FDIC report on US Banks’ financial profitability confirm dire circumstances
These graphs extracted from the latest US FDIC quarterly report display the long term impact of the crisis on the US Banks. Their predicament has a much earlier lead time, and a suggests a far longer expected period for improvement to anything close to pre 2008 results.
People are in retrenching mode, and the consumer confidence and asset values that drove banking business volumes until 2007 are not returning in the near future, depsite the stock market growth which has occurred in 2009.
Loan losses remain 400% higher than the 2001/ 2007 period. when related to Operating Revenue.
Relevance to Bankwatch:
Banks have a double whammy of covering loan losses that continue to grow, and lack of new business growth on the retail banking side to help grow out of those losses.
‘UK banks set to vote on abolition of cheques’ | Finextra
A headline like that is music to my ears. The fact that Banks in UK, Canada and European countries (less so US) are still spending enormous sums on a set of fixed cost infrastructure designed to manage volumes in cheques that are orders of magnitude larger.
The ultimate irony here is that it is the government considering this move. As the largest shareholder in Banks, perhaps this is the responsible thing for them to do, to enhance their investment. Indeed it is hard to imagine any one bank having the gumption to eliminate cheques.
UK banks set to vote on abolition of cheques | Finextra
The UK’s major banks are set to vote next month on whether to stop clearing cheques as consumers increasingly turn to cards and electronic transfers.
‘The Shape of Business – The Next 10 years’ | CBI
Confederation of British Industry (CBI) have issued this paper. It is a short but useful discussion on what business ought to consider in the UK, but my reading suggests most western economies. It touches on the main categories of concern of business, people issues, environmental, partnerships, supply chain and technology
Here is an excerpt from the Table of Contents, followed by the conclusion.
Download: The shape of business – the next ten years (PDF 2MB) | CBI
The Changing Business Environment
- Changing finance and capital conditions
- The decline of trust in business and markets
- A less benign macroeconomic environment
- Social and demographic change
- Sustainability and resource issues
- Technology trends
The Business Response
- Capital and investment
- Workforce
- Organisation and location
- Governance and sustainability
Conclusion:
The next decade will be one of fundamental change for businesses in the UK and the actions business takes will begin to have a significant impact on the shape of the UK economy.In ten years time, businesses will typically be involved in a range of collaborations, partnerships and joint ventures, supporting investment finance, R&D and innovation, training and new organisational structures. There will be much more rigour in identifying investment and innovation projects for funding and businesses will have outsourced the next level of activities, including many specialist tasks. The workforce will be more diverse, highly flexible and mobile, making the most of new ways of working and using more business-relevant professional skills. This will leave organisations focused on a smaller core of people and projects, supported by a much wider range of individuals and businesses around the periphery. Building and maintaining trust with business partners and the public will become critical to the smooth operation of these structures, and compliance with governance and sustainability standards will be a major objective. Effective management will be the key determinant of survival and success.
These changes will have a range of implications for the UK economy, which have been highlighted in the previous section. Taken together, we identify the following as the main areas of concern and opportunity:
- In the short term, the UK will see slower (but more sustainable) growth and a longer climb out of recession, with elevated unemployment for an extended period, and the socio-economic consequences this will bring
- An increased number of burdens coalescing on business at the same time will increase business costs, reducing profits and tax revenues
- Until new systems of governance, collaboration, risk management and SME financing come into place, and start to work effectively, businesses are likely to miss opportunities for more radical innovation and the UK may fall behind some of
- its competitors
- But, by the middle of our five to ten-year time frame, these same systems will make the UK more productive and competitive and our expertise in implementation will be valuable in its own right
- New business structures, new ways of working and new relationships with employees will make businesses even more flexible and this will enhance what is already our most important competitive advantage
- Towards the end of the decade, some key aspects of the UK economy may ultimately fall under the control of overseas governments, and as market opportunities shift, current prominent businesses in both services and manufacturing may move substantially overseas.
The ugly side of globalisation | security breach in Spain impacts German credit cards
Courtesy of Finextra.
