The Financial Services Club's Blog

The future of capitalism

It’s Davos time, as usual.

In the last week of January, the great and the good of the world’s leadership from governments, business, academia and media all gather in Switzerland to debate the future of the world’s economies and the World Economic Forum, #WEF.

In the build-up to this year’s WEF, it seems that all the magazines, media and men are talking about capitalism, what capitalism means post-crisis and what the future of capitalism will be.

David Cameron made a speech about this last week, as did Nick Clegg and Ed Miliband, and much of the debate resonates with the speech of Amartya Sen that I attended last week.

The core of the debate is embodied in the quote by Winston Churchill that “capitalism is the worst form of economics, except for all the others that have been tried.” 

Link: TrogloPundit

True.

The debate is then what form of capitalism you want: state capitalism or liberal capitalism.

A wholly state run economy fails, as demonstrated by communism; whilst a wholly liberalised, free market economy also fails, as demonstrated in 2008.

So there needs to be a middle ground, but how middling is that middle ground?

Somewhere between the extremes of Western and Eastern approaches to commerce.

Some believe that the West is crumbling due to over-excessive free market liberalism.

In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid-1980s, with conditions deteriorating in 17 of them.

A recent report  by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more.

Meanwhile, the average income for an American has reduced every year for the past three years.

On the other extreme, Asian markets are rising fast and taking over, using a more state-led capitalistic approach.

“The world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned …  state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s.”  [The Economist]

“The ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D)—as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender … America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%. But science is not a zero-sum game.”  [The Economist]

So there is a new model rising which, according to Time Magazine, “is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American ‘leave it to the markets’ capitalism, which is being challenged by ‘capitalism with Chinese characteristics’, euro­capitalism, ‘democratic development capitalism’ (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, UAE and Israel). All these models favour a more significant role for the state in regulation, ownership and control of assets.”

The Economist furthers this debate, asserting that the winner is ‘state capitalism’.

Link: Ifyouhavetoaskyoudontknow

“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”

Examples of state capitalism include:

“The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed including the world’s biggest natural-gas company, Russia’s Gazprom, China Mobile and Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year ...  State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil. They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones.” [The Economist]

“State-Owned Enterprises (SOEs) make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies.” [The Economist]

“France owns 85% of EDF, an energy company; Japan 50% of Japan Tobacco; and Germany 32% of Deutsche Telekom. These numbers add up: across the OECD state-owned enterprises have a combined value of almost $2 trillion and employ 6m people.” [The Economist]

The Economist believes the trend for the next decade will be towards state capitalism based upon the Chinese model, albeit with caveats and issues along the way, and  concludes that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model:

• Over the past 30 years China’s GDP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion.
• China has taken over from Japan as the world’s second-biggest economy, and from America as the world’s biggest market for many consumer goods.
• The Chinese state is the biggest shareholder in the country’s 150 biggest companies.
• China’s 121 biggest SOEs saw their total assets increase from $360 billion in 2002 to $2.9 trillion in 2010 … in 2009 some 85% of China’s $1.4 trillion in bank loans went to state companies.”

But note that, unlike America where CEOs’ paychecks are 325 times bigger than their employees, state capitalism is fairer in terms of income disparities: “in 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000.” [The Economist]  China Mobile has 600 million customers and is one of the largest telecoms in the world.

FYI, I debated these points a couple of years ago, and concluded that the future is one where capitalism is heavily influenced by the influence of the Chinese and Islamic principles.  

Seems to be coming true?

Link: The World Is Not Enough

Postnote:

The main reading behind this blog post is inspired by two cover page stories:

• How to Save Capitalism, Time Magazine
• State Capitalism, Economist supplement

 

Amartya Sen: thoughts on poverty and the global financial crisis

I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.

If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism. 

Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.

He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.

An impressive guy.

Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.

Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).

Some people say we live in interesting times, but I think we live in baffling times.

We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future. 

The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.

Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907. 

The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States. 

The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not. 

Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty. 

But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it. 

He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.

If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist. 

This raises the immediate question: who, then, are the wrong-doers?

If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.

You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.

The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.

Who is right and who is wrong?

Or is this the right question? 

In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations. 

We have to ask: how can things be done differently so that the evil of poverty is ousted? 

We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction. 

That is not, however, the same as trying to identify the wrong-doers?

The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society. 

We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty. 

Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.

In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.

This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program. 

In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good. 

This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.

That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor. 

There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action. 

So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.

My argument so far has been based on seeing poverty as lowness of incomes. 

Is employment with income a full solution to all problems of poverty? 

To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty. 

By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.

Is employment for income in order to buy food the answer to everything therefore?

No, as this misses the point of why there is persistent poverty

Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty. 

Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.

What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.

For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.

The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty. 

Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.

As a result, they balance between market mechanisms and state activities.

There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.

Does this mean arguing against Adam Smith’s principles for free markets?

Not really.

That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.

Adam Smith clarified how markets work and how they can work exceedingly well.  He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.

The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.

The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.

Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.

Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.

The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.

For example, he specifically argued about protections from unlimited usury practices.

So how should we think about the wrongdoers that need rectification, and how should we address poverty?

According to Adam Smith and my own thinking, the key is increasing employment.

Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.

As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.

Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.

But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.

What we are seeing is that, in order to pay back their debts, governments have far more accountability.  However, they are addressing this accountability in the wrong way.

It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,

Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.

What these governments need is fast economic growth.

Economic growth creates resources to address unemployment and poverty.

This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.

Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.

In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime.  The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics.  Human lives in society are interlinked through economic, social, political and cultural associations.  The nature, causes and consequences of poverty reflect the richness of those connections.  We have no reason to be surprised by that elementary understanding.

Amartya then took Q&A from the floor and was asked a few interesting questions.

Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?

You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence. 

For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham. 

The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.

As this shows, free markets and the state are two separate entities that are interdependent.

A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.

Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?

There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.

Q: Do you think the euro will survive?

No.

When the euro was created, I didn’t see why it was needed and didn’t believe it made sense.  I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.

You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union.   Greece is a good example.

Now however the loss of a country would be very destabilising for this European Union.

This is why Germany is being forced to bailout Europe.

Could they retreat out of it? Yes.

Is that the right thing to do? I think so.

 

Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007.  These words of wisdom are integrated in parts of this article to ensure more accuracy of content.

 

How will the world look post-crisis?

I’ve been debating some future presentations with various folks today, and a little ray of light went off in my head.

The light was triggered by a comment: “can you talk about what impact regulatory change may have on bank to corporate relationships using examples historically?”

The question was really asking about the unintended impact of regulatory change in the past and what it might mean for their future, but it made me think about something else.

Each time we have seen a major bubble burst, the cause has been a coagulation of several forces of change.

Forces for change come from four major directions: Political, Economic, Social and Technological (PEST).

These forces for change are used in many ways, and can be seen in my banking history discussions (and soon to be published book) which talks about many historical periods including the Italian Renaissance, the Great Depression and the Credit Crisis.

In each of these, we can see Political, Economic, Social and Technological forces working together at the same time to drive change.

In the fall of the Renaissance Italians, it was a mixture of change between the break from the Catholic Church with the Protestant and other movements (Political), mixed with the ruin of the Italian banks due to over-extension of credit to overseas Royal Houses (Economic), along with expansion of merchant shipping and colonisation (Technological).

In the Great Depression, we saw the end of the Industrial Revolution (Technological) combined with post-war wrangling over the gold standard (Political and Economic).

Right now, we see a major world of change too.

We have the rebalancing of power between America and Asia/China (Economic) combined with an internet revolution that is connecting everyone on the planet (Technological), leading to changes in society, where a Molly Katchpole can reverse a bank’s policy and an #Occupy movement can change global thinking (Social).

The Political outcome of all of this is what is driving bank regulations right now.

And the outcome of all of this will be a massive change.

A New World Order?

Probably not.

We already have a New World Order as China is expected to be the world’s largest economy by 2018 (ten years ago, it was estimated to be 2047).

But we will see a restructured playing field and one that is not level.

We can see this already as one major economy (America) bans prop trading whilst another (UK) just separates prop trading from retail bank operations.

Even more pronounced are the differences between the US and EU on OTC Derivatives regulations and how to define and regulate Systemically Important Financial Institutions (SiFi).

From CME Group in October 2011:

“In an ideal world, global financial regulators would function something like a team of horses, with policymakers in the United States, Europe, Asia and elsewhere all pulling at once in the same direction, and moving toward a common goal.

“Reality is turning out be far more chaotic, however. Regulators and lawmakers are having a tough time forming a consensus even within their own national borders, let alone across international boundaries. The result is turning out be a patchwork of overlapping and often inconsistent approaches to regulation in the aftermath of the financial crisis that gripped global markets in 2008 and 2009. Many financial experts fear that the inconsistent global regulatory framework will alter the flow of capital around the world, as trades are directed to the cheapest jurisdiction, a process known as regulatory arbitrage.”

So we end up with a world where the politicians are trying to react to the implosion of markets at the end of another revolution – Globalisation – and find that they are seriously lacking consistency, vision, leadership or agreement.

The Eurozone is one of the best illustrations of this, although America and China aren’t guaranteed to come out of this stainless as the American elections will change ground again, as will China’s challenges of a property market bubble and inflationary pressures.

All in all, the PEST approach to the world today says that we are going through a momentous change from all angles – Political, Economic, Social and Technological.

Where will it end up?

Probably in a place no-one expects and one which, on this blog, I’m going to avoid predicting decisively.

From Reuters:

“By 2020, the workforce in western Europe will shrink by 2.4 percent, including a 4.2 percent contraction in Germany, according to a Boston Consulting Group study.

Looking further ahead, HSBC projects that Germany's working population will shrivel by 29 percent by 2050, Russia's by 31 percent and Japan's by 37 percent.

Over the same period, the population of many African countries will double. Nigeria will log a rise of 3 percent a year in its workforce - in contrast to a 1 percent decline in Russia and Japan - and will have as many people as the United States by 2050.

On current projections, Pakistan will be the sixth most-populous nation by the middle of the century. And the Philippines could be the world's 16th-biggest economy, HSBC reckons.”

 

2012: an economic outlook

2012 is here and we all hope it’s better than 2011.  Sure, some of you may have had a very good last year, but most thought it pretty dire with job losses, austerity measures, civil uprisings, protests, a second financial crisis in the Eurozone and more being the name of the day.

Time Magazine named their Person of the Year as a collective Protestor, rather than an individual …

And the Times named Mohamed Bouazizi - the young market trader who set fire to himself outside the government offices in Tunisia as a martyrdom act that fuelled the Arab Spring - as their Person of the Year.

Is this a time when societies worldwide change their world or will media, finance and government, continue to control and direct?

