurers - The Telegraph
In The Spotlight: Hedge fund boss who found he couldn't escape the regulator - The Independent
Bonnie, Yonni, and a tale of insider trading at Disney? - The Independent

Companies

Lehman sues JP Morgan - BBC
Goldman seeks settlement with SEC on lesser offence - Financial Times
Embarrassing snub over D Börse pay plans - Financial Times

UK

Banks' customer rules to change - BBC
Mortgage approvals remain off highs - The Independent
Developer warns of long loans drought - The Times

Europe

Spain orders banks to come clean on debts to restore shattered faith - The Telegraph
Markets rise as China backs euro - BBC

USA

US fears German move may damage recovery - The Times
US growth slows as stimulus wears off - The Times

Fight

We'll make more money than Apple, predicts Microsoft chief - The Independent

 

When's the next financial crisis and what will cause it?

WARNING: THIS BLOG ENTRY WILL NOT CHEER YOU UP [sorry]

I spent the morning with a group of futurists debating the long-term outlook for financial markets and am never sure about the usefulness of such debates, although there is definitely something of use in creating scenario plans for the future which is where we were focused.

The key question I kept asking myself during the conversation is: when will the next financial crisis take place, what will cause it and is it predictable?

To answer the first part of that question, we only need to look back in history.

If we take the first financial crisis as the fall of the Roman Empire then it was about 1,000 years until the second financial crisis occurred, with the collapse of the Medici banks of Renaissance Italy. Four centuries later, the South Sea Bubble and Great Tulip Collapse took place. 250 years after that, we hit the Great Depression; and 80 years after that we imploded in the Subprime Crisis and Global Credit Crunch.

Sure there were plenty of hiccoughs along the way - LTCM, Asia, Russia and Latin American implosions in the late 1990s for example - but global crashes have been notable.  Loosely speaking, global crisis are now occuring twice as fast as the previous ones:

• 1,000 years – the Roman Empire to the Medicis
• 400 years – the Medicis to the South Sea Bubble
• 250 years – the South Sea Bubble to the Great Depression
• 80 years – the Great Depression to the Subprime Crisis

On that basis, you could bet on the next crisis being anything between thirty and fifty years from now.

2040 to 2060.

So what would cause the next financial crisis? After all, we’re only just trying to get through this one. Surely we can regulate to avoid another one?

Maybe not.

Here’s a view you could take of the factors that contribute to the next financial collapse. I should say that it doesn’t make for fun reading, but the logic could have some grain of accuracy.

2011

Banks globally are heavily regulated, taxed and governed to avoid another subprime crisis. The focus is on derivatives, liquidity, capital and governance.

2012

The European Union struggles through a fragile and fallow period of financial and political instability with Portugal, Italy, Greece and Spain managing to just about maintain Eurozone requirements. Unfortunately, it is at the expense of citizens and governments in many of these nations.  In fact, the cuts and tight budgets in these Southern member states creates a major movement of economic migrants from Southern Europe into Northern Europe, with the associated tensions and fissures appearing between Northern Europe and Southern Europe as a result.

The outcome is that Europe never quite achieves the competitive economic zone it dreamed of becoming.

2016

China opens its markets to full financial servicing, with a rocking stock exchange in Shanghai that becomes the world’s second major investment banking city by volume and value by 2020, just behind New York  This is combined with a revaluation of the Remnimbi (RMB) that satisfies their critics but worries some, particularly the USA, as the Chinese currency is looked towards by the investment community as a possible alternative reserve currency.

2019

Rather than creating a reserve currency for the world, the investment community creates a basket of currencies to avoid too much exposure to risk in one economy – after all, they don’t want a repeat of the 2008 crisis. The basket includes Euro, RMB and Dollar, along with Gold and other commodities. Nevertheless, the decision to place a weighting towards RMB rather than the Dollar creates issues for the USA, which has spent most of the 2010s in stagnation.

2022

The Middle East enters a major crisis, as oil becomes less needed as a commodity due to the rise of alternative energy sources and conversion of many motorised vehicles to electricity. Iran and Israel go to War and there is a huge effort by the United Nations to bring stability to the region. Eventually, Sovereign Wealth from the GCC outflows towards new and rising economies, such as Africa, and tensions continue to rage across the region on an ongoing basis.

2025

Africa’s economy is raging onwards and upwards. Like the BRICs of the 2000s, Goldman Sachs creates a new investment portfolio known as CAGES – Congo, Angola, Guinea, Ethiopia and Sudan – where natural resources of platinum, cobolt, gold, diamonds, manganese, uranium, chromium and tantalite are abundant. Johannesburg is rising fast as one of the largest world financial centres.

China is now the largest trading partner and region with Africa, thank to their investments at the turn of the century. America finds this to be particularly challenging, as their view of Africa had been one of occupation and charity, rather than investment and growth, during this period.

But China doesn’t care too much, as China has now become the world’s largest economy.

2028

American and European investment firms decide to make RMB the reserve currency of the world, and drop the concept of the basket of currencies.

2032

The quiet rise of India as the world’s second largest economy had largely gone unnoticed but, in 2032, for the first time China’s economy had less than 3% growth. This was put down to the lack of skills in the country where skills were needed, and is a reflection of the aging population in China and lack of new blood. China’s one-child policy of the previous century, and a distinct lack of female population for the overly male populated society that resulted, means that 2 in every 5 citizens has reached or is near retirement age. This, combined with strict immigration controls, places a strain on continued growth and industry.

2039

India’s continually booming economy has created frictions between their Chinese border rivals, and a Cold War commences between the two nations. Like the Cold War of the previous century, no arms are traded or battles take place, but the economic controls freeze out much of China from India’s trading partners and vice versa. The result is an economic climate where India’s investment community trade with India and China’s with China.

There are ripples through the Shanghai and Mumbai stock exchanges as a result.

2044

India continues to see success as a stable and harmonised country. China appears to be becoming more unstable as the government struggles to maintain investment and trading, and avoid the inflationary pressures created by their exposure to investments in Africa for future commodities that can no longer be utilised.

