IBM and BBA look at banks; restoring loyalty and trust
The British banking system has changed beyond all recognition. It was not a difficult prediction that I concluded last year, but it has come to be sooner than even I thought.
RESTORING LOYALTY, TRUST AND INDUSTRY PROFITABILITY | IBM / BBA
Hand-in-hand with this increase in consolidation and government ownership, we have also seen a major new entrant arrive – Banco Santander now has over 1,300 branches through its acquisition of Abbey National, Alliance & Leicester and Bradford & Bingley – and non-banking groups flexing their muscles in the banking space. Tesco Bank has now exited from its joint venture with RBS and announced its intentions to offer a mortgage and current account. Virgin Money is one of 53 new applicants for banking licences in the UK, while the mobile operator O2 has launched a pre-paid card ‘powered by NatWest’. There is also renewed discussion about the role of the Post Office in supplying banking services.
The prediction was that we would see two types of institutions form:
This will effectively split the financial community into two distinct sets:
- financial utilities – significant operating restrictions in light of implicit and explicit government guarantees underpinning the business
- risk takers – not clearly defined as yet – will be dependent on regulation applicability
Lloyds and RBS are the former. Virgin and Santander are examples of the latter.
One thing I did predict and has not occurred yet in any meaningful way despite public outcry is the enforcement of government requirements on bank actions that come with their new found ownership responsibilities. This surprises me, and I suppose is due to discomfort with being in an ownership role, but it will come in time.
Anyhow the paper looks at customer perceptions and impact of regulation.
I looks at at what customers will pay for ….
and how to create value from customer information.
Their conclusion:
Conclusions
Now, more than ever before, there is the potential for significant change in the retail banking landscape. In our view, the winners will be those who:
- Focus their cost reduction efforts intelligently on the areas we have identified: continuous improvement techniques, empowered workforces, and the right technology and data foundations for their operations
- Build targeted customer propositions to gain significant wallet share, using ‘fine grain’ pricing techniques
- Meet regulatory requirements effectively
- Exploit the potential of smarter banking models that are instrumented, intelligent and interconnected.
To help enable these smarter banking models to work requires the fuel of high quality, accurate data, plus an
ability to look across the different product and geographical silos that still operate in many banks. When banks have the data to serve customers better, they also have the basic building blocks required to meet regulatory (and board) reporting requirements.To win will require significant investment and management effort by both the established UK players – challenging at a time when they have to meet enhanced capital requirements and sort out mergers and divestments – and the challengers.
Banks prepared to make bold plays on this agenda, with clear strategic intent, will force the competition to respond. The competitive dynamic will lead to a smarter banking industry that we can all be proud of and which customers will trust.
Global risks that affect everything for years to come
McKinsey provided a list here of the latest risk assessments done by three groups. I had the WEF one already, so its was interesting to review and compare the three.
- World Economic Forum Global Risks 2010 (In collaboration with PricewaterhouseCoopers Global Thought Leadership group)
- Economist Intelligence Unit’s latest global business risk assessment
- Eurasia Group, Top Risks and Red Herrings for 2010
Relevance to Bankwatch:
This is a sobering list (see below for complete table of contents of all three. The news today is full of:
- Greece, Portugal and Spain country risk problems
- government debt, particularly US, UK and Japan
- consumer debt – all western countries, with special mention to Canada, UK and US
- possibility (likelihood) that we are in the midst of a commodity price bubble
- post crisis statistical recovery associated with a continued consumer recession (approximate quote from Larry Summers at Davos)
- total failure of confidence and trust in banks and their management (Dimon, Lewis, RBS etc)
- US government deficit at unprecedented levels
- potential for catastrophic economic collapse in China (asset bubble, unsustainable government spending
- polarisation of banks into zombie /utility banks and risk takers
- deflation resulting from developed countries and their population deleveraging
The list could go on, and we all see these things through our own lens. These are the things we know about. If we look down the list below, and pick some outlier events such as
- US/ China trade war,
- Muslimisation of Turkey and alliance with Syria and Iran,
- a real global pandemic
Even one such event would have dramatic impacts on confidence, currencies, interest rates and therefore inflation/ prices. Banks and there customers are not immune whether in UK, US, or Switzerland. The results of the risk outcomes will have effects on us all.