Probably a mixture of both.

Thanks to this internet age, the individual can change things and change things fast – the Arab Spring, Occupy Wall Street, Anonymous and Wikileaks prove this – but those in power will still direct, as far as they can.

The question may be who is in power, as demonstrated by the Eurozone issues of 2011.

Where are we going in 2012, is therefore a key question.

To put this question in context, I said three years ago that the next resurgence in the economy would be in 2014, after plateauing in 2012. 

I still believe that.

This year is going to be a tough one, as things haven’t finished yet, but things are stabilising. 

Europe’s going to a have a mild recession, America is going to revive and Asia is going to wonder where it’s going.

So here are the four key things that reflect the economic times of 2012:

1. Asia’s light continues to shine, but not quite as bright
2. American equities is the place to invest
3. There will be a major European bank failure
4. A country will leave the Eurozone

Asia’s light continues to shine, but not quite as bright

Asia, particularly China, continues to astound. 

 

From Urban Times, 2010 

Ten years ago, China had more mobile phone users than America, and last year it manufacturer more and registered more patents.  In 2014, its retailers will sell more too and the day that China becomes bigger than America is getting ever nearer.

In 2003 – when Jim O’Neill coined the term the BRICs for Brazil, Russia, India and China – he estimated that China’s economy would overtake America’s by 2041.  Last year, that estimate had moved fourteen years nearer, to 2027, thanks to the economic crisis.  As the crisis has continued, the estimate is now that 2018 will be the year China gets to be bigger than the USA, according to Emma Duncan in the Times.

Nevertheless, with the American and European market demands contracting, China is not sailing a static sea.  For example, Reuters Breaking Views blog states that China’s growth may dip under the magical 9% this year – even falling under 8% – as multiple challenges hit: falling house prices, a slump in property investment, and slowing exports.  Add to this that salaries surged 40% last year – admittedly to just $160 per month – and we can see that global growth and stability will not be plain sailing at all in 2012. 

 

Source: PhilSTAR / Bloomberg

So where should you invest?

American equities is the place to invest

In a bout of good news for Barack Obama, in the year where he fights for his political future against Mitt Romney, the US looks to be a safe bet for investments in 2012.

Terry Ewing, head of US equities at Ignis Asset Management, believes the US can continue to surge, as its economy has differentiating growth characteristics that will underpin both earnings growth and the stock market.

Mr. Euwing has expectations of 2% GDP growth, compared with the 'inevitable European recession' this year. By way of history, US industrial production rose by 8% between 1993 to 1995 whereas Europe's shrank by 5% and he believes a similar divergence could well happen again.

He lives with good company, with Jim O’Neill of Goldman Sachs saying that American equities could rise by as much as 20% this year, and Paul Frank agrees.  John Paulson promotes buying US stocks over US government bonds, whilst James Paulsen sees this year as the ‘gear year’.

Source: PhilSTAR / Bloomberg

With all those “Pauls” behind it, something’s gotta be right and so yes, invest in America is the message in 2012.

Unfortunately, that means don’t in Europe.

There will be a major European bank failure

In July 2011, the European Banking Authority (EBA) issued its summary of how fragile the European bank system was after stress tests on 90 European banks.  Eight failed that test – nine if you include the German Helaba Bank that dodged it – and a further 16 were in the danger zone.

However, the tests did not include a sovereign debt default, such as the issues we now see in Greece.

And with the ECB lending €500 billion it should stabilise the system, except that the ECB is receiving a similar amount back in overnight deposits and European banks still have to face almost €2 trillion of toxic assets on their balance sheets.

Add on to this that European banks also face a major capital shortfall – at least €115 billion and more like €350 billion – and we are bound to see more European banks failing this year.

I said a third of European banks would fail two years ago.  It won’t be that many, due to the €440 billion European Financial Stability Facility, but there will still be some major failures with Commerzbank already in the frame.

It should be noted that this is not unique to Europe however, as 92 banks failed in the USA in 2011.  It’s slightly down on 2010 (157 failed) and 2009 (140) but it’s still high and will continue as an analysis by The Wall Street Journal suggests that failures are down because troubled banks aren't failing as quickly.

A country will leave the Eurozone

Due to fragility in the European banking system continuing, along with a lack of confidence in Europe’s leadership, one or more countries will be forced to leave the euro.

There’s already been lots of speculation that a Eurozone member will need to breakout of the euro.  Greece is the usual one cited, but Italy and others are also regularly debated.  There has been lots of simulation and planning for such an event and so, when it does, it won’t cause any major ripple in the markets at all.

It will be a disaster for the country concerned of course, but the idea of continuing the Eurozone where a third of the members – Portugal, Italy, Greece, Ireland, Spain and more – are being propped up by Germany, and to a lesser extent France, is just not workable long-term.

And I’m not the only one saying this.

The Wall Street Journal is charting its demise, whilst the Guardian is talking about it every day, as are many people in the countries affected themselves, such as Greece and Ireland.

The UK Treasury is planning for it to fail; as are most bank analysts, banks and companies.

In fact, the only ones saying it won’t happen are the ECB, obviously, and Wolfgang Schäuble, the German Finance Minister.

But what does it mean if it happens?

Well, it ain’t good, but it doesn't mean the end of the Eurozone.  Just that Europe has to rethink a lot of the Maastricht Treaty, and come up with a new Economic & Monetary Union approach.

Peter Sands, CEO of Standard Chartered, puts it succinctly:

“I think the probability of countries leaving the Eurozone has increased because we have had several successive plans announced to solve the problem of the Eurozone which simply haven't convinced the market.

“Nobody should underestimate what a big deal that would be, because it would be very difficult to manage the contagion risk, even if it was only Greece. The disruption from that would really be quite significant.

“That will have ramifications all over the world . . . because the simple maths is that the Eurozone is a very large part of the global economy and if it is going slower, then economic trade will be slower around the world.”

So there’s a short guide to the 2012 economic outlook:

• Asia’s light continues to shine, but not quite as bright
• American equities is the place to invest
• There will be a major European bank failure
• A country will leave the Eurozone

This is one of three 2012 outlook pieces:

• 2012: an economic outlook
• 2012: a banking outlook
• 2012: a bank technology outlook

 

The outlook for UK banking results this week

So today marks the start of the bank reporting season in the UK which, based upon last week’s results in the USA and Europe, will be pretty bleak too.

First, we have HSBC which is a mixed bag of news.

According to the Telegraph, HSBC will report “a profit for the first six months of the year of $10.9 billion, becoming the first of the UK's major banks to announce its interim financial performance.

“The profit figure, which means HSBC made nearly $1.7 billion of profit in each of the first months of the year, is slightly down on the same period in 2010 when the bank reported a before-tax profit of $11.1 billion.

“HSBC currently employs 335,000 staff around the world and the redundancies would equal about 3pc of its total workforce.

“Mr Gulliver wants to reduce HSBC's cost income ratio to between 48pc to 52pc. In the second half of last year the bank reported a cost income ratio of 60pc and in the first six months of this year analysts at Credit Suisse estimate this has fallen to 57pc.

“Profits from HSBC's personal financial services business are forecast to have more than doubled to $3.2 billion compared with the same period in 2010, largely as a result of reduced losses in the bank's North America business, which lost $1.5 billion in the first half of last year …

“Global banking markets, HSBC's investment banking division, is expected to have recorded about a £1 billion fall in profits compared with the first six months of 2010 at £4.6 billion.”

One point of note is how HSBC is restructuring, started with the sale of its 195 branch network in upstate New York to First Niagara Bank for $1 billion (£609m).

HSBC also recently sold its Russian business and further sales of international retail banking businesses are considered likely, though the bank has ruled out selling any of its UK, French or German operations.

One point to note in HSBC’s globality is the retrenchment of operations, and the refocusing from shrinking markets – the USA – to growth markets – Asia.  For example, although profits were boosted by growth in emerging markets, there were still write-downs in the USA of around $3 billion, two-thirds the figure of last year and adding to the cumulative pot of near $70 billion losses on Household since its acquisition in 2003.

This is why Stuart Gulliver announced in May, that HSBC would slash costs by up to $3.5 billion by 2013 with the savings “ploughed back into fast-growing markets around the world, especially in Asia.  The lender has already said it would be hiring at least 2,000 extra people in mainland China and Singapore over the next five years, as it seeks to tap the fast-growing Asia Pacific market.”

Apart from HSBC, and looking around the other banks, the outlook is also grim.

Lloyds and RBS have seen their shares plunge 30% and 17% respectively in the last six months alone, while Barclays' shares have plummeted 26% and HSBC has lost 14%.

Much of this is down to severe downturns in trading, with some bulge bracket firms reporting that year-on-year trading was down by over 25% in June.

At Barclays Capital, the investment banking arm of Barclays, analysts estimate that profits could have fallen by about 40pc to just over £2 billion in the first half of the year compared with the same period in 2010.  In 2009 the division reported revenues of £13.7 billion, up nearly 90pc on 2008. A year later revenues had dropped by more than a third to less than £9 billion and this year the forecast is for a fall of another 8pc to around £8.1 billion.

Taxpayer-backed Lloyds Banking Group is expected to report pre-tax profits of £1 billion on Thursday, a steep reduction on the £1.6 billion reported a year earlier.  Losses in Ireland and Australia, although still high at £2.2 billion, will be £1.4 billion lower than the second half of 2010.

Royal Bank of Scotland closes the week with its results on Friday, which are expected to reveal £611 million in reported profits, down 19% on the previous year.  Much of this will be due to disappointing investment banking results, down 31% over the same period last year.  This represents a more than halving in profits in its global banking and markets business to £1.3 billion. Nevertheless, RBS will show overall business lending is up, driven by increased borrowing from large corporates.

Analysts estimate the combined pre-tax profits of the so-called "casino banking" divisions at Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and Lloyds Banking Group fell from £11.1 billion in 2010 to £9.1 billion in the first six month of this year.

All of this means lots and lots of job losses.

Apart from the 10,000 at HSBC, there were 15,000 job losses announced in June by Lloyds Banking Group, taking the total number of redundancies at the bank since its rescue by the taxpayer to about 40,000. Royal Bank of Scotland has already shed 28,000 staff since the financial crisis started.

Barclays has been shedding staff for months, with Barclays Capital, its investment banking arm, cutting about 600 people worldwide since January and its retail business losing almost 2,000.

At UBS, as many as 5,000 jobs are set to go across the group, including the bank’s wealth management arm. Credit Suisse is eliminating about 2,000 positions, largely in its investment bank.

Goldman Sachs, the US investment bank, was the first to announce a substantial cull of jobs last month, saying it was trimming 1,000 posts after a poor performance by its fixed- income trading division.