The economy fails to achieve growth rates above 1% for three quarters, and the government determines that the Remnimbi needs devaluation. This angers the USA and Europe, who have major investments in Chinese land and other illiquid stocks, along with major reserves of Chinese currency.

The decisions taken by the Chinese government force them to look towards India and Africa.

2050

The outflow of investment by American and European investment houses from China results in aggressive currency arbitrage between the Chinese RMB and the Indian Rupee, with the latter winning as the RMB’s reserve currency status ends.

The resultant big time betting against the continued stability of China causes the Cold War between India and China to spill over into skirmishes.

The world sees a period of major instability ensue and the China Crisis is put down to currency speculation amongst the world’s capital markets created by complex foreign exchange instruments intertwined between the major economies.

Nothing to do with housing this time.

Jeez, that was a depressing vision and I told you this conversation wouldn't cheer you up.

Thank goodness it’s just fiction.

However, if you like this sort of future conjecture and dialogue, you are welcome to join us for two more optimistic discussions (hopefully) at the FSClub in June:

Monday, 07 June 2010
The Long Now of Finance
A panel discussion with Professor Michael Mainelli and guests

This evening is dedicated to a panel discussion focusing upon: "The Long Now of Finance - a Framework for the next 10,000 years".

Many financiers and academics are beginning to focus upon how to invest in long-term projects that secure the planet for our children and grand children and great grandchildren. Short-term thinking is killing the planet. So how do we think long term: the Long Now, and how do we fund it: Long Finance?

Long Finance is an initiative begun in 2007 by Z/Yen Group in conjunction with Gresham College, to establish a World Centre of thinking on Long-Term Finance. The initiative began with a conundrum – “when would we know our financial system is working?” and has worked on a variety of projects, including the signature program focused upon an Eternal Currency.

This debate will be chaired by Professor Michael Mainelli, a cofounder of Long Finance and Executive Chairman, Z/Yen Group.

Monday, 14 June 2010
The Future of Banking, a discussion with Professor Ray Barrell, Professor David De-Meza and Professor Donald MacKenzie of the Economic and Social Research Council, chaired by Brian Caplen, editor of the Banker Magazine.

The Economic and Social Research Council (ESRC) is the UK's leading agency for research funding and training in economic and social sciences. Established in 1965 as the Social Science Research Council, under a Royal Charter, the ESRC covers a wide range of disciplines, ranging from anthropology to statistics with a budget that has grown from £73 million in 2001-02 to £204 million in 2009-10. Financial services are a key sector for the Council's business engagement strategy. The ESRC is partnering with the Technology Strategy Board on the new Financial Services Knowledge Transfer Network. This evening the ESRC has kindly agreed to host a discussion focused upon the Future of Banking featuring three very distinguished scholars.

Professor David De-Meza is with the London School of Economics and has published many papers on banks policies in a wide range of journals. He is the on the Council of the Royal Economic Society and the Institute of Economic Affairs; Associate Editor of the Journal of Industrial Economics and Joint Managing Editor of the Economic Journal.

Professor Donald MacKenzie is a Professor of Sociology at the University of Edinburgh, with work that has constituted a crucial contribution to the field of Social Studies of Finance. He has also undertaken widely-cited work on the history of statistics, eugenics, nuclear weapons, computing and finance, and was awarded the Chancellor's Award from HRH Prince Philip, Duke of Edinburgh and Chancellor of the University of Edinburgh, in August 2006 for his contributions to the field of Science and Technology Studies.

Professor Ray Barrell is a visiting professor at Brunel University, Director of Macroeconomic research and Forecasting for the UK and World Economies, and Senior Research Fellow at the National Institute of Economic and Social Research. Previously, he has been a visiting Professor of Economics, Imperial College, London from 1996 to 2004, and was a part-time professor at the European University Institute, Florence, 1998-1999. He is on the editorial boards of Economic Modelling and was on the board of the Journal of Common Market Studies until 2007.

Things worth reading: 27th May 2010

Things we're reading today include ...

Companies

Nationwide says FSA must do more for mutuals or risk damaging the industry - The Telegraph
Knight to take stake in Equiduct - Financial Times
Apple now bigger than Microsoft - BBC

Fraud

Italian police eye £4.8bn in HSBC client accounts as part of tax evasion case - The Telegraph
Disney secretary caught in insider trading sting - The Times

Regulations

Cable says UK may go it alone on banks levy - The Independent
Banks must fund the recovery, not governments - The Times
EU bank tax proposals are unveiled - The Independent
EU proposes bank tax to end 'unacceptable' taxpayer bailouts - The Telegraph
SEC proposes audit trails for equities - Financial Times

Markets

City dismisses call for sharp rise in rates - The Times
The Eurosceptic case for saving the euro - The Times

It's not personal, just business

I went to see my bank manager this week to discuss a small irritation in the business accounts – that’s a bank account, not a part of the anatomy. The irritation was that I needed to transfer a large amount of money fast - £20,000 - and it could not be transacted online due to a transaction limit of £10,000.

OK, so it's an unusual transaction, but is should be easy as the money was moving from my business account to my personal account with the same bank. In my naivety, I therefore thought it was just like moving money between personal accounts and should be a simple instant transfer.

It wasn’t.

Not only did the bank make me get out of my comfortable office and toddle off down to the branch, but they then asked me for numerous points of proof that I managed the account – including photo ID and an ability to remember a couple of regular direct debits or standing orders – along with filling in forms in triplicate.

This all seemed a bit rich in the age of the mobile internet, particularly as all I wanted to do was transfer an amount from my business account to my personal account in order to pay a large bill two days later.

Anyways, all went through according to plan and the funds were available in time for the payment to be processed from my personal account.

Then the shocker.

When the monthly statement arrived at the end of the month, it transpired that what the branch had done in order to ensure funds would be available 48 hours later – this is a slower payment, not a faster one - was to act as though I had cashed the business cheque.  That way, they could pay the cheque into my personal account as though it were cash, and hence funds would be immediately available.