More than 100,000 German credit cards have been recalled by banks following a suspected security breech at an unidentified Spanish payment processor
The coming media crisis and parallels with the financial crisis
A general thread that has been building for me for some years now is highlighted in a few things I have seen recently. The thread is my hatred of advertising and in particular online advertising. For me it lies in the same category as junk (paper) mail except worse. I can simply throw paper junk mail out as one package, so it is not intrusive. Online advertising is horribly intrusive because it is pervasive. I use lots of things to ensure my online experience is minimally interrupted by ads
In 2004 people were asking about blog business models. Now it is social network business models. I have suggested other ways to deal with business models, but the mob continues to aim directly at advertising as the answer. It will pollute the web, and result in the opposite result than what is desired. It will not bring sustainability for them using advertising.
So what happened this week.
- twitter volumes are already dropping. Pick any topical topic and search it on twitter – result 80% of the tweets are re-tweets of the topic. Its a gigantic echo chamber. In fact the next question – how many of those re-tweets were someone with a vested interest, a professional marketer, or a PR company? The theoretical value of wisdom of crowds does not allow for gaming the system. The black swan of twitter search.
- the volume of requests to me at this blog for linkbacks, blogroll links and outright requests for ads is increasing significantly. That will never happen btw. However it is indicative of the desire for ’social media’ results
- A good friend who despite my recommendations still uses hotmail (now windows live). This persons entire contact list and archive of emails were deleted and it turns out this person not alone. Some kind of scripting virus inside hotmail launched by making the wrong click and signing up for something let the virus in. The clue was emails to all the contacts notifying my friend was happy with some TV or the like. Needless to say my friend is now using gmail exclusively but its a bitter lesson.
- techcrunch reported on the real evil of ad networks online and the significant money being made. Its a long post, but the key is that no-one is generating any real value here. Individuals are getting rich and that is all.
So what is the point of these seemingly unrelated observations especially as I am a devout proponent of the value of internet. What I am against is traditional interruption advertising coming online. It pollutes the medium and hinders the genuine creation of new and valid business models.
Today I read Umairs post at Harvard and that solidified it all for me (Umair does that). He points to the coming online crisis that is the online version of the subprime crisis. Readers of this blog get the sub prime crisis. The coming online crisis is one of trust, and realisation that online activities require security and protection yet something more which is still to be invented – control. It will be a crisis and it will be a broad based internet crisis of confidence. The result will be serious and cause serious grief for banks and others who have come to rely on online for servicing.
The parallels with the financial crisis are interesting. The financial system was getting better and better at recycling money and the convoluted networks that were built lost sight of the origin of the credit instrument, and the underlying risk. Causes were lack of transparency, shadow markets, rapid expansion, and mis-allocation of risk amongst others. In the case of the online advertising market, there are similar attributes. Transparency is non-existent in most cases, because there is no way to know who is behind those ads. Shadow markets and rapid expansion – ditto. Mis-allocation is interesting. I avoid online ads because they are interruptive. At a deeper level, they are mis-allocation of resources away from user experience and towards the requirements of a stupid ad server that is busily collecting data on you. The value is highly one-sided – worse the server is gather data that may or may not be of any value. Internet is simply clicks – do clicks imply desire, need and future purchase patterns?
Relevance to Bankwatch:
Smart banks and others will look at the embedded value in the customer base they have and define models that add value to those people, not spam them. What is known about your customer base, and what do your customers actually want. Traditional advertising models assumes customer needs – internet models will (I believe) enjoin the customer to participate in the definition of what they need and in return protect them (the customer) from spam advertising. One example is the promise of VRM. But it is only one – others will be developed, and will be supported by powerful authentication tools.
Innovation is another loser in this coming crisis, or as Umair notes unnovation. In advertising land, innovation is all about finding ways to get inside peoples click patterns and drive ad revenue. There is not value created for the majority of consumers (90% + who do not click), nor for merchants who actually desire long term client loyalty.
This has turned out to be a negative post, but really it is intended to provoke thinking beyond online advertising and ad servers. Which innovations will align customer advocates and merchants in a genuine and trusted manner?
On Bank Systemic Risk, International Integration and Capital Requirement | Turner Discussion Paper
There has been much talk of systemic risk since the financial crisis hit. I see it more as a crisis of banking and banking confidence, and the debate on systemic risk is critical because it exists because of Government intervention and protections, implicit and explicit. The latest from Lord Turner of the FSA is a discussion paper, that reviews systemic risk and provides as good a discussion on that topic as I have seen.