The overall expectations are that as many as 15,000 City-workers, or about 5pc of London-based financial services staff, will lose their jobs before the end of the year, resulting in a drop of more about £1.3 billion in lost income tax revenues for the Exchequer.

This is based on an average salary of £150,000 and income tax of 50pc, employer national insurance of 2pc and employee national insurance of 2pc, this works out an average lost tax income per lost City job of £81,000, or a total loss of about £1.3 billion in tax revenue.

To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15pc of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7pc.

It’s not all bad news however, as Standard Chartered is set to announce pre-tax profit of around $3.5 billion, up from $3.1 billion in the first half of 2010.  Again, this reflects the strength of Asia.

Also, the taxpayer “made a net profit of £339.8 million pounds in the first half of 2011 from the assets they still hold in Bradford & Bingley Plc and Northern Rock (Asset Management) Plc.”  So that’s not so bad then.

Meanwhile one Spanish Bank, Bankia, has offered the ECB Cristiano Ronaldo as collateral for their loans.  What is the world becoming?

The above is an amalgam of a variety of articles as follows:

• HSBC to cut 10,000 jobs despite $11bn profit – the Telegraph
• HSBC sells 195 New York branches for $1bn – the Telegraph
• HSBC expected to announce 10,000 jobs cut, disappointing results next week – the Australian
• HSBC set to 'confirm 10,000 job losses'– the Independent
• Market braces for banking results bonanza – the Independent
• Investment profits at UK's biggest banks 'fall by £2bn’ – the Telegraph
• City job cuts to cost the Government £1.3bn in lost tax revenue – the Telegraph
• UK banks’ jobs cull intensifies – the Financial Times
• Taxpayers Get 339.8 Million-Pound Profit From Nationalized Banks – Business Week
• Spanish bank fields Ronaldo as collateral – the Telegraph

 

 

 

Alipay: innovation in banking is a good thing

Going back to my discussions in Asia last week, I am intrigued by the results of the interactive voting we performed.

I asked a number of questions last week, and have already blogged about one of them:

Do you agree that innovation can only be delivered by a CEO or equivalent mandate?

• Yes – 49%
• No – 51%

Considering the audience were Asian CEO’s or equivalents, that one is quite telling.  I disagree with this view, and believe you have to have the line of business owners’ mandate to change or otherwise it will be constrained.

However, let’s look at one of the other ones:

PayPal has been the only real disruptive innovation over the past decade, do you believe there are others out there and should they concern us?

• Yes, and they are serious threats – 42%
• Yes, but they are not serious threats – 27%
• No, disruption has happened already and will wipe out parts of our business – 24%
• No, I have no worries about disruption – 7%

This poll reflects the old mantra that Only the Paranoid Survive, as coined by Andy Groves of Intel.

What worries me here is that a third of the audience are not paranoid.  Are they complacent?

And the other two thirds, what are the threats they worry about and what do they mean?

I managed to ask the audience to clarify a little and one bright spark said that the disruptors in Asia were people like Alipay.

Alipay is China’s PayPal and was part of Alibaba, the largest online commerce group in China, until it was hived off without board approval in order to keep it out of the hands of Yahoo.

This dispute has rumbled on for a while now, as Alipay was transferred into the ownership of CEO Jack Ma last year, without the agreement of 40 percent Alibaba shareowner Yahoo, whilst 30 percent owner Softbank has been playing hardball over the whole deal.

It looks like some agreement is being made now, but what is the real deal here?

The real deal is over China’s PayPal and the fact that it dominates online payments with every other cent exchanged over the internet made through the payments service.  As of December 2010, Alipay had more than 550 million registered users and facilitated around 8.5 million transactions daily.

The service is the key service recommended by Alibaba, and by Taobao.

Alibaba.com is a global leader in e-commerce with an online business community of more than 65 million registered users from more than 240 countries and regions; whilst Taobao is China's largest online retail website and one-stop platform for shopping, socialising and information sharing, with over 800 million product listings and 370 million registered users

In addition to Taobao and Alibaba.com, Alipay provides payment solutions in China for more than 500,000 external merchants for online retail, virtual gaming, digital communications, commercial services, air ticketing and utilities fee payment transactions.

In July 2010, Alipay was processing about RMB 1.4 billion a day, which is over US$ 200 million a day or near $80 billion of transactions for the year 2010.

Hmmm … PayPal processed $92 billion in transactions in 2010 so it’s serious stuff.

As is Tenpay and QQ which I’ve referred to before.

So there are serious threats out there, and some have happened and some are emerging, such as Facebook Credits.

Maybe this is why 78% of the audience voted that innovation in banking is critical (38%) or important (40%) for banking today.  20% said it was required, and only 2% thought innovation irrelevant.

Equally and more stunningly, 88% of the audience thought that innovation would be more important for banks in the future and no-one thought it would be less important.

So, is innovation a good thing to pursue in banking?

Of course it is.

Oh, and just noticed this from the O'Reilly Radar:

China's AliPay develops barcode payment system

China's search engine giant, Alibaba, has launched a barcode-based mobile payment system for paying for real-world goods. Alibaba's payment subsidiary, Alipay, isn't waiting for near-field communications (NFC), and has developed an app on iOS, Android, and Nokia platforms. Similar to the well-knownStarbucks app in the U.S., Alipay generates a unique barcode that merchants can scan with a barcode reader or their own smartphone camera. The system draw funds from a user's credit card or a prepaid AliPay account.

Like everything in China, the opportunity is tremendous. There's more than 420 million Internet users, including some portion that spent 400 billion yuan ($62 billion U.S.) online in the first quarter of 2010. Within this market, AliPay (which some U.S. readers may know as the subsidiary that was spun off from Alibaba without notifying key investors Yahoo and Softbank) held 45.5% of the market for online payments in China in 2010, followed by number two player Ten Pay. Earlier this year, AliPay announced that, having signed up 200 million users, it has more registered users than PayPal.

 

 

The Top 20 Banks of the World, 2011: China hits the Big Time

I’ve enjoyed the Banker’s Top 1000 listings for a long time now and, when last year’s listings came out, looked back over the last twenty years to see how things had changed.

This year’s list has now just been published (get a copy by subscribing) and makes for interesting reading, especially as Chinese banks have finally made the big time (doubleclick image to see large version).

All in all, this list when combined with my reflections in 2010 over the last twenty years, makes for a fascinating story of risk bubbles and bursts.

You had the banks from the rising sun rising up the charts in the early 1990s.

Then, as the Asian crisis nuked most of the region, the Japanese banks disappeared and the Anglo-Saxon banks took over.

The principle-led regulatory regime was rife and the Americans and Brits ruled until 2008 when their “debt whore” approach failed.

Now, everyone is bailing out everyone else, with PIGS, TARPS and QE’s by the shedload.

So last year’s list was interesting, in that we finally saw Chinese banks rising up the list and more diversity as the American and British banks stumbled a little.

I have been saying that China’s banks will dominate global banking since 2005, and certainly there is a growing swagger of China’s banks as they watched the failure of the West.

For example, it used to be that Chinese bankers were desperate to learn how the West did banking and would send troops of managers to European and American conferences to learn their ways, as well as hiring the best talent to import into Chinese territories.

Back then, we all scoffed at Asia for their poor risk management of credit leading up to the 1997 crisis, with debt defaults and NPLs everywhere. 

Now the Asians and Chinese may scoff at the West for the same reasons, although there is still risk in the Chinese system as most enterprise is propped up by financing given through the governmental influence over the banking system.

That aside, the fact that China's market capitalisation will rise to $41 trillion by 2030 from $5 trillion today, according to Goldman Sachs, makes it a market that cannot be ignored.  After all, this would make China's stock market the biggest in the world, as American market capitalisation rises to $34 trillion from $14 trillion over that time.   

This is one of the reasons why this year's Banker list is important as, for the first time, THREE of the TOP TEN banks of the world are Chinese.  Last year, there was just one.

This year, four of the top twenty banks of the world are Chinese, when there were none just a few years ago in 2004’s list.

So, no matter the risks, China’s banks have finally risen to the top ... but at what risk?

The original Asian crisis was created by a higher than expected percentage of Non-Performing Loans (NPLs) and Moody’s has recently downgraded China’s banks on the basis that “8 to 12 percent of all the loans made by Chinese banks could go unpaid.  Moody's had earlier estimated only 5 to 8 percent of the loans would be classified as ‘non-performing’.”

If China has a financial crisis, then we really will all be up the swanee ...

 

 

 

Which nation will be next global superpower?

As mentioned the other day, we are asking some big ticket long-term questions at SIBOS this year, such as:

• When will we know that financial systems work?
• How will we know when financial risk is not an issue anymore?
• What will America and Europe be doing when the economic power balance has shifted to Asia?
• Can we confidently create a way of investing for the long-term instead of our net present value short term view of today?
• Can we foretell a future where a human right includes "to not be poor", and what happens to work, life and war if there is no poverty?
• If money is just a way of exchanging value, and it's all now digitised, can we create digital money without the need for real money? How do virtual exchanges and virtual currencies change the commercial infrastructure?
• Could we create a world where financial transactions are sponsored, for example by Google ads, so that they are free? If so, what is the role of a bank and how will it make money, if all financial transactions are free?

This is all part of the focus upon the work of the Long Now Foundation and Long Finance group, of which I’m a part.

Long Now looks out at what will change over the next ten millennia, whilst the Long Finance looks out at a financial lifetime and how to build a financial system that could last 100 years.

In this series of discussions, I thought I would tackle one of the big questions we are considering: What will America and Europe be doing when the economic power balance has shifted to Asia?

Regarding the shift to the East, this is not a Long question, as the shift has already happened, if you listen to some folks.

But does it matter?

If America is no longer the great superpower but just a power, does it matter?

If Europe has zero competitiveness due to its fragemented structures, does it matter?

And what about Latin America and Brazil, don’t they matter?

And Russia?

And the Middle East?

The answer to all of the above is that of course it matters.

Any shift of economic or military power matters.

For example, we could pose a different view to the above if we really want to be Long, and ask: what happens when the balance of economic power is determined by Africa?

When we think of our land masses and populations, the real matters are determined by commodities, capabilities, processes and capital.

So let’s look at these areas, and then consider who has the balance of power and who will get it.

When we think of commodities, we think of oil, metals, cocoa, gold and similar.

Those who have an abundance of scarce commodities that have value are naturally going to be richer than those who have none but need them.

The Middle East has lived on their oil riches for long and will do so for the near future but, in the Long Now, some will fail.

This is because the oil riches are a finite resource, and will eventually be drilled to extinction.

The illustration of this issue is no better exemplified by Yemen, where poverty is rife having squandered away millions in oil revenues years ago, and being unable to create any substitute.