Obviously, this is a new form of faster payment.

The trouble is that this switched the transaction from a cheque transfer between accounts to an exception request for funds, which incurs a charge of 66 pence per £100 cashed. That doesn’t sound like much, 0.66 percent, but the cheque was for £20,000 and so they charged £132 for cashing a cheque.

Again, this is silly as it costs the bank no more to process a £20,000 cheque than it does to process a £2 cheque but, more importantly, no-one had mentioned there would be a charge so I was a bit irritated to say the least.

Luckily, my business relationship manager tolerates me quite well and he said that the charge would be waived on this occasion. As a result, and in my relief, I asked to meet him to review my account and whether I was getting the best from the bank and so we met this week.

And here’s another aspect of modern banking that surprised me.

My banker explained to me that the reason the cheque charge was waived is that the issue I had encountered happens all the time.

“Why's that?” I asked.

“Because they don't understand charges on business accounts,” he said.

“Is that an issue with staff training?” I wondered.

“No”, he replied. “It’s all down to this branch being a retail branch. They don’t deal with businesses.”

The branch in question covers a small town conurbation on the outskirts of Greater London with a population of tens of thousands and many small businesses.

“OK”, I asked. “But that doesn’t mean they shouldn’t be aware of the charges on business accounts.”

“Nah”, he said dismissively. “It’s all about cost and process. These guys want this branch to just be a processing centre for retail transactions and that’s what they do well. If you want business transactions, you need to go to a bigger branch.”

I wondered about this as, several years ago, Barclays Bank had tried to overcome this very issue through an internal project called Jigsaw. The idea of Jigsaw is what it says – it’s a bank with lots of bits and they should be joined up.

The bank recognised that small businesses are often family-based or sole proprietor, and that they ran their business accounts like their personal accounts. In fact, many treat them as interoperable and they therefore joined up the SME group with the personal accounts people so that all branches could service both communities as one.

That makes sense, but it creates other issues.

For example, if you want business advice, will you get good business advice from a consumer focused financial advisor and vice versa?  Is it a good investment to have a small business advisor cashing consumer's cheques?

This challenge of how to split or correlate the retail and commercial banking operations is obviously a challenge.

For example, as a result of the error on my account it had cost.  It had cost my time – two visits to the branch plus three phone calls – and their time – applying £132 charge and then removing it, plus the two half-hour visitations to the branch to instigate and then retract and discuss this transaction.

In fact, it had cost far more than if either a higher level were set on my internet transactions or if the branch was better versed in bank policies.

Ho-hum.

What was really intriguing was that, at the end of the conversation, I said to my manager that the one thing that really gets me about the particular small bank branch for retail transactions is that it always has queues.

“Oh, queues are good”, he replied.

“They’re good?” I asked incredulously.

“Oh yes, because whilst you’re queuing we can sell you stuff”, he retorted smugly.

My brow furrowed as I ponderously threw back the remark, “but no one is ever free to sell anything.  They're always busy cashing cheques and dealing with transactions.”

“Ah, cut backs”, he said thoughtfully. “Cut backs, not enough staff, too much cost focus ... you know how it is.”

I sure do.

Things worth reading: 26th May 2010

Things we're reading today include ...

Regulatory role to be handed back to the Bank - The Independent

EU to press for European bank tax - BBC

Cost of swapping euros for dollars soars - Financial Times

Double-dip fears over worldwide credit stress - The Telegraph

The collapse of the euro would open the door to democracy - The Telegraph

Turning a debt drama into a banking crisis - The Times

Plot thickens in Australian bribery probe - The Times

The credit rating agent's thumb

I dropped into the offices of one of the credit rating agencies this week. The one that caused confidence in Greece to fall through the floor: Standard & Poors.

The agencies are interesting places at the moment as many attributed the AAA-rated toxic mortgage derivatives to their watch, so now they’re being cleaner than clean and holier than thou. Or that’s my take on this.

That’s why S&P came out with a negative rating on Greece just when Greece needed a cheerleader. Downgrading their sovereign wealth to junk bond status at the end of April, just at the point where sensitive bailout terms were being agreed, created the meltdown in the euro. Equally, I suspect they’ll do the same for Spanish bonds next, followed by Portuguese and Italian debt later.

The fear is that this could create a contagion effect, with Europe on the point of fragmentation and the end of the euro in sight. Hedge funds are betting big time against the euro and Angela Merkel and Nicolas Sarkozy are fighting for the future of the Union.

With all of the repercussions, it makes you realise the power the rating agencies now wield. They are almost being looked at as the Credit Rating Caesar of today in the Colisseum of Investments where the Hedge Fund Lions surround the Sovereign Debt Christians for a good Short Selling Gladiatorial meal.

Will the Credit Rating Caesar raise his thumb skyward or to the ground?

Will the Hedge Fund Lions attack or be held back to allow the Sovereign Debt Christians to fight another day?

I hear that our European leaders are calling their national regulators to call their credit rating contacts to plead for the thumb to be raised skyward.

We shall wait and see.

In the meantime, it gave me a chance to pop in and pick up a copy of S&P’s excellent weekly publication Credit Week, and guess what? Page 38 explains and defends the reasons for the Greek downgrade in a one-page article by David T. Beers.

It makes for fascinating reading, particularly in light of the fact that the credit rating agencies will come under a new EU regulatory mandate from 1st January 2011.

Will Barnier outlaw credit rating agencies from doing another Greek downgrade in the future? I wonder.

Specifically, is it agreeable for the ECB to hold ‘junk’ bonds ... they do now, as they’re backing the Greek funding crisis.

Anyways, here’s what S&P has to say about it:

Standard & Poor's Ratings Services' recent decision to lower its sovereign rating on Greece has drawn various comments: some supportive, some suggesting it is either too little too late, or too much too soon. It is a debate that highlights the very different responses that our rating opinions can sometimes elicit--and the need for us to reiterate the reasons for our actions and our broader role in the market.