I keep going back to Homer-Dixons The Upside of Down. That book set the tone for the 21st Century for me, and provides a backdrop for financial planning, and therefore bank planning for its customers. The view of the last 20 years to buy stock and wait is no longer an adequate plan. Not a good time to be laboured with expensive infrastructure, or to be increasing that infrastructure.
Lots to think about.
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Here is a summary of the coverage of each report.
World Economic Forum – Global Risk Report 2010
Economic Risks
- food price volatility
- oil price spikes
- major fall in US $
- sowing Chinese economy (< 6%)
- fiscal crises
- asset price collapse
- retrenchment from globalisation (developed)
- retrenchment from globalisation (emerging)
- burden of regulation
- underinvestment in infrastructure
Geopolitical Risks
- international terrorism
- nuclear proliferation
- Iran
- North Korea
- Afghanistan instability
- transnational crime and corruption
- Israel- Palestine
- Iraq
- global governance gaps
Environmental Risks
- extreme weather
- drought and desertification
- water scarcity
- NatCat cyclone
- NatCat earthquake
- NatCat inland flooding
- NatCat coastal flooding
- air pollution
- biodiversity loss
Societal Risks
- pandemic
- infectious diseases
- chronic diseases
- liability regimes
- migration
Technological Risks
- Critical information infrastructure (cli) breakdown
- nanoparticle toxicity
- data fraud/ loss
Economist Intelligence Unit
Growth without jobs
The global economy is set to endure a "jobless" recovery, but governments are ill-equipped to deal with the economic and political consequences of entrenched high unemployment.
Austerity and unrest
Moves by many countries to introduce fiscal austerity measures in 2010-11 could spark social unrest, particularly in eastern Europe but also in the developed world.
Shaky foundations
We have fractionally raised our forecast for global economic growth in 2010, but we remain concerned that unsustainable factors are driving much of the recovery.
Preventing the next crisis?
The process of reforming global financial regulation is well under way, but policymakers are reluctant to demand measures that could undermine the economic recovery.
Key issues for 2010
The world economy is improving, but the fading of short-term factors that have supported recovery thus far will feature among the key issues to watch for in 2010.
COP-out
The UN climate-change summit in Copenhagen has ended in failure. It has produced a heavily diluted agreement that omits concrete targets and lacks unanimous support.
A global carbon market?
Carbon trading is at the centre of proposals to limit greenhouse-gas emissions. But for trading to achieve useful scale, a global benchmark for carbon prices is needed.
Bubble fears
Rising global risk appetite and the spillover of liquidity from the developed world are creating conditions for asset-price bubbles in emerging markets.
Eurasia Group
1 – US-China relations
2 – Iran
3 – European fiscal divergence
4 – US financial regulation
5 – Japan
6 – Climate change
7 – Brazil
8 – India-Pakistan (no, not Afghanistan)
9 – Eastern Europe, elections & unemployment
10 – Turkey
CIBC release first Canadian bank iphone app
It was October 2009 when I posted ‘who will be the last bank without an iphone app’.
For Canada I should have said who will be first, and its been a long time coming but it is CIBC. After an initial delay in December, it is released today. No bill payment yet, but it does have EMT (Canadian p2p payments between participating banks).
Kudos to CIBC.
Nicolas Sarkozy opening plenary | Davos WEF Annual meeting 2010
I finally got around to watching the full Sarkozy opening to WEF. It is both controversial and interesting. He continues the theme that ‘anglo saxon’ financial models are the problem and makes some good points that are hard to disregard. For example, he notes that it was too easy to earn large amounts of money based on ‘today’ with no regard for future implications, and with little effort.
Worth watching. There are more ways to see the world that the North American way.
Beware of Greeks bearing Gifts
Beware od Danaos bearing gifts.
((Laocoön warned his fellow Trojans against the wooden horse presented to the city by the Greeks. In the Aeneid, Virgil gives Laocoön the famous line Equo ne credite, Teucri / Quidquid id est, timeo Danaos et dona ferentes)
With that famous line, the worry of surreptitious infiltration is captured, as we now know as the Wooden Horse of Troy.