This is unlike the Emirates, who ballooned into a prosperous construction, tourism and trading centre, built upon sand.

So when we talk about commodities we are talking about a finite property, which is why there is scarcity and value. From a Long Now viewpoint, it must beg the question: what are you investing your finite billions in today for the infinite post-commodity years later?

The answer is that these nations should be investing in education, knowledge, brains and science, as these capabilities build a sustainable future.

The capability battle is one that Britain used well to build an empire a century ago, and that America used well to create prosperity through the twentieth century. It’s also what other nations, such as Singapore and India have realised in building their empires of today.

It’s all about looking at things that humans can create that are of value and, by building leadership in this area, it means that your nation can stay ahead of the world when it comes to technological, scientific or commercial scarcity.

Britain had that scarcity during Queen Victoria’s reign, with a technological leadership based upon naval and military strength. This allowed one small nation to colonise many other nations. By doing so, the strength of the nation increased by being able to access commodities of those nations, and gain commercial value, capital and further technological strengths which became a virtuous circle.

This leadership faded as the industrial revolution led to America, with its vast swathes of land and resources, to take over as the manufacturing engine of the world.

In America, that leadership came from building cars and computers, creating value through innovation, and through using knowledge to gain power over capital, commodities and resources.

Today, this is the piece that is shifting to the East.

China’s leadership is based upon people, processes, resources and investment in capabilities for building cheaper, faster and better.

China’s a nation that saw the weakness in the model of the world – the cost of manufacturing – and exploited it to gain growth. Now, having gained that edge, they are investing in all the other things to generate wealth from science and knowledge, and to maintain and sustain future growth.

This is why China has a space mission, as does India.

These are indicators of building capability leadership through scientific and technological research.

India saw a different weakness in the world’s model – the cost of service – and their strategy was therefore to invest in knowledge, and specifically to use their brainpower to gain economic growth. The use of English language and investment in technology skills, restructured the world’s knowledge chains in the same way as China re-engineered the world’s supply chains.

It is these investments in human capabilities that led to other nations, who had the commodity resources to support the wealth of manufacturing and services growth in China and India, to also enter a growth phase, particularly Brazil and Russia.

Now, Brazil has invested in human capabilities to sustain their growth, whilst Russia is still a fragile economy due to a lesser focus on building such a sustainable future.

So that outlines two cycles of economic power shifts: commodities and capabilities.

The thing that now makes the difference is that, if you start with an abundance of resources and use the investment capability of such resources to create capabilities, which nations get the Long Win, as in they become a superpower.

This is all down to processes.

The two go hand-in-hand, and are easily reflected by Germany and Japan.

Since the 1970s, we all say that Germany and Japan are the world’s leading nations in terms of their excellence in making cars and electronics.

This is because Germany and Japan had a huge squeeze on capital after the War, and therefore had to create efficiency and effectiveness in processes.

Luckily they could do that, thanks to a clean spread of land and knowledge that had a focus upon creating processes that maximised the efficiency and effectiveness of manufacturing.

Just look at the work of W. Edwards Deming in post-War Japan to see how Just-in-Time manufacturing re-engineered the world.

So where does this lead us to, in thinking of the Long Now future world?

Who will be the future superpower?

Not Europe, if the region continues in its current form.

This is because Europe has a problem with managing the four dimensions of commodities, capabilities, processes and capital, mainly because Europe is a grouping of 27 individual nations rather than a singular whole.

This is why Europe is bad at dealing with these, although some nations within Europe excel, as in Germany. This is why Europe is grappling with the question right now as to whether the Union can survive long-term if one or two nations are good at building a sustainable model of wealth, whilst having to give it all away to support the nations that aren’t.

China and America are different as they are a nation and not a region.

Admittedly, they are not a singular whole either – China and America are a formation of many individual states, like Europe – but they do have centralised governance for strategic planning and control, as well as a common language and currency. Again, I know some will be tutting at this point, saying that Mandarin and Cantonese are different languages and almost half of America speaks Spanish, but it is fundamentally different. This is because these nations do have a cohesive structure for planning, investment and management of commodities, capabilities, processes and capital, whereas Europe does not. Europe may in the future but, right now, it does not.

Equally, many claim that Europe fails due to disparate and historical legacy infrastructures, whilst America succeeds by starting as a new Nation, with a new currency and agenda. China’s a new nation, in terms of infrastructure, and again can exploit and leverage that capability.

So when we look at the capabilities criteria, China and America are the two large nations that both fit. Russia, Brazil, India and Africa would be the other contenders.

We can leave Africa off the list for the moment, as they suffer the same paranoia and fragmentation as Europe. Similarly with Russia, for they need some serious investment in people and capability if they are ever to maximise their resources and opportunities.

So, America, China, Brazil and India are the four Long Finance nations on the radar.

They are all single nations with central planning structures and a relatively new Nation mentality, which means that they are not bogged down by legacy infrastructures from an economic viewpoint.

They all have strong capabilities and access to resources, so we don’t need to think of these as an issue.

Therefore, for the next century, the superpower from these four will be based upon processes.

And here’s where it gets radical.

America has been very good on process, and India is very good on process.

Everything is in signed off in triplicate, checked, double-checked and authorised.

The thing is that this procedural approach to processes is not adept for the new millennia process, where the fast beat the slow.

Today’s globalised world works in seconds, not years, and the heavy-duty processes and rigid disciplines of the twentieth century will fail in the twenty first.

So, for these reasons, America and India may be hindered culturally in the Long Finance twenty-first century, which leaves Brazil and China.

You probably think it’s China, don’t you?

China will be the Big Superpower of the twenty-first century.

Well, maybe not.

Maybe Brazil holds the balance of power for the Long Finance world.

The reason for this conclusion is that China will be contracting in power in 2050-2060, due to their single child policy.

The lack of new blood and an aging population could drag China’s economic tiger into a toothless and clawless sloth in the Long View.

Meanwhile, Brazil has the commodities, capabilities, processes and capital to be the world’s largest economic force in the next century.

If that’s the case, North America will feed off South America, and will be the subservient economy to Brazil. It will be a reverse relationship to the structure of the twentieth century, where you had the poor South and rich North.

Similarly, Africa will have been raised from poverty, and India and China will still be forces of power, but not necessarily THE force of power.

Europe will still be fragmented, with member states fighting for capital and control just as they are today, and Russia will still be tipped as the next big economy and, if the government does invest more strategically in commercial capabilities and processes, it just might make it.

Meanwhile, I’m moving to Australia as, in the picture I’ve just painted, the world has turned upside down. All the wealth and control that was in the Northern Hemisphere has moved to the South, and so the natural juxtaposition of London will to live in Sydney.

Interesting.

Instead of coming from a land down-under, I’ll come from a land up-over ...

G’day mates.

The World's Top 20 Banks 1994-2010 ... Anglo-American Banking Rules!

I’ve just received this month’s Banker magazine which the editor, Brian Caplen, describes as their most important issue of the year as it covers the latest Bank 1000 listings.

This year’s listings show a surprisingly stable crew of American and British banks.

World   Bank                               Tier One              Pre-tax
Rank                                            Capital                profit
                                                      $m                    $m
1        Bank of America Corp        160,387.77           4,360.00
2        JP Morgan Chase & Co       132,971.00         16,143.00
3        Citigroup                          127,034.00          -8,445.00
4        Royal Bank of Scotland       123,859.00          -4,366.29
5        HSBC Holdings                   122,157.00           7,079.00

Considering the crisis was meant to have killed these banks, you may find it surprising to see that Citigroup and RBS have maintained their leading positions.

This is down to the fact that the Banker measures a bank’s strength by its Tier 1 Capital, and so their positioning is more of a reflection of the sheer size of these firms than by their brand or market capitalisation, which is used in some other studies of size.

The Banker’s data is fascinating though, as the database also contains profitability, revenue, cost-income ratio and more, so it’s a useful tool in all senses.  And the online data goes back to 1996, so you can do some useful comparisons.

Mind you, my data - old Banker magazines - goes back even further so I quickly took a snapshot of a few useful year’s – 1994, 1999, 2004, 2008 and 2010 – to see how things have changed.  Mapping out the Top 20 banks of the world for each year makes for an interesting picture (doubleclick the picture to see a larger version):

Back in 1994, Japan ruled the world.

Then their economy went South and Origami Bank folded, Sumo Bank went belly up, Bonsai Bank cut back their branches and something fishy went on at Sushi Bank where staff got a raw deal.

Post-Japan’s slump, the Anglo-American financial system ruled. So you would think that, as that system failed, it also would have gone South.

Not the case.

Maybe that’s a reflection of the sheer scale of investment American and European firms have put into these economies to avoid such a crash.

Well worth spending time looking at the data and looking forward to playing around with it further.

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.

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.  They have:

• 150 million customers
• 11 million High Net Worth customers who earn >US$10,000 per month
• Increased their ATM network from 12,000 to 20,000 units over the past year

Surprisingly, they only have 3.5 million internet banking users and, having released mobile access to the bank in December 2008, only 240,000 mobile banking customers.   Admittedly, the latter is growing at 35,000 customers per month, but it is low.

I'm sure those numbers will change over time anyways, as more rural customers come onstream via mobile payments, like the M-PESA style revolution taking place in Kenya. Oh yes, btw, not sure if you spotted it but M-PESA is now a fully-fledged banking service.

That's an aside however, when you think of the sheer scale of the Chinese and Indian banks.

For example, China has 200 banks that each have more customers than the UK's largest bank (Lloyds has 30 million customers) and China's banks are also the most attractive for investment right now.  For example, according to the most recent Financial Times Global 500 firms by market capital, the Top Three Banks are Chinese, whilst ICBC and China Construction Bank now feature as Two of the Top Six firms globally.

Oh, the times, they are a-changing ...

So not PC but ...

This is so politically incorrect that I almost didn't post it ... but then I did to show how cultures are different and sensitivities are not the same.

As I left Singapore, I saw this and felt quite offended:

Yet Singaporeans are desperate to avoid offending foreign visitors, as are most Asian countries, so how could I be offended?

Well, look more closely ...

I'm sure that my Western colleagues will get the point.

No wonder, following on from Damian Glendinning's points raised earlier, that we don't always agree:

• SAMBO (Singapore): a building company
• SAMBO (UK and USA): a racial slur

But then we arrive in Asia and handout business cards with one hand and immediately put a received business card in our pocket without reading it. 

In Asia, the protocol is that we should offer the business card to the receiver as a gift, with the upper top corners held in each hand so that the card is presented the right way round to be readable.  Similarly we should take their card with honour, and read the details of title properly before putting the card away.

These nuances of societies are brilliantly described in Richard Lewis's book, When Culture Collide, and have been used in HSBC's advertising to great effect for the past eight years.