First and foremost, we recognize that our views are sometimes unwelcome to the issuers we rate--and in this case to EU officials--but we believe our focus has to remain firmly on serving investors.

This is clearly a difficult time for the Greek government, the Greek people, and for the Eurozone as a whole. But as an independent provider of credit research and opinions, our primary duty to investors is clear: we have to communicate our view about relative credit risk as we see it, without fear or favor.

Greece is a good example of this principle in action. Our recent decision to lower its sovereign rating to 'BB+' was prompted by downward revisions to our economic growth assumptions for the country. In our view, the size and scope of the fiscal retrenchment required to stabilize Greece's debt burden are likely to further depress Greece's medium-term growth prospects. Under our new assumptions, we do not expect nominal GDP to regain its 2008 level until 2017.

At the same time, like many others, we see the Greek government facing a growing challenge to implement its fiscal reform program. We now estimate that stabilizing the government debt burden implies a reduction in the primary fiscal deficit (excluding interest payments) in the order of 13% of GDP-?a tough target compared with what other sovereigns have been able to achieve in the past.

In short, Greece's longer term fiscal prospects have led us to conclude that the sovereign's creditworthiness is no longer compatible with an investment-grade rating.

Some have suggested we should have suspended judgment until the EU/IMF bailout was finalized. We think not. We have repeatedly pointed out that a bailout, while addressing Greece's near-term liquidity problems, does not necessarily secure its longer term solvency-?as examples of sovereign bailouts in other parts of the world have shown.

In our view, Greece should be able to roll over its maturing debt for the remainder of 2010, as a result of the official financial support it is receiving-?and which we have repeatedly said would be forthcoming. But our reservations about Greece's credit standing are focused on the political and economic challenges its government is likely to face over the next three to five years?-challenges that, in our opinion, the bailout cannot easily resolve.

A faster return to fiscal balance may, in time, help market confidence recover and lead to an improvement in the sovereign rating on Greece. However, in our view, the success of this strategy ultimately rests on one factor the Eurozone authorities and the IMF can try to influence but cannot control--the willingness of the Greek people to embrace fiscal austerity on a scale never before attempted in the country. And that willingness is only now being tested.

As our 'BB+' rating implies, we do not see Greece in imminent danger of default (the historic 10-year default rate of 'BB+' rated sovereigns is 14%), but we do see increasing risks to its credit standing over the longer term.

Some have suggested that our ratings have been driven simply by market sentiment. In fact, as our record on Greece shows, the contrary is true. For much of the last 10 years, until the financial crisis, the market valued Greek debt nearly on a par with 'AAA' rated sovereigns like Germany and France. Yet our first downgrade was in 2004, when we lowered the rating on Greece to 'A' from 'A+'. For over a decade, in fact, our views on Greece's credit standing were contrary to the market consensus.

During the past year, investor sentiment has clearly swung in the opposite direction, but we have continued to take a more balanced view of Greece's creditworthiness. That remains the case today, even after our recent downgrade.

There is little evidence, in other words, that we are driven by the market. The reality is that we provide an independent view that investors may or may not choose to consider. Ratings are one of many inputs that investors look at, and they are only one of many factors that may affect movements in the market. While credit markets regularly overshoot and undershoot depending on the ebb and flow of sentiment, ratings take a longer term view of fundamental credit risk and tend to steer a middle course.

The market benefits from competing views on credit risk, whether from ratings firms or others. Currently, for instance, it is digesting three different ratings on Greece from the three major credit ratings firms. We welcome this debate and are committed to contributing to it by providing our independent view. We do so on the basis of rigorous research, local knowledge, criteria that we apply consistently worldwide, and transparency about our rationale and assumptions, which enables investors to take an informed rather than uneducated view of our ratings.

This principle of independence is a crucial one. It is enshrined in the EU legislation governing ratings firms, which comes into effect in September. This regime introduces day-to-day oversight of ratings firms' activities by EU securities regulators and is expressly designed to promote the independence and integrity of ratings?-in particular, to ensure they are not unduly influenced by debt issuers or other external parties. We strongly agree with this principle and believe that our recent rating decisions on Greece, and other EU sovereigns, demonstrates its application in action.

Sir Win Bischoff on Banking Reform

So, another fun evening at the Financial Services Club the other day, with Sir Win Bischoff kindly agreeing to be our keynote speaker. The result was a record turnout of 120 people for a dinner discussion about the future of banking from someone who is an expert.

Sir Win Bischoff was appointed Chairman of Lloyds Banking Group on 15th September 2009, after being formerly chairman of Citigroup Inc. (2007-2009) and interim CEO in 2007.

Sir Win was knighted in January 2000 for services to the banking industry. He started his career with Chase Manhattan Bank in New York in the 1960s. Subsequently he joined J. Henry Schroder & Co. and became Group Chief Executive of Schroders plc in December 1984. Schroders was worth £170 million then. When the investment banking division of the company was acquired by Citigroup in January 2000, the Group was valued at just under £5 billion, generated wholly by organic growth.

Alongside his responsibilities at Lloyds Banking Group, Sir Win is a non-executive director at McGraw-Hill, and Eli Lilly and Company in the U.S. and Chairman of the British educational charity Career Academies UK. He co-chaired with the Chancellor, Alistair Darling, a review of the competitiveness of UK financial services and is Chairman of the Advisory Council of the newly formed TheCityUK, the promotional organisation recommended by that review.

Sir Win Bischoff, Chairman, Lloyds Banking Group from Chris Skinner on Vimeo.

We all wanted to know what was happening with Lloyds Banking Group, I’m sure, but the evening was under Chatham House rules and so none of that is bloggable. What I will say is that he gave a very good insight into where the industry has come from and is going, so here are a few of my own notes.

We talked about bank capital positions, which are all much improved today, but that has not solved the issues in the industry as liquidity is still a challenge. In fact, the lack of trust across the system is still not what it was or should be, and so liquidity risk will remain a high priority for the near-term.