What it particularly interesting is how the insights raise the prospect of penalising globally integrated banks over nationally independent organizations with higher capital requirements. Things just got more complex for decisions on integration.
DP09/4: Turner Review Conference Discussion Paper | FSA
3.18 In general terms, a firm is systemic when its collapse would impair the provision of credit and financial services to the market with significant negative consequences for the real economy. The factors which make firms systemically important fall into three categories (although firms may combine elements of these factors):
- systemic by size. This can be a function of the firm’s absolute size or in relation to a specific financial market or product in which a firm is particularly dominant. The channels through which systemic risks would crystallise as a result of the failure of such a firm include: losses to uninsured creditors and depositors through high bankruptcy costs and reduced recoveries; disruption to financial services (such as to payments, clearing and settlement, extension of credit); and losses to insured depositors because the DGS could not pay out sufficiently quickly or because the aggregate payout imposes unsustainable costs on those who fund the DGS. In addition and crucially, systemic risks can take a macroeconomic form, with the loss of credit extension capacity leading to, or exacerbating, a downturn in economic activity which then has consequences for the rest of the financial system.
- systemic by inter-connectedness. Links and inter-connections can include, inter alia, inter-bank lending, cross holdings of bank capital instruments, membership of payment systems, and being a significant counterparty in a crucial market. The channels through which such problems manifest themselves include:
- interbank exposures. The domino effect where the collapse of one firm leads to
major losses at others, and then in turn leads to their collapse. This can then
trigger a chain reaction;- the confidence channel. The collapse of a systemically important firm leads to a
crisis of confidence in financial markets. The confidence channel is particularly
important to the ‘systemic as a herd’ category (see below), given the perceptions
by the market that a number of firms are exposed to the same set of risks;- the asset margin spiral channel. Firms increasingly finance themselves through repo
and reverse repo arrangements. The haircuts charged on the collateral underlying
these contracts dictate the extent to which firms can leverage themselves. In a crisis,
both funding conditions and credit concerns will lead counterparties to increase
haircuts, triggering a deleveraging process. This will in turn be disruptive, through a
self-reinforcing spiral between lower market liquidity and funding liquidity.
- systemic as a herd. The market can perceive a group of firms as part of a common group (for example, because they have a similar business model, such as building societies in the UK and the savings and loans banks in the US), or common exposures to the same sector or type of instrument. A single firm in this group may not be systemic in its own right, but the group as a whole may be.
“Rally fuelled by cheap money brings a sense of foreboding” | ft.com
Gillian Tett voices her concerns here, based on background discussions with bankers. We are not out of the woods yet, despite the equity markets.
Rally fuelled by cheap money brings a sense of foreboding | FT
Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying – even as non-risky assets such as Treasuries bounce too.
… …In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.
Is the utility bank/ risky bank model workable?
Martin Wolf makes a persuasive argument that regulatory division between financial utilities and risk takers (casinos in his words) is impossible.
Why curbing finance is hard to do | FT Martin Wolf
First, the border between utility and casino banking is impossible to draw. For Mr Kay, the utility is the payment system and protection of deposits. This would leave all lending – including to households and businesses – inside the casino. For those in the US who hark back to the Glass-Steagall Act, the distinction is between commercial and riskier investment banking.
… …
Mr Kay’s distinction is clear, but problematic. If we followed him, all risk management would become unregulated. It is inconceivable that governments would, or could, leave them so. If we moved back to a Glass-Steagall distinction (itself never accepted in continental Europe), we would need to draw a line. But where? Why would lending to households and business be good, but securitising those loans bad? Why would hedging be good, but speculating bad and how might one draw the line between them?
I disagree. It is hard but not impossible. From inside a bank it is abundantly clear where the distinction lies, so there has to be a way to draw up the rules. Personal mortgages funded dollar for dollar directly against retail deposits for example with no securitization vehicle in between would be a good place to begin. The inevitable argument would be that without access to alternative securitization activities that consumer credit would be more expensive. Well recent experience would suggest stability over extreme discounts would be a good thing. There could be two types of mortgage offerred by utility and by risk banks. This would be a fascinating comparison.