It was 2002 when this ad first aired ...

... and it's true.

When global, think local, so I wasn't offended after all, as the meaning of the word is not intended.

Now, who was it called me ****** just now?

Are Asian corporates the same or different?

After writing earlier this week about the bullish views of HSBC on China and Asia as a whole, with the clear view that the world has decoupled, Asia is self-sustaining and China will be the largest economy in the world by 2035 or sooner, I was really interested to hear the views of Damian Glendinning and David Blair.

Damian Glendinning is Vice President & Treasurer with Lenovo, the Chinese PC firm, having previously worked for IBM in NYC, USA. David Blair is Treasurer with Huawei, the Chinese telecoms firm, having previously been treasurer with Nokia in Helsinki, Finland.

In other words, we have two guys in senior jobs at Western firms who have moved East. If anybody can explain the world of China, their outlook and view of the West, it’s these guys.

The main discussion came from Damian’s presentation titled: Asian Multinational Corporations (MNCs) – are they the same or different?, with the point being whether they act like European or American firms, or whether they have their own unique outlook.

Again, not verbatim, but here’s the summary of Damian’s presentation and yes, it’s very useful if you really want to know what’s going on in the world of Asia:

Asian Multinational Corporations (MNCs) – are they the same or different?

First, I think the question is wrong. It’s not Asia we should focus upon, but emerging markets including Russia, Brazil and Latin America.

We’ve seen massive growth in emerging markets for the past decade. For example, according to JPMorgan, GDP growth from 2002 to forecast in 2012, not compounded, is an average 11% growth in China, 8% in India, 7.5% in emerging markets overall. This compares with an average 2.5% across the world, and an average 2% growth in the USA, 1.5% in G7 countries and just 1% in Japan.

As you can see, the country with the lowest growth rate for the last twenty years is an Asian country – Japan – whilst two of the main emerging markets are also in Asia – China and India. So my first comment would be: don’t treat Asia as just some homogenous mass and remember that there are other emerging markets, particularly Brazil, that should be included in this discussion.

The companies which dominate these emerging markets are now not just international firms, but major MNCs:

• the top three banks by market capital are Chinese
• Tata, Mittal are huge Indian conglomerates
• InBev of Brazil is a very large drinks company

Part of the reason for the fast growth of these firms is that their technologies are better. For example, Lenovo are ripping out the IBM IT systems and implementing Lenovo ones. We expect a huge increase in productivity as a result.

Another factor about these companies, is that their home markets are under threat from Western firms who are looking towards emerging markets for growth. These foreign competitors are a major threat, as they can invest significantly to gain market share.

This means that the critical question emerging markets MNCs are asking is that, if you are the market leader in a domestic emerging market, what do you do?

You either expand or you face severe threat from foreign firms and, as the best method of defence is attack, you end up creating aggressive expansion and acquisition plans because you have to. That is a major factor in the reasoning as to why Lenovo acquired IBM’s PC division, why TATA bought Jaguar and Land Rover, why Geely buys Volvo and why Arcelor were bought by Mittal.

Sure, these sound like major expansion plans into overseas markets, but all of these acquisitions are to expand in markets where growth rates aren’t great. These Western brands do not offer growth as they are in mature markets where growth is less than 2%.

If you compare that to the strength of emerging markets, which is based upon growth, then you realise that any acquisition of a western brand is a pure defensive move, not an expansionist one.

I had this realisation when I realised that a decade ago, I lived in New York driving a British car, a Jaguar, and working for an American firm, IBM. I now drive an Indian car, still a Jaguar, and work for a Chinese firm, Lenovo. I suppose the only good news there is that Jaguar, a UK firm, is now being subsidised by Indians rather than by Americans.

So why are these firms buying into mature markets?

What they are buying is brand, access and knowledge of how these markets work.

They then have the challenge of how to make these acquisitions work.

Any firm expanding overseas has challenges, and the challenge here is whether they want to be a true MNC, or an international firm head officed in China or India.

The difference between an international firm and a MNC, is that a MNC has a broad base with diverse senor management whilst an international firm is controlled its from domestic HQ, with key positions occupied by home country nationals and standards imposed by the home country.

The latter are always seen as foreign, whilst the former is far more integrated.

Asian MNCs would historically include examples such as Toyota, Nissan, Hitachi, Sony, Honda and more from Japan; Hyundai, Samsung and LG from Korea; Lenevo, Huawei from China.

This means to be a MNC you have to make acquisitions.

Then you encounter all the other issues, with the biggest challenge being culture. A MNC is different because corporate culture in MNCs is stronger than national cultures. This is why international firms don’t work as well as MNCs.

Another big issue is merging IT platforms, as rarely can a MNC operate on multiple systems, so there has to be an evolution towards a single platform.

A further issue is pride. A Western firm acquired by an Eastern firm has employees who may feel slightly lessened by being owned by Mumbai or Shanghai rather than New York or Frankfurt.

The recent movement in banking is a good example, with high street banks taking over investment banks. Investment bankers have many qualities, but being modest is not one of them, so moving from working for a prestigious Wall Street brand to a common High Street one is not appealing to many of them. This is why so many of these people have moved firms.

Equally, buying an American firm if you come from a low income market, creates challenges develop about pay differentials and attitudes.

So the real issues for an emerging market corporation is where do you go for growth, particularly when developed markets are not growing.

Today, it means that you do look towards other emerging markets, but that creates other risks.

Now risk is interpreted differently based upon your view of the world.

Risk in financial context used to mean that emerging markets firms would look towards working with Western banks, because banks don’t fail, right?

Now, Chinese banks don’t fail, right!

Emerging markets MNCs will therefore say to you today to explain risk management. What are the qualities of risk management that you can give to us in the East, developed in the West? And you complain about our strict regulatory environment, but maybe our regulations aren’t such a bad thing. And with all of your systems and controls, tell us how they work again.

In fact, emerging markets can be less risky because government intervention can prevent overheating in the economy. Remember that the current crisis was purely one seen in developed markets, not in emerging economies.

We actually like our regulations because regulations can prevent excesses. There is no subprime lending in India or China, there’s a lack of derivatives and leverage has been pretty much smothered ever since the financial crisis which occured over here in 1997 to 1998,

Payment disciplines are different too.

For example, Days Sales Outstanding (DSO) for Lenevo in Asia is 15 days. This is because everyone knows payments are a problem, so we offer early payment incentives. In the USA, 30 days is our typical DSO whilst, in Europe, it’s 60 days. So, tell me where the risk lies?

Equally, where are the countries with excessive external debt?

China, Brazil and Russia are down at the bottom of the league table for sovereign debt, because we do not have leverage in emerging markets; whilst, at the other end of the table, the UK, USA, Japan and many European countries are leveraged to the hilt. So tell me, where the risk lies?

In conclusion, we are seeing MNCs coming out of emerging markets, but more because they have to as a defence than that they want to. As a result, they have to grow in developed markets, but the risks and reward are poor and, for many, they would feel more comfortable acquiring and growing in other emerging markets, where there are better opportunities for growth and less issues with regulatory barriers and other hurdles because, as an emerging market firm, they are used to them.

We will see some convergence with traditional MNCs, but we will also see some big differences. For example, emerging market MNCs are far more open than their counterparts, because they are buying in skills and intellectual property to integrate the workforce, not alienate them.

So I can’t tell you what the world will be like tomorrow but I can tell you it’s going to be different, and the future MNC will be much more open and embracing than those of the past.

Let the iWars begin

Inspired by three events this week, I focused on apps for my panel discussion today ... and got shot down in flames for talking bollards.

Harrumph.

Here are the events, the logic, the proposal and why it got shot down.

First, the events.

Event number one: my first iPhone

My Blackberry has just been switched for an iPhone. Now, not knowing the beauty of iPhone apps personally until I made the switch, I am so in love with the new phone. It’s not just the ease of everything, the thousands of choices of apps from flight and traffic alerts to currency values to imitating noises your bottom makes, it’s something else that really amazed me. The ease of setup.

You see I am used to programming things, like the PC and Blackberry. With the iPhone, you just plug it in and it automatically synchs all your contacts, calendar, email accounts, music etc. No setting up involved, it just does it. Fantastic.

Event number two: bank bloggers unite 

This week, James Gardner kicked off a debate about iPhone apps and the lack of one at HSBC. A good debate is always a great way to resolve an issue, and between James and Brett King’s entries on this, I think it’s obvious that the iPhone and iPad have some potential in banking.

Event number three: apps are for dummies

Number three event is the front page in the business section of the Straits Times today, which has headlined with an interview with Philip Yeo.  Mr. Yeo heads up the Singapore government’s innovation and enterprise programme, Spring Singapore, and has managed to incur the wrath of Apple's fanatical followers by saying that they buy 'useless applications' for Apple's products as 'gullible customers'.

In fact, he goes one step further and calls them ‘dummies’. Tut-tut.

He did clarify later on that he meant dummies as in ABC for dummies, the books, rather than being idiots although, listening to the interview, I think he meant the latter.

Anyways, these three events inspired me to outline a vision of the future based upon this logic.

The logic is that banks are being componentised, as mentioned many times before.

As banks componentise their services into little pieces of functionality, my original proposal is that they would then offer these as widgets to customers who could build them back into any form of integrated service they wanted.

Now, my view has gone a step further with the belief that the banks will actually wrap them into apps.  I should say that my use of the word app here, is in terms of the ease-of-use of Apple apps but it does not mean that has to be Apple based. 

Just so you know I'm not an Apple fanatic, just someone who can see the ease-of-use of apps is a revolution.  So where I talk about apps, think about Google's Android phone or any other phone that makes mobile interet access easy, as these are the new generations of phone that are revolutionary.

Y'see first there were SMS and WAP-based phones; then there were mobile internet access smartphones; and now there are intelligent mobile internet phones with apps.

That's the revolution.

The first phones were mainly for just that - telephone calls.  The second wave allowed us to pull information to the phone, but push internet services were more difficult.  Push began with the Blackberry, but that was just for push email.  The iPhone revolution of apps gives us location-based push services that users download to gain such usability.

That's the revolution.

It gives us the ability to create location-based components of functionality that are relevant at the point of action.

It gives users the immediate access to pieces of functionality on demand.

It makes using the internet on the mobile as simple as touching a screen.

That's the revolution.

Now, back to banking and treasury services (note: the only reason for the focus on treasury, corporate and B2B is because that's the conference I'm attending this week).

If banks are component-based, and each bank offers different treasury apps and usability, you will soon end up with a million banking apps.  There will be a liquidity risk app, an e-invoicing app, a supply chain app, a cash management app, an accounts payable app, a foreign exchange app ... and so on and so forth.