The public and media debate about banks being bailed out will also remain for a while to come, but is mis-directed as the gross direct support from governments has not been as high as initially reported and is reducing all of the time. In fact, it is reducing at a rapid rate and the feeling is that all of the capital injections into banks will be repaid with interest sooner rather than later, unlike some of the more risky industries like auto.

Meanwhile, the tax regime being discussed for the banking industry is slightly concerning, and it implies that banks can be taxed in isolation and in different forms in different countries. That won’t work. Similarly, the IMF proposals won’t work if there is opportunity for regulatory arbitrage.

In other words, unilateral action by any government is not going to work ... even though the City of London says that global action won’t work either.

What is interesting here is the quandary it leaves for the UK Coalition government who came out with a stack of regulatory reforms and tax proposals for the banking sector, just as European markets meltdown and the USA introduce their own regulatory reforms.

Nothing like co-ordinated action is there?

Anyways, full proceedings of this and future Club meetings can be found at www.fsclub.net and on the blog.

Come along if you haven’t been before as my guest ... just drop me a note to request attendance.

Things worth reading: 25th May 2010

Things we're reading today include ...

Companies

HSBC cutting US sub-prime loan book by $20bn a year - The Telegraph
Bank of New York Mellon facing £1m lawsuit from 'overworked' employee - The Telegraph
IBM acquires Sterling for $1.4 billion - The Times

Capital Markets

Banks reveal extent of 'dark pool' trading - The Independent

Spain

European bank jitters as Spain steps in to save Cajasur - The Telegraph
IMF warning on Spain's economy - BBC
IMF tells Spain to get tough after bank collapse - The Times

Markets

Japanese-style stagnation could affect UK, warns MPC member - The Independent
Libor rises on fears over European debt - The Telegraph
Wall Street falls on European debt jitters - The Times
Wall Street faces fresh mortgages inquiry - The Times
China vows more currency reform - BBC

What happens to SEPA, Chi-x etc if the euro fails?

There’s the classic old joke about the European dream being a place where the police are English, the chefs are Italian, the car mechanics are German, the lovers are French and the bankers are all Swiss. The nightmare is that it is a place where the police are German, the chefs are English, the car mechanics are French, the lovers are Swiss and the bankers are Italians.

It seems that the nightmare is coming true, although the basket case is Greece and the bankers are German.

Last week’s surprising comments from German Chancellor Angela Merkel that “the euro is in danger” and “if the euro fails, Europe fails” sent shudders across the world’s markets, and probably made Brussels shake with rage.

But the Germans are shaking with rage. After Nicolas Sarkozy was rumoured to threaten Merkel with France’s withdrawal from the euro if she didn’t step up to the plate and support a Greek bailout, Germany’s citizens have been demonstrating their rage by printing deutsche marks whilst the national newspaper, Bild, is stirring anger towards the EU and the Greeks in particular with headlines such as:

• "How much more do we have to pump into this country?" April 26th
• "Why are we paying the luxury pensions of the Greeks?" April 27th
• "Greeks ready to cut back? They would rather strike!" April 28th

As I talk to German colleagues, they refer to Greece as the Golden Fleece and that they aren’t paying bills in Greek restaurants because they’ve prepaid to 2020.

All of this puts a huge strain on the European Union, in its fragile 53rd year of unity, particularly as Spain, Italy and Portugal are considered to be on a par with Greece by many, forming a Southern European Union called the PIGS [Portugal, Italy, Greece and Spain].

It raises a key question in my mind, and I’m sure all of the bankers I deal with: if the euro fails, what happens to the monetary union of banks, the Financial Services Action Plan and all those bank and insurance directives like Solvency II, MiFID and the PSD?

What happens to Chi-X, SEPA, the EBA and the rest?

In order to answer this question, you have to look at two key areas. First, is the economic and monetary union (EMU) broken? Second, if it is, do we throw away the eighteen years of change introduced by the agreement to launch the euro when the Maastricht Treaty was signed in February 1992?

Let’s take the first question: is the EMU broken?

We asked this question in 2005, when the French and Dutch threw out the EU Treaty. Answer: it is political union that they were rejecting, not economic union. Note: even with their rejection, and the Irish no vote, the Treaty became the Lisbon Treaty in 2010 regardless of such resistance. In other words, in the interests of the long-term vision of Europe, Europe wins.

Equally, America has taken years to gain its United status, starting with a nation of disparate states that had far less history than those of Europe.  Their Union was easier in comparison, and that still took years, so Europe’s union will take time and will face many more tests.

But this is the greatest test so far.

The size of this test should not be underestimated as it is the first time that we are seeing an economic union, resulting in a cascading effect upon money and politics. Historically, the tests for Europe have been mainly about how much power is ceded to Brussels. This test is showing the inter-relationship between economies and Germany’s anguish is that if they are to keep the vision of Europe in harmony, then they have to pay for it.

Therefore, returning to the rejection of the European constitution, that was a political rejection and when a country has an economic crisis, the monetary union means that other nations pay and, as a result, that political will is tested when one nation's tax dollars are taken to pay for another nation's debts.

That is why this challenge is so much greater than any before, because it is testing the political will of citizens, not just their ability to trade and compete.

The core issue though, is that it is not just the Greek economy and Greece that would leave the Union if they were allowed to fail.  It is the Union.

Should the Greek economy fail to honour their government bonds due to being economically bankrupt, the ratings agencies and banks would downgrade Spain, Portugal and Italy, and there would be a spiral effect. This means the European Union breaks apart.

That is why the Greek failure option is unpalatable ... but is the alternative palatable?

Why do we need a European Union?

Answer: Europe needs to be a Union to maintain its drive to be a regional superpower, and competitive commercially and economically with China and America. There’s the rub. If Europe fails, then the UK, Germany and France fail, as parity to compete internationally and intraregion becomes far more difficult.

This is why Greece needs the bailout and why Germans are paying.

It does not help Angela Merkel maintain her status or power hold in Germany – her popularity is sinking faster than the Titanic – but if Greece fails, it is felt that Europe may fail too. And that is not an option seen to be agreeable today.

Also, nations have been bailed out already.