At the other end of the division Mr Wolf draws we have clear investment banking activities funding large corporates with obscure investment vehicles.
The difficulty would lie in the middle range of products as to whether they are utility or casino. The rule would be best served to keep them in the casino until they can be shown as deserving to be in utility. No amount of debate will solve this – it would require draconian regulation driven by speaking to regular bankers, not investment bankers.
Finally the drive from consumers towards utility or riskier banking products would be the ultimate measure. Bearing in mind that the offerors of the risky products would have no government backing, this would be reflected in the price and the nature of collateral they would require. The final piece of this puzzle is the extent to which the utility offering banks have deposit insurance, and government assistance. They should in my view have deposit insurance to a limited dollar value, but should not be government owned.
It is a journey worth beginning, and should not be written off lightly as this Wolf piece does – the future stability of consumer economy depends on it.
Bank of Canada joins other Central Banks is calling for caution
In the regular Monetary Policy Report the Bank of Canada keeps their focus on a low interest rate environment right through 2010.
On inflation the view is mixed …
The main upside risks to inflation relate to the possibility of a stronger-than anticipated recovery in the global economy. A stronger global recovery would be transmitted to Canada via trade, financial, confidence, and commodity price channels. There is also the risk that Canadian domestic demand could be more robust and have a more sustained momentum than projected.
On the downside, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. Another important downside risk is that the global recovery could be even more protracted than projected if self-sustaining growth in private demand, which will be required for a solid recovery, takes longer than expected to materialize.
Worldwide consumer demand rejuvenation is not assumed in the near term …
Vigorous and coordinated fiscal and monetary policy stimulus in the G-20 economies, including a wide range of measures to support the fl ow of credit, have been sustaining aggregate demand, but evidence of self-sustaining private demand remains modest. Necessary adjustments on both the real and financial sides of the global economy are under way, and will involve a significant and protracted rotation of global demand, as well as deleveraging by U.S. and European banks, households, and firms.
Canadian consumer confidence is very real estate focussed due to affordability.
On capacity …
After reviewing all the indicators of capacity pressures and taking into account the weakness in potential output associated with the ongoing restructuring in the Canadian economy, the Bank judges that the economy was operating about 3 1/2 per cent below its production capacity in the third quarter of 2009, in line with the July projection.
This chart is worrisome though, begins to sow seeds of doubt. Consumer credit is growing but business credit is lagging. Consumers are increasing mortgage debt but not purchasing ‘things’ – (sound familiar – 2007?)
On money supply enormous growth, but suggestions the money is being parked – i.e. low velocity of money suggesting low prospect of near term inflation.
The monetary aggregates have continued to grow strongly. In the three months to August, the narrow aggregate M1+ grew at an annual rate of 18.2 per cent, while M2++ grew by 7.0 per cent. It is diffi cult to assess the implications of monetary expansion for economic activity, since the demand for money is likely to be abnormally high in an environment of very low interest rates and tight credit conditions. The continued robust growth in narrow money reflects the desire of both households and firms to keep money in liquid assets until it is clear that the economic recovery is taking hold. Consistent with our base-case projection, the growth in money balances is expected to gradually decline over time.
On GDP – this is a very clear depiction that consumer spending has been replaced by government spending, and that won’t change consequently until 2011. The other factor also noted here is that currency shifts and changes in imports/ exports will be the real next thing that determines each country’s economy
On consumer confidence 2 …
In the wake of a short, severe recession, and with residual economic uncertainty, the personal savings rate remains elevated over the projection horizon.
Monetary Policy Report Oct 2009 mpr221009.pdf
A succint comparison of exiting 1980 recession, and 2009 recession
I thought this a particularly succinct view of the next 10 years view prospects for banks and their business planning.
The view from New York | Buttonwood/ Economist
The bearish view came from Josh Rosner of Graham-Fisher. Mr Rosner was one of the first analysts to spot the potential havoc caused by the interaction between subprime mortgages and structured products like CDOs. He thinks the economy will not rebound as it did in the 1980s. Demographic trends are not as favourable (the baby boomers were entering their prime earning period in the 1980s; now they are retiring); while credit card use was about to explode (now it is contracting). He argues that small businesses, a key source of job creation are still being denied credit; one problem is that small businessmen can no longer afford to use their houses as collateral.