Corporates will then take these apps and select those that work best for their businesses.

They will download the apps to their corporate treasury iPads, iPhones and Androids (Google), and roll these out to their  ‘dummies’: the employees who need to look at days sales outstanding, inventory, supplies and logistics, etc.

These dummies will be used to the interface and service – a bit like folks got used to using PC’s and keyboards to access the internet in the old days – and will take to this easily.

Similarly, the users, the corporates and the banks will be in continual ‘synch’ because, just as my iPhone automatically synched with my iTunes and Outlook, it will automatically synch with my corporate treasury processes, data and content.

In other words, you end up with treasury being redefined as we move to banking-on-demand 24*7 through treasury-in-the-pocket.

The critical point in this logic is that, by making treasury app-based, corporates will be much more efficient:

• They will be able to mix and match the apps and the app providers – banks – to best fit their business model;

• They will be able to ensure that even the most unskilled member of staff, associate, player, employee or whatever can use them;

• They can be easily adjusted to suit business changes over time through centralised control;

• They can be a mix of in-house created or bank provided and operated or collegiate, open source apps; and

• They will always be secure, up-to-date, controlled and managed in real-time 24*7.

All of the above will give the treasury ops incredible flexibility, agility and speed to adapt to changing circumstances.

Now ok, I said a lot more than that, but this was the gist of it.

So here’s the proposed treasury operations future.

The corporate treasury runs on SAP today, and will in the future probably. However, the CFO will have consolidated all treasury ops onto SAP as a single platform and determined that a small number of bank partners will be selected to integrate with it.

Those bank partners will be selected on the basis of the beauty, ease, adaptability and refreshment of their component-based bank app functionality, and its fit with the business needs of the corporation.

To me, this is a simplified future as we have turned a tipping point from proprietary bank lock in and lack of standards in the past, to very easy and flexible developments that are open sourced and simple in the future.

And here’s where I got shot down.

“Oh, but treasury is far more complex than your simple consumer view of the future.”

“Oh, but this won’t work because our processes and infrastructures are too difficult to change to this vision.”

“Oh, but technology is expensive.”

“Oh, but oh but, oh but, yea but no but yea but no ...”

I was really disappointed with this reaction.  Of course, I had views on these points which have been explored on this blog before, but the disappointment is that I expected more buy-in for such a vision in visionary Asia.

Then I got it.

None of these guys use iPhones (double click image to enlarge, and note Chinese and Indian iPhone users):

Sourced from icrossing

Note: Japan and Australia don’t count in this context as these are developed economies versus emerging markets

The thing that really sticks in the throat is that by omitting to view these developments, corporates and banks will miss the whole trend towards business simplification that such tools allow.

Luckily some banks are not so short-sighted in Asia, as the announcement of the iPad coming up for sale from July in Singapore was underscored with the news that OCBC and DBS have both developed specific apps for this service, amongst the first.

Meanwhile, and to put the record straight, HSBC and First Direct are on the case with these technologies as they are sponsors of this conference and have told me some of their plans.

Finally, and the real underline of this blog entry, is that it now explains why, when the Chair of the panel I was on asked: "Chris, what are the new things you see happening?  Do you think, for example, that we could use the iPhone for Treasury one day", he got a big laugh with that opening question.

Like Philip Yeo, these guys think the iPhone is just a toy.

It's not.

The iPhone, Android and, more importantly, the app is for business use as much as it is for consumers.

Get real.

Postnote: it's a shame but I suspected this at the time.  Apparently many folks in the audience thought that I was some Appleite with iPhomania because I kept referring to 'apps'.  To be honest, I meant apps as an interchangeable idea with widgets and gadgets to refer to the componentised bank functions. 

It actually doesn't matter that much if folks did interpret this as being Apple-based however, as the PC-age was Microsoft-based, the internet-age is Google/Firefox/Explorer-based and the mobile internet is now Apple-based.

With 100 million units shipped in just three years, a further 58 million this year, the iPhone is becoming the de facto standard for the mobile internet.

Ah but wait, what's this?

Android tops iPhone: Google's Android operating system edged out Apple's iPhone operating system for the No. 2 spot in the U.S. consumer smartphone market in the first quarter, according to research firm NPD Group.

Whatever.

Mobile, Mobile, Mobile

View more presentations from Paul Golding.

China will be world's largest economy by 2035

So I’m hiding out this week in Singapore at the Eurofinance Cash, Treasury and Risk show for Asia.

I love this conference as you get here and see the sponsor’s names – HSBC, JPMorgan, RBS, Deutsche Bank, Standard Chartered and Bank of America Merrill Lynch.

There ya’ go, you just know it’s gonna be a rich week of food, entertainment, wine and song. None of that cheapskate IT show stuff, where everything has to be managed on a teensy-weeny small budget. No, this is way beyond the small budget syndrome so I know it’s gonna be fun.

It’s also gonna be fun because it’s in Singapore, a place I first came to in 1987 when, if my memory serves me right, the Merlion fountain sat in the grounds of the Raffles Hotel which sat in its own unique position on the Peninsula Marina.

Today, Raffles is surrounded by buildings, hotels and skyscrapers, and the Merlion statue has moved.

That’s progress, but then Singapore is a progressive place.

I won’t say too much about Singapore though as, if you’re interested, National Geographic had a superb supplement analysing all features of the country. I won’t say too much about the article, except that it’s opening gives away that it’s a great story:

“How did a sleepy little island transform into a high-tech powerhouse in one generation?” by Mark Jacobson

If you want to get a Singaporean to look up from a beloved dish of fish-head curry—or make a harried cabdriver slam on his brakes—say you are going to interview the country's "minister mentor," Lee Kuan Yew, and would like an opinion about what to ask him.

"The MM? Wah lau! You're going to see the MM? Real?"

You might as well have told a resident of the Emerald City that you're late for an appointment with the Wizard of Oz. After all, LKY, as he is known in acronym-mad Singapore, is more than the "father of the country." He is its inventor, as surely as if he had scientifically formulated the place with precise portions of Plato's Republic, Anglophile elitism, unwavering economic pragmatism, and old-fashioned strong-arm repression.

Unfortunately, it’s also a country I find difficult to enjoy straight away as I took the overnight flight from London which gave me about three hours sleep in 36 hours, so I spent yesterday fitfully sleeping on and off and watching crappy movies on HBO and Star ... but at least in Singapore you can watch crappy movies in the English language, unlike hotels in Europe where fitful night hours are dulled with non-stop CNN news.

Back to the conference though and Robert Prior-Wandesforde, Senior Asia Economist with HSBC, gave the opening speech: Asia - aren’t you glad to be here?

Here are my brief notes:

Asia - aren’t you glad to be here?

The economic recovery began around the second quarter of 2009 for most economies, and Asia’s industrial production index is now back on track, exceeding the peak pre-crisis levels of 2008. This unlike the Eurozone and USA, which took such a shock that their output is still at levels below 2000.

This means that Asia has reached a self-sustaining cycle, without dependency on USA and Europe, and the concerns over decoupling have not materialised because Asia is no longer coupled with the other geographies as they were a decade ago. In fact, Asia now has a virtuous circle of growth, based upon strong domestic demand, which boosts imports and exports, which helps lift personal income and profitability, which creates more domestic demand.

That is why HSBC forecasts year-on-year export growth of 20 %+ in the region, which is crucial to the level of sustainability of a recovery here in Asia.

But how can that level of export growth be the case when you have the mess that’s in the EU and America?

Answer: a lot of increase in demand has just been within Asia.

So we have this old world view of the American consumer being the consumer of last resort, but it has changed. For example, Korea’s electronic shipments to China and China’s shipments of electronics to the USA were closely coupled at the start of the 2000’s. Today, they are not.

Over the last 18 months, Korea’s exports to China have surged significantly but China’s exports to the USA have not. So it does suggest that the Korean products are going to China and staying in china. This is true not just for electronics, but for motor vehicles and more.

In other words, it’s the Chinese who are shopping!

Historically, China has been an export and investment led economy. That isn’t going to change necessarily, but the fact that private consumption as a share of GDP in China is about 36%, it singles the country out from others in the G20, such as the USA where private consumption is over 70% of GDP.

Equally, savings as a percentage of household disposable income has risen to almost 40% in China over the last decade, up from under 30% at the end of the 1990s. That compares to about 3% in the USA.

Why they are saving so much is, according to a survey of citizens by the Central Bank of China, for their child’s education and their own retirement. These are Chinese citizens’ major concerns and the Chinese government are therefore trying to change this mindset to encourage consumerism.

This does not mean a massive swing to USA-style consumerism, but does mean giving more assurance to citizens about education and pensions so that they save less and spend more.

If this does change the mindset of the people of China, then even a few percentage points swing to spending rather than saving will have a massive impact as it will change the habits of 1.4 billion consumers, not just a few million.

This does not mean that Asia does not need the USA and Europe though, and the risks of continued growth or not are related to America and Europe’s issues.

America has delivered better than expected results for the past few quarters, and so there is recovery there.

In Europe, there are different issues and the concerns about Greece are major. But Greece is a small country in Europe, and the contagion kicked off is not necessarily justified as Spain and Italy, which have been caught in this maelstrom, are different to Greece. Spain’s government debt to GDP ratio is half of that of Greece’s, whilst Italy does have a government debt issue but the budget deficit there is half of Greece’s.

The fundamentals are different but, overall, we do expect governments in Europe to increase taxes and reduce spending, with the UK being one of the critical countries to face that challenge.

In summary, Europe as a region may be in continued recession but you have to look to Germany, which stands out and is still motoring forward. Germany’s economy is about ten times the size of Greece’s and is stable. So there are positive indicators in the region along with those negative ones.

Other worries may be things like the end of policy support from governments, which is unlikely; the end of inventory-led growth, which is also unlikely; exchange rate appreciation, but that assumes demand disappears, and we cannot see that happening as Asia is now self-sustaining.,

There are also concerns about an asset-bubble boom and bust in China. For example, seventy Chinese cities saw property prices were up 12% year-on-year and, in Singapore, it is even more marked with private residential prices up 30% in just the last nine months.

In China, you then need to look at GDP growth, which was up 12% in the first quarter and nominal GDP growth for the last year was 15%, so a 12% rise in property prices makes sense.

What about inflation?

Inflationary pressures are showing some signs of issue, as it is growing rapidly with a bigger underlying inflation problem in the region anticipated for 2011. This means that asset price bubbles could develop in a more meaningful way going forward.

The issue here is that many of the Asian central banks are unwilling to tighten interest rate policies, but interest rates will need to be watched and managed carefully in Asia this year if we are to avoid an asset bubble next year.