Two years ago, Spanish banks received over €50 billion worth of ‘aid’, in the form of mortgage-backed securities with the European Central Bank (ECB), when they faced a property meltdown.

Did the Germans wail out about that bail out?

No.

Why?

Because it wasn’t on the front page of the Bild.

That bail out was smaller and less obvious, so no-one really noticed.

The Greek bailout is a bit bigger – €110 billion – admittedly, but it is supported by the IMF and is necessary for Europe’s future. ‘nuff said, although if you want to know more, Robert J Samuelson in the Washington Post provides a particularly good overview of why Europe needs to support Greece.

My summation is that Europe will survive this crisis, the euro will stay and the currently ridiculous pricing of US$1.24 to the euro will reverse within the next month or so, as forecasted by most economists.

But let’s look at the worst case scenario: what do we do if the euro does fail? Does it mean we unravel all we’ve done to date?

This is the second and, in some ways, more important question: is there a backup plan?

OK, if the Eurozone breaks apart, then it matters ... but it will not throw away all that has been built to date.

The banks will still want to use cross-border instruments that work. They will just bring back a margin to represent those cross-border movements whilst maintaining the efficiency of the infrastructure that has been built.

As Werner Steinmuller, Head of Global Transaction Services of Deutsche Bank, stated when we researched the Payment Services Directive (PSD) and the Single Euro Payments Area (SEPA) last year:

Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.

In other words, the SEPA process has forced the banks to build new infrastructure, new systems and new efficiencies in transaction processing. That will stay.  It does not go away if the euro goes away, as the new infrastructure is designed to handle efficient transactions, not euro payments.

So if we look at SEPA Credit Transfers and Direct Debits, the Euro Banking Association (EBA) and STEP2 ... it will all stay. The EBA will be a private consortium to operate efficient systems, rather than a government initiative to create efficiency, and it will stay. There will be a charge for this, and a charge that could provide a substantial return to the banks that created this infrastructure, but it will not go away.

The same will be true for Chi-X, and the capabilities electronic trading platforms have introduced into the European equities markets. Sure, some countries may want to block and reverse policies in these areas – Spain? – but the process of regional investing is unstoppable now. Goldmans, Merrill, BarCap and co, won’t want to see this go away, so it will remain.

Bottom-line: the efficiency of European payments and investing is in the interest of banks, corporates and institutions today, not just governments and policymakers.

So, if the euro fails, my answer is that the all the investment made by the financial markets in efficient systems will stay.

It will just be at a profit rather than a regulation.

Need money fast?

It's interesting to see the rise in high interest, short term loan sites.  I blogged about Wonga last year, and now there's Quick Quid.

Here's their advert:

Wow!

2356% APR!

That's TWO THOUSAND, THREE HUNDRED AND FIFTY-SIX PERCENT annual interest!!!!

2356%!!!!!!!!

OK, it sounds bad ... but it's not.

Y'see these sites are designed for folks who are in a tight spot for a week.  Their monthly wages are coming in on Monday and it's Thursday.  The rent's due and they're broke.  What to do?

Borrow the rent for four days off Wonga or Quick Quid.

Problem sorted.

These sites don't encourage long-term borrowing as, if they did, they would be considered loan sharks which they are not trying to be.

As founder of Wonga, Eroll, puts it:

"Responsible lending is at the heart of our mission at Wonga. It means #1 being transparent.  Anyone dealing with credit card companies and banks knows the frustration of dealing with companies that aren't transparent about what things really cost.  We've never had a customer at Wonga who has told us, after they've taken the loan, that they didn't understand how much it was going to cost them, when they were going to be charged.  That has never happened."

Even so, 2356% interest rates. 

Now then, if I could get you to borrow for a few months longer ...

Things worth reading: 24th May 2010

Things we're reading today include ...

Companies and People

Green to step down as chairman of HSBC - The Telegraph
HSBC will miss Stephen Green, a keen moderniser and voice of restraint - The Telegraph
Standard Chartered bets on Indian expansion - The Telegraph
US Justice Department ends AIG probe - Financial Times
Intesa boss calls for global banking rules - Financial Times
LSE profits eroded by competition - The Telegraph
Lloyds attacked for 'abuse of taxpayer cash' - The Telegraph

Euro

German short ban mired in confusion - The Telegraph
European bank jitters as Spain steps in to save Cajasur - The Telegraph
Everything you always wanted to know about the euro – but were afraid to ask - The Independent
European bank risk close to that after Lehman Brothers collapse - The Telegraph
Hedge funds bet big on the falling euro - The Telegraph
Britain beware: why the euro crisis is a problem for us too - The Telegraph

Regulations

UK coalition is talking tough but global resolve on reform is cracking - The Telegraph
US Senate passes biggest overhaul of big banks since Depression - The Telegraph
US Senate votes for new 'Glass-Steagall Act' - The Telegraph

Markets

Markets on alert after bank bailout - The Times
China vows more currency reform - BBC

The Finanser's Week: 17th May - 23rd May 2010

The biggest news stories of the week include ...

• Inventor of the cash machine dies - BBC
• JP Morgan: England to win World Cup - The Telegraph
• Coalition outlines bank reforms - BBC
• Mayor of London Boris Johnson calls coalition policy of attacking banks 'nuts' - The Telegraph
• Euro in danger: Germans trigger panic over future of single currency - The Times
• Reforms to cost European banks £208bn in lost profit - The Telegraph
• Dow crash: broker blamed - The Times
• Historic Wall Street overhaul passed by US Senate - The Times
• Bankers trade their BlackBerrys for iPhones - The Times

And our biggest stories of the week are ...

The future of banking regulation

The City of London released an interesting document yesterday on the future of regulation of banking. They talk about liquidity, leverage, capital and risk liberally, and state that the future regulatory regime must not clamp down on capital reserves in banking so hard that the banks are unable to lubricate the global economy.  What I found interesting is that there are quite a few contradictions in the 77 page report although, such as a proposal for global regulations and then they say that global regulations will not work.