When people accept a condition in the midst of a complicated negotiation with no apparent conditions beware.
When I read this headline “Bankers in favour of paying global fee” my immediate reaction, as an ex banker was. what!!!
Banking as it is designed anywhere in the world is based on a highly levered model supported by central governments. The problem in the world as we work out of the crisis is leverage. Banks are central to the problem. Yet as head of a bank your targets are designed to maintain return on equity so any interference in the model is bad.
Regulation is bound to reduce leverage in some way so the opportunity to have a fee imposed to all banks equally is manna from heaven. The equilibrium remains.
Two views of Canadian economy – the external view is flawed
Consider these headlines about Canada, both published this week.
First the world view of Canada, reaffirmed at Davos.
What Toronto can teach New York and London | ft.com
That’s where Canada comes in. It is a real-world, real-time example of a banking system in a medium-sized, advanced capitalist economy that worked. Understanding why the Canadian system survived could be a key to making the rest of the west equally robust.
Next a Canadian view, that says Canada is a bubble waiting to burst, that is not widely shared other than by yours truly.
Awash in a sea of Debt | Macleans Feb 8th, 2010 (partially published on Roseth)
It seems we have learned nothing from the American debt crisis; and here in Ontario, we have forgotten the housing collapse of the early 1980’s, when house prices dropped as much as 40 % and did not recover their old values until after the turn of the century. Speculation was rife; people kept moving up, sometimes changing homes every one or two years; speculators were “flipping” homes, and ordinary people were buying forward several months and expecting their old home to appreciate before putting it up for sale. It worked for a while, but then the market turned, and some people who had committed to a new home and waiting to sell their own at higher prices had to sell much lower and ending up with a new house but a much larger mortgage. Some seniors, selling their old, large home and hoping to move into a new, smaller home, mortgage free, ended up with a smaller home with a large mortgage. Quit claims were rampant.
Now, here we go again
For the rest of the world what is happening in Canada is that home prices rose through the recession, and continue to rise. Extraordinarily low interest rates are incenting people to borrow against equity or purchase a more expensive home than they might otherwise. The reset point for Canada will be when interest rates begin to rise.
Analysts from Bank of Canada conducted an analysis of Canadian debt from a historical perspective to 2005 recently.
In a nutshell Canadian debt was significant amongst certain groups as early as 2005. More recently Bank of Canada conducted a sensitivity analysis that noted risk associated with defaults if Canadian interest rates rise to the 4 – 5% range, and that would precipitate significant defaults and loss of capital at Canadian Banks.
The most telling statement in the Macleans piece is this is that ‘you never see a crisis coming’. As recently as 2009 Scotiabank published a piece entitled “Canada’s Mortgage Market is not like the US”. I believe they are wrong. Time for some economists to read “This Time is Different – Eight Centuries of Financial Folly”. As you can imagine the conclusion of the book, is that it is never different.
Securitization is nothing more than unrecorded leverage
I could not agree more with this quote from Niall Ferguson. The problem is leverage, and securitization is nothing more than leverage that is not appropriately recorded on the balance sheet. There is no amount of regulation, bank taxes or bonus taxes that will decrease the propensity for the next crisis until that simple recognition is agreed.
Niall Ferguson: This Crisis Didn’t Happen Because Banks Were Too Big | Clusterstock
"I don’t think it was really the banks’ involvement in hedge funds that were nearly as much of a problem as banks involvement in securitized MBS collateralized debt obligations."
2010 Annual Letter from Bill Gates
This is not terribly on topic, but it is interesting just because it is Bill Gates. A very thoughtful letter.
2010 Annual Letter from Bill Gates: Introduction
This is my second annual letter. The focus of this year’s letter is innovation and how it can make the difference between a bleak future and a bright one.
2009 was the first year my full-time work was as co-chair of the foundation, along with Melinda and my dad. It’s been an incredible year and I enjoyed having lots of time to meet with the innovators working on some of the world’s most important problems. I got to go out and talk with people making progress in the field, ranging from teachers in North Carolina to health workers fighting polio in India to dairy farmers in Kenya