Remnimbi is also a topical issue, with the Yuan:$ exchange rate pretty well fixed over past few years. The more pressure the USA puts on China to untie that fix, the more likely China will not do anything but we do think that China will appreciate the exchange rate later this year. It won’t be a massive revaluation of the remnimbi, however. It will just be tentative.

This is because China is worried about their exporters and want to avoid any double dip recession within China, so we expect it to be around a 5 percent appreciation of the Yuan against the US$ over the next nine months.

Longer term, our view is that we expect China to overtake the USA economy by 2035.

In other words, China will become the largest economy of the world in 2035, with the USA and Europe closely behind, and India nipping at their heels.

The only thing that can hold this back is that China’s government are showing too much concern right now about a double dip recession and asset price boom domestically, whilst India does have an asset price bubble and inflationary issues.

The Central Bank of China and Reserve Bank of India must get to grips with these issues to realise these dreams.

 

And the best bank brand in the world is ... Chinese

Fascinating report in the FT this week about Global Brands, with the financial sector bouncing back the strongest of all. MasterCard and Visa led the financial pack, although Goldman Sachs saw a 25% growth in brand value over the last year ... I wonder how much they lost this year?

Anyways, considering banks had the worst results ever last year and lost all brand momentum, it’s no surprise I guess to see they’ve bounced back this year, and even beat beer as a sector for brand improvements:

Year-on-year growth in 17 categories
Category                      Brand value growth (%)

Financial Institutions             12%
Beer                                     10%
Technology                            6%
Fast Food                              1%
Retail                                   -1%
Soft Drinks                           -1%
Mobile Networks                   -1%
Bottled Water                       -2%
Gaming Consoles                  -3%
Spirits                                 -3%
Luxury                                 -3%
Apparel                                -4%
Personal Care                       -4%
Coffee                                 -6%
Insurance                             -7%
Cars                                   -15%

Source: Millward Brown Optimor (including data from BrandZ, Datamonitor and Bloomberg)

Strange how and why insurance is languishing down the bottom though ... maybe it's their lack of ability to cover Toyota's these days, which is why the car sector sits at rock bottom.

All in all, a big contrast between this and the Harris Interactive Reputation Survey I blogged about earlier this month ... so brands and reputation have nothing to do with each other, do they?

What surprised me is the list of the top 10 brands in our sector (doubleclick picture to enlarge):

Wow! ICBC from China, the #1 bank brand in the world!

In fact, they’re the 11th best brand in the world, just behind Google and Apple:

A great report from the FT again, and well worth a read if you have the time ...

 

Why the G20 will disagree with the IMF reforms

I don’t know if any of you read the IMF report recommending two new bank taxes:

• a bank levy based upon the risk banks represent, called a Financial Stability Contribution (FSC); and
• a straight tax on profits and bonuses called the Financial Activities Tax (FAT).

If you haven't, then I can recommend it's worth a skim.  For example, they reject the Tobin Tax / Robin Hood Tax idea, saying that this would just get passed on to customers by the banks. 

However, the fact that they support the idea of a levy and a tax – a double whammy – could have bankers worried ... except that bankers are pretty clever at tax avoidance and Canada and Japan have said they won’t implement these plans so it’s a G18 agreement right now, or less.

In my view, the document is also flawed.  Here's why.

The document itself is just for discussion for the G20 Ministers meeting this week, with the aim of agreeing something in June.  It was leaked by Robert Peston over at the BBC, and has created a fair bit of mileage for him with two blog entries: IMF wants two big new taxes on banks and How much would IMF bank taxes raise?

Robert's estimate for the latter is about £5 - £10 billion ($7.5 to $15 billion) per annum.

The leak has also sparked a whole range of other headlines, including:

Leaked IMF document urges two new taxes for banks - The Times
IMF recommends double tax whammy on the world's banks - The Independent
IMF urges double tax hit on banks to refund taxpayers - The Telegraph
IMF warns over sovereign debt - The Independent
Post-crisis banks must refinance $5 trillion - The Times

And here’s the document itself (Download IMF G20 Document, 57 page pdf).

All well and good.

Now the actual content is debatable and not set in stone.

As I said, it’s for discussion.

But it does contain some really interesting appendices which are noteworthy as useful research materials, covering diverse subjects from each country’s proposals for reform to their contributions to the bank crisis to date.

For example, here are the amounts announced or pledged for financial sector support so far, as a percentage of 2009’s GDP (doube-click chart to see a bigger version):

What this shows is that for the ‘advanced economies’ – think USA, UK, France, Germany, Japan et al – the cost has been 6.2% of GDP in direct support and a further 10.9% in guarantees.

The total of columns A to E represents 29.8% of advanced economies’ GDP in 2009.

That compares with 1.8% in the emerging economies – think the BRICs, Indonesia, et al. 

Mind you, they then go on to say that “for the advanced G-20 economies, the average amount utilized for capital injection was 2 percent of GDP, that is $639 billion, or just over half the pledged amounts. France, Germany, the USA and the UK accounted for over 90 percent of this. For the advanced G-20 economies, the utilized amount for asset purchases was around 1.4 percent of GDP, less than two-thirds of the pledged amount. Similarly, the uptake of guarantees has been markedly less than pledged.”

This is why the report reckons that the global financial crisis has cost about $533 billion less than originally estimated, and is now just a mere $2.28 trillion when all is said and done.

Now how much is $1 trillion again?

Thanks Mint.

So yes it’s still a lot, but it’s half a trillion dollars less than before.

Phew!

Now who’s the daddy when it comes to global bailouts and guarantees:

Wow, the UK wins!

We’re number one, we’re number one, we’re number wohohohohone.

Wait a minute.

That means we’re #1 in global bailouts of banks.

Hmmm ... not sure if we should be so thrilled with that accolade and maybe this is why Gordon Brown is so keen on the idea of a Tobin Tax or a Robin Hood Tax or a Financial Activities Tax or ... well, any tax really to help with our debt mountain to be honest ...

Source: the Daily Mail

... as the burden of national debt amongst the G7 nations is at a 60-year high, with the UK’s Treasury planning to increase national debt by over £560 billion between now and 2015. That’s about $800 billion or almost a trillion (how much is a trillion again?).

Meanwhile, the emerging economies paint a very different picture:

Apart from Russia, this crisis has cost the key future economies of the world urrmmmm ... nothing.

These charts make it clear that NINE of the G20 nations have had no crisis. Add to this the fact that Canada’s financial system has been the most stable in the world, and Japan do not intend to implement these tax and levy options, and you realise that under half of the G20 will be keen to support any radical changes to the financial markets.

It's not as clear cut as this, as the fact that the Advanced Economies bailouts allowed the Emerging Economies to survive this crisis without their economies also imploding is a key part of the dialogue.

Another useful chart shows why the IMF has reduced the bailout numbers by $533 billion where financial markets have used far less of the pledged amounts than those offered by their respective governments:

Finally, these charts are followed by a review of each country’s bank taxation policies implemented or proposed (Appendix 2, Page 32), a review of corrective taxation and prudential policies (Appendix 3) and the current taxation policies (Appendix 4).

This last section is also particularly intriguing as it demonstrates why banking has been so critical to Gordon Brown’s policies of the past decade. For example, here’s the percentage of a country’s total tax pool raised from financial firms by country.

G20 Corporate Taxes Paid by the Financial Sector (in percent)

This makes it clear that for every country, but particularly for Italy, Turkey, Canada and the UK, the role and influence of the financial sectors on their economies and government policies is fundamental to the country and its economic and public sector health.

Without bank taxes, countries fail.

But with bank failures, countries fail.

And that is their Catch-22 and the reason why this is so hard to change.

Between domestic interests and focus, aligned with the radically different ways in which this crisis has impacted each G20 nation, it is unlikely that we shall ever see a simple agreement of policy reform now, or at the G20 meeting in Toronto in June.

UPDATE: 23rd April 07:50

Looks like the head of the IMF agrees with me:

IMF Says Financial Revamps Could Thwart Global Deal

The International Monetary Fund's managing director said he worried that rivalries among countries could thwart a global overhaul of financial regulation, as governments split over the merits of an IMF proposal to levy a new tax on the world's banks.

"The risk…is that different parts of the world will have their proposals which make sense" to them, but "which may be somewhat inconsistent," Dominque Strauss-Kahn said at a press briefing ahead of this week's meetings of financial officials from around the world.

Why mobile is changing the banking planet

Back in 2004, I asked a group of bankers when mobile would take off in banking. They all said: “not in our lifetimes”.

In 2007, Bank of America launched their mobile banking applications and has seen a rapid uptake of users. In less than a year, they reached a million customers on mobile, and saw a further 300% growth in 2008. It took them over a year to get the first million customers; a pregnancy period of just nine months to get the second million; and a short six months to get the third.

According to Doug Brown, the man responsible for mobile banking at Bank of America, the speed of take-up is accelerating even faster in 2009, with 150,000 new mobile customers in September 2009, 210,000 in August and 220,000 in July.

What are they doing?

99% of mobile users’ view balances, 90% view transaction details and about $10 billion of funds have been moved via mobile.

But this is not just for existing accountholders wanting account access. The bank has gained over 150,000 new accountholders from competitors during 2009, just because they wanted mobile banking.

So far so good.

Now jump to Africa.

M-PESA is the story in Africa.

M-PESA is the mobile text service introduced by Vodafone’s subsidiary, Safaricom, back in 2007. Suddenly a country with zero electronic methods for making payments for the masses had an electronic access which has revolutionised the country.

Within a year, one in five Safaricom users were using M-PESA to make payments, and one in ten Kenyans had used the service. By November 2009, M-PESA had become the world’s biggest mobile money service with over 10% of Kenya’s GDP moved by mobile payments. Accidentally, Safaricom had become the biggest bank in Kenya with 8 million users registered and over $2 billion transferred by mobile.

Now M-PESA is being expanded into Nigeria, South Africa and other African countries, whilst banks are saying that customers are actually switching banks to get mobile channel access.

Now jump to Japan.

A bank launched in Japan in June 2008 called Jibun Bank.

Jibun Bank is a mobile only bank. The Bank is designed for access via mobile only. You try to use the bank online, and it’s rubbish. As for branches, forget it. This is a multimedia rich, mobile only bank.

The bank is a joint venture between the Bank of Tokyo-Mitsubishi UFJ and telecom operator KDDI.

Jibun Bank, which means my bank, gained 500,000 account openings in just eight months and, after eighteen months, had Y140 billion ($1.5 billion) of deposits by December 2009, from over 850,000 accounts.

At the start of March 2010, the bank opened their millionth account.

What is the point of these three short case studies?

Well, there are many, many examples of banks innovating with mobile worldwide today, but the lesson is this.

In 2004, bankers believed this revolution would not take place in their lifetime.