Challenges and Solutions for Banking UK

Another two interesting documents were released on Friday.  The first is an official House of Commons Library publication: Key Issues for the New Parliament 2010.  the new coalition Conservacrats published their document: The Coalition programme for government.  Both documents place banking reform as a priority with bonuses, splitting retail and investment banking and taxing banks high on the agenda.

The euro is in danger

After Angela Merkel's comments about the "euro is in danger", I was going to write a long and in-depth review of the state of the euro ... but I was beaten to it by Chris Blackhurst's column in the evening standard.

Managing liquidity risk in a changed and global world

I received an interesting white paper the other day from Wim Raymaekers, Head of Banking Market at SWIFT on Liquidity Risk. Here’s the Executive Summary.

2010's most innovative financial firms

Finovate took place in San Francisco last week. It is definitely the one place you will find the NEXT generation of banking with over thirty-six firms presenting to a record audience of 500 industry executives. Which four firms were voted 'Best in Show' to be cited the most innovative financial firms 2010?

Can Tesco and Virgin hack it as banks?

I was having a conversation today with a firm considering entering banking in the UK. They would be an unexpected player, as their brand is seen to be trusted but totally unrelated to financial services. So I sent them this article that details how non-banks could become banks and the challenges Tesco and Virgin have faced.

Numbers: State Bank of India

I love talking to Chinese and Indian banks, just by the sheer drama of hearing their numbers.  For example, I talked with State Bank of India this week who have:

• 150 million customers
• 11 million High Net Worth customers who earn >US$10,000 per month
• 3.5 million internet banking users

The original iPad, 1990

Nothing to do with banking, but a wander down memory lane.  Twenty years ago I demonstrated a prototype of what you would call the very first iPad ... a 386 Intel processing Table PC!

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Challenges and Solutions for Banking UK

There were two interesting documents released yesterday, and worthy of mention here.

The first is an official House of Commons Library publication: Download Key Issues for the New Parliament 2010 (8 Mb pdf). 

Two pages of the 72 page document are dedicated to the future of financial services.  What does it say?  Here's the text:

“There can be few policy areas of comparable size with a bigger ‘in-tray’ than that of financial regulation and services. While the world hesitantly recovers from the global financial crisis, its legacy is a profound re-examination of the adequacy of existing legislation and institutions, together with a consideration of just what society wants and expects from its financial institutions.

“CONTRADICTORY OBJECTIVES

“This consideration will inevitably involve making a choice between potentially inconsistent or irreconcilable outcomes. For example,

“Banks should be forced to raise more equity capital to make them stronger.

“Banks should be subject to higher taxation and controls on profits.

“BUT new equity is hard to raise if banks’ profits are permanently lower in future.

“Or,

“Bank lending should be more tightly controlled by restrictions on ‘leverage’.

“BUT banks should lend more to industry and individuals.

“QUESTIONS TO BE ANSWERED

“The issues currently facing regulators and legislators include:

• Capital adequacy – how much and what quality of capital should banks and others be forced to hold?

• Liquidity – what level of liquid resources should banks retain? What should these consist of and how should they be measured?

• Size - should there be controls on the size of financial institutions? If so, should it be by way of splitting the banks by function, or by quantitative controls on the levels of business they can carry out? If not, might they be forced to pay a surcharge as an insurance policy against the consequences of future failure?

• Remuneration and ‘corporate governance’ – what structures need to be put in place to improve internal controls?

• Other agents and influences – what should be done regarding credit ratings agencies or short-selling hedge funds? Did the accounting profession and its standards contribute in some way to the problem? How ‘complex’ should complex financial instruments be allowed to be?

• Lastly, the regulatory system itself – is there a role for a more formal international supervisory system? If so, what powers and sanctions should it have over national authorities? What actually is macro-prudential supervision?

“How will the UK Parliament make its voice heard in international discussions of the future of banking?

“These issues will be decided upon at a variety of different policy levels. While some will be purely ‘domestic’ - for example, the future regulatory structure in the UK - others, such as broad principles on capital adequacy, will be agreed on by international regulators in Basle and subsequently form the core of new European Union directives for implementation in EU Member States. In the UK, implementation might be by national legislation or by rules made by the current independent regulator, the Financial Services Authority (FSA), outside of Parliamentary control or scrutiny. One challenge for the future Parliament is to be able to exercise its voice and express its opinion within this framework.

“The end of the cheque could disproportionately affect the most vulnerable firms and individuals

“DOMESTIC CONCERNS

“For Members for whom (saving) the world is not enough, an important domestic agenda awaits that they will find hard to ignore.

“By 2012 bank cheque guarantee cards will be withdrawn. By 2016, the Payments Council will have decided whether or not cheques should cease to be a recognised method of payment. The next five years therefore will see this argument unfold in public. The issues are likely to be the impact on groups that still use cheques – the elderly, small firms, traders etc and the adequacy of any technological replacement.

“‘High cost credit’, or the provision of sub-prime credit to individuals excluded from the mainstream banks, is currently being reviewed by the Office of Fair Trading. When it publishes its conclusions, anticipate a lively debate over the balance between control, regulation and credit accessibility. More generally, the terms and conditions under which credit is made available will change with the imminent transposition of the EU Consumer Credit Directive.

“Last, but by no means least, approximately 10,000 small independent financial advisers are likely to cease trading following the FSA’s Retail Distribution Review. The review was the response to the long-running complaint that a commission-driven sales model has contributed to past mis-selling scandals of financial products. Arguments stressing the commission system’s lack of transparency and its potential for conflict of interest between seller and customer will be set against fears that, when faced with up-front charges, individuals will be put off seeking much-needed financial advice.

From consideration of the global regulation of credit derivatives to the possible death of the cheque book, from bankers’ bonuses to credit for the poor, from ‘too big to fail’ to too small to survive, there is much for Members to consider and decide upon in the next five years. Watch that in-tray.”

Interesting stuff.

Responding to this straight away, the new coalition Conservacrats published their document: Download The Coalition programme for government (500 Kb, 36 page document).