One banker actually said to me, in writing: “I think this idea is way out there – ten to twenty years – before this plays out in any sizable way.”

Six years later, the battleground is already defined and being won.

Are you fighting in this space?

Have you lost already?

I wonder ...

Mobile Trends 2020

View more presentations from rudydw.

Mobile Banking in 2020 - Mobile World Congress Report

View more presentations from Nadejda Tatarciuc.

Online payments is far more than PayPal

As those who follow this blog know, I write regularly about services such as Facebook and PayPal.

This is because they are disruptive and fresh, as well as being incredibly successful.

For example, Facebook is now the world’s #1 website, bigger than Google.

Not bad for a five year old.

Meantime, PayPal is still growing fast, making over $95 a second in revenues based upon $3 billion in revenues this year. This makes them the interweb’s sixth most successful website by earnings.

Not bad for a ten year old.

But these sites are not the be-all and end-all. You have to bear in mind that they are purely popular in their language of origin: English.

As a result, there are several other search engines, social networks and P2P payment services that are succeeding out there, from China’s QQ to Russia’s Yandex.

Here's a world map of social networks, taken from the blog of Vincos, Italy (doubleclick to enlarge picture):

Although Facebook is a big hit worldwide with 400 million users, it’s tiny in some countries like the Czech Republic (Lidé is the #1 social network), Hungary (iWiW), India (Google’s Orkut), Japan (Mixi), Netherlands (Hyves), Philippines (Friendster), Poland (Nasza-Klasa), Russia (vkontakte), South Korea (Cyworld), Taiwan (Wretch) ...

Similarly, PayPal is hardly recognised in some countries.

In the Netherlands, for example, the banks launched iDEAL, a set of standards to facilitate online payments.

iDEAL was created in 2005 by a range of participating banks with ABN AMRO, ASN Bank, Fortis, Friesland Bank, ING, Rabobank, SNS Bank, SNS Regio Bank and Triodos Bank on board today.

Some of the major features of iDEAL include the fact that it offers both real-time payment initiation and authorisation by both the issuing and acquiring bank, followed by irrevocable credit transfers to the merchant at the time of online purchase.

The participation of the banks along with real-time processing, has created a strong perception of iDEAL being SAFE. As a result, iDEAL has gained over 15,000 participating merchants and 5.8 million users, resulting in a total of 45 million transactions in 2009 worth over €3.4 billion (up 60% over 2008).

* maandtotalen = monthly total

In other words, iDEAL has a 40% market share of all e-payment transactions in the Netherlands, with an acceptance rate at almost 9 out of 10 online merchants (88% of all Dutch merchants) compared with only 1 in 4 for PayPal (although that’s up on 1 in 5 a year ago, thanks to the decline of AMEX in the Netherlands).

So the banks do have a PayPal service equivalent ... but, right now, only in the Netherlands, although iDEAL aims to expand across more of Europe by gearing up for SEPA Credit Transfers (SCT) and the Unify XML standards.

Meanwhile, in Russia, their version of Google Checkout has taken a place ahead of the market.

Google Checkout is actually called Yandex.Money run by Yandex, Russia’s largest search engine.

According to Liveinternet.ru, Yandex increased its share of search traffic from 56% in January 2009 to 59% in December to 62% in February 2010.

Yandex.Money claims to be the leading online payment system in Russia as a wholly owned subsidiary of Yandex. Founded in 2002, Yandex.Money has seen payment volumes grow 135% CAGR, processing 21.5 million transactions per year worth $350 million.

This may sound small, but the appeal of Yandex.Money is for the vast numbers of unbanked and underbanked Russians who want to deal online.

Yandex.Money provides over a million prepaid cards per year through 100 distributors, to be used in over 50,000 participating outlets all over Russia. They have over 200,000 participating terminals to load cash on the cards in 80 of Russia’s largest cities, and 1 in 5 customers use them as top-up wallets. Meanwhile, 61% of users pay directly from the Yandex.Money interface online.

So Russia’s online payments market has developed a slightly different way.

Meanwhile, China has an incredible story of the success of Alipay, a division of Alibaba the B2B ecommerce portal.

Alipay is China's primary payment platform thanks to being the preferred payment system for sister firms Taobao and Alibaba.com, along with over 460,000 external merchants. The result is that Alipay has a 49% market share today for all online payments in China:

Q1 2010 market share figures from iResearch

Equally, it has a larger userbase than even PayPal with over 300 million registered users as of March 2010, with five million transactions per day worth an average RMB 1.2 billion (US$176 million).

Why should this be of interest to our global banking community, and PayPal specifically?

News Headline, April 11th 2010: “Alipay, China’s largest online payment network, has announced that Alibaba Group will invest a total of RMB5 billion (US$732 million) over the next five years to upgrade the payment solution for e-commerce in China and around the world.”

Serious stuff!

Meanwhile, in a non-exhaustive list, there are many other online payment services worth a look including 2CO, AlertPay, Bill Me Later, C-gold, CashU, Dotpay, E-Gold, LiqPay, Mobile Wallet, Nochex, PayPay and Z-Payment.

So in future, when I talk about PayPal, don’t forget that we’re also talking about their national equivalents such as iDEAL, Yandex.Money and Alipay. Similarly with Facebook, don’t forget that there’s also Mixi, Hyves, Orkut and Friendster.

The implications of these services on core banking is exactly the same which is that we are seeing the creation of many disruptive, fresh and incredibly successful web services for social and P2P finance ... leading, in future, to social B2B finance.

G20 regulations collapse in disharmony

I'm sure you realised this was an April Fool ... or was it?

The Wall Street Journal reports this week that "U.S. and European governments are moving toward a consensus on taxing large banks to cover the cost of any future bailouts rather than asking taxpayers to foot the bill, as happened regularly in past banking crises".

However, in an exclusive report, the Finanser has learnt that the G20 Finance Ministers' negotiations for a global agreement on banking regulations disintegrated dramatically last night. 

This was after lengthy talks about a transaction tax caused fundamental disagreements and a major rift between the key economic nations of the world.

The Tobin Tax, or Robin Hood Tax as some call it, is meant to create a fund for future issues in the financial system. In principle, the G20 has agreed that this is the right thing to do and were discussing the level of the tax being 0.01 cents per transaction, no matter the size of the bank transaction.

That’s all fine in principle but, in practice, governments are unable to agree as to its usage.

The German and French authorities have been arguing that the fund is meant to be there to protect citizens and, should another bank collapse occur, to fund future bank bailouts.

Most of the other G20 nations agreed with this – particularly the Canadians who often sided with the French – but several disagreed fundamentally, particularly the British.

Alistair Dawling, on behalf of Gordon Brawn, argued that the tax should be used to create a home fund for the procurement of homes for those challenged by opportunities to get on the housing ladder.

His argument being that individual’s and pension funds’ investments in property had seen major losses during the crisis, and that this area specifically needed help to ensure a strong economy. Equally, in current climate, using the Fund for such purposes is seen to be a strong justification for supporting the housing markets, and therefore the economy, in this time of crisis.

His argument unravelled somewhat however when Christian Lagarde – the French Finance Minister – said that this was a unique situation to markets, such as Britain’s, where home ownership was a major factor, and she asked him to be explicit in how such funds would actually be allocated.

In response, Mr. Dawling said that for Britain the access to such funds would be reserved for those with a legitimate vote in the UK Houses of Parliament, and would be limited to just those members with second homes.

By introducing such a bank fund, Mr Dawling argued that it would overcome the issues created by the banking disaster. Not only has the crisis caused the housing market to collapse but this, combined with the scandal of MPs expenses, has meant that many of the right honourable members have lost a fortune.

The Americans didn’t like this idea.

Tom Geithner believes that any bailout should not be a bailout for the long-term or for a politician. It should be for a banker and a banker only. Therefore, the Americans argued that the Fund should be evaluated at the end of each year, and distributed equally back to the banks based proportionally upon their profitability.

In other words, JPMorgan and Goldman Sachs should be legally entitled to 90% of the Fund each year.

The Chinese objected to this approach and the wicked Western ways of undermining the global financial system. Finance Minister Xie Xoren countered with their approach to the Fund’s usage, which would be based upon a ‘Committee of Worthiness’. The Fund would be reviewed each year by a G20 Committee of Finance Ministers, who would have a discussion of projects and their worthiness. The most worthy global projects would then get their funding from the Fund.

The Americans and British almost bought into this idea, which could have led to an agreement with the Chinese until Xie Xoren black-balled their suggestion that the ‘worthiness’ panel should be chaired by Simon Cowell, with a public vote to determine the winner each year.

Tom Geithner thought this a particularly good idea because it would double the Fund’s value, based upon members of the public being charged a minimum dollar per call, but the Chinese didn’t like the idea of parading their government works in public and so it soon got canned.

President Lala of Brazil then came up with a good idea for an alternative spin on this venture, with the view that, as the financial disaster had been created by ‘white men with blue eyes’, the Fund should be run by ‘brown men with brown eyes’.

This almost succeeded, as Mexico and India came on board having been abstentious to that point, until the whole thing got shot down by Wayne Swan, the Australian Finance Minister, who called it a “shitty idea from a man who was more Gu-Ga than Lu-la”.

This caused a fight to start between Brazilian Finance Minister Guido Mantoga and Mr. Swann, which was only resolved when Russian Finance Minister Alexei Leonidovich Kodrin stepped in. Mr. Kordin managed to break the stranglehold Mr. Mantoga had on Mr. Swann, by kicking Mr. Montega hard in a very sensitive part of the body.

Although this worked, it did not endear Mr. Kodrin to the rest of the Ministers in their search for cooperative global relations.

Luckily the Japanese sorted out the frictions, just in time, by saying that the competition for the Fund should be managed on a secret ballot basis, with each country having a vote as to how the funds would be used.

The ministers all agreed with this idea until Turkish Minister Mehmett Şimmşek reported that the Italian Prime Minister, Silvio Burlusconi, had offered him a million euros to vote for using the Fund to encourage improved sexual relations ... and he didn’t think Mr. Burlusconi meant relations in the workplace.

At this point, Tom Geithner was overheard to whisper ‘f***ing Italians’ which led to another fight starting between Mr. Geithner and Italian Finance Minister Julio Tremonti. Seeing another fight starting gave Guido Mantoga, the Brazilian Finance Minister, a chance to get his own back on the Russian Minister, and so he immediately launched himself at Mr. Kodrin, managing to gorge his fingers into Mr. Kodrin’s eyes.

With this murderous moment, Alistair Dawling immediately hid under the table, the Chinese left and the meeting ended in bedlam.

So much for global harmony.

Of course, the good news is that the banks can continue to practice their methods of investing, remunerating, operating and managing our monies as before.

Plus ca change.