The first priority, #1, number uno, is banking. Here’s what they’re going to do:

“In recent years, we have seen a massive financial meltdown due to over-lending, over-borrowing and poor regulation. The Government believes that the current system of financial regulation is fundamentally flawed and needs to be replaced with a framework that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices and we take action to promote more competition in the banking sector. In addition, we recognise that much more needs to be done to protect taxpayers from financial malpractice and to help the public manage their own debts.

• We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.

• We will introduce a banking levy and seek a detailed agreement on implementation.

• We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.

• We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.

• We will develop effective proposals to ensure the flow of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

• We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.

• We will reform the regulatory system to avoid a repeat of the financial crisis. We will bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

• We rule out joining or preparing to join the European Single Currency for the duration of this agreement.

• We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated.

• We will create Britain’s first free national financial advice service, which will be funded in full from a new social responsibility levy on the financial services sector.

• We take white collar crime as seriously as other crime, so we will create a single agency to take on the work of tackling serious economic crime that is currently done by, among others, the Serious Fraud Office, Financial Services.”

Alright?  'Nuff said?

... watch this space.

 

The euro is in danger

After Angela Merkel's comments about the "euro is in danger", I was going to write a long and in-depth review of the state of the euro ... but I was beaten to it by Chris Blackhurst's column in the evening standard.

Rather than reinvent the wheel, just read what he has to say:

"Merkel was only saying in public what other EU governments and their advisers have been saying in private for weeks. Greece, with its rioters to the fore, could literally go up in flames and no amount of injection from the other euro countries may be enough to save it ... and after Greece come Portugal and Italy and Spain."

Totally agree, although I don't agree that the euro's day has come.

Will blog about that shortly. For now, his column is worth a read.

 

 

Things worth reading: 21st May 2010

Things we're reading today include ...

People and Companies

Broker fined for 'rotten' scheme - BBC
RBS eyes sale of Priory to private equity - Financial Times
Dubai World reaches $23.5bn debt deal with banks - The Telegraph

UK

Coalition outlines bank reforms - BBC
Coalition reveals hopes for banking levies and lower corporation tax - The Times
'Unfair' bank charges facing ban - BBC
Lib-Con plan for City crime super-agency - The Times
In The Spotlight: A bitter-sweet moment for the City's top crime buster - The Independent

Europe

Angela Merkel calls for tough regulation on banks - The Telegraph
Merkel leads calls for global financial tax as markets continue to slide - The Times
Merkel begs G20 to speed up reform as markets fall - The Independent
Whatever Germany does, the euro as we know it is dead - The Telegraph
Spain passes $19bn austerity plan - BBC
Euro bank builds for the future - The Telegraph

USA

Historic Wall Street overhaul passed by US Senate - The Times
'Flash crash' saw Apple shares gain 40,000 per cent - The Independent
US state pensions becoming federal issue - Financial Times

 

The future of banking regulation

The City of London released an interesting document yesterday on the future of regulation of banking. They talk about liquidity, leverage, capital and risk liberally, and state that the future regulatory regime must not clamp down on capital reserves in banking so hard that the banks are unable to lubricate the global economy.

What I found interesting is that there are quite a few contradictions in the 77 page report although, to be honest, I only read the Executive Summary.

From this summary, it’s interesting that they plead that the macroprudential structures don’t squeeze capital ratios, but hardly talk at all about the leverage issues Lehman Brothers created.

If my memory serves me, Lehmans was operating at leverage ratios of up to 1:40, e.g. for every $1 of capital, $40 was being used to ‘gamble’ on the global markets. I also remember that their debts at bankruptcy were around $400 billion and BarCap estimated that for every $1 of debt, around $20 of Credit Default Swaps were being leveraged against Lehmans AAA rating. In other words, $8 trillion of leverage was in the system off the back of Lehman Brothers.

That was the issue, particularly when this leverage – and therefore liquidity – disappeared overnight.

Following on from this, they refer to the fact that the crisis was not caused by a lack of capital, but by a lack of liquidity. True, but I did not gather a clear view on liquidity risk or leverage ratios from the document. It may be in there, but it’s hard to find.

For example, in Section Five that addresses Leverage Ratios, the report states that “judgement and discretion are vital, including judgement and discretion concerning circumstances under which firms will be permitted temporarily to have capital that is inadequate. The notion of employing a leverage ratio as a last-resort backstop to limit the damage caused by regulatory get-arounds arises precisely because of the limited ability and appetite of regulatory authorities for exercising discretion. That core problem is the one to address.”

A bit of fudge if you ask me there.

The same is true on liquidity risk, with the report proposing a global liquidity standard and yet they then say that they are “unconvinced that there is a case yet made for pursuing significant further deepening of international coordination of banking regulation. Indeed, we believe it quite likely that greater exercise of national discretion is the appropriate path forwards.”

Now I understand the conundrum that you cannot have one nation regulate for example to stop bank bonuses as it will just mean bankers jump across to other nations. So you need a global agreement of some form. Equally, no global agreement will work, as there is always gold-plating and protectionism of national instruments, so you need a global framework with local interpretation.

That is kinda what they’ve proposed, but it’s rather unclear. For example, their closing comment on liquidity is:

“In our view, improving liquidity standards are amongst the most important and material changes to be introduced — though they are likely to have high costs that must be recognised. However, the scope for international standards to deliver adequate liquidity is limited without increased roles for national lenders of last resort and in particular an increased role for central banks in prudential supervision.”

In fact, the regular mantra in the document appears to be the frictions and tensions between global and local. For example, they state that there is a “risk that regulation will not apply evenly or that regulation will apply in the UK before the rest of the world”, and that this “is seen as a significant threat to London’s competitiveness. It is therefore widely urged that the Basel measures enact a common international timetable. International firms that operate in multiple markets are particularly keen to see common, consistent frameworks and standards applied.”

Yet, as mentioned, they don’t think regulation will or can be applied consistently across multiple markets.

All in all, more questions raised than answers in this document, but worth a read for those who are technically minded and interested.

Download available from the City of London's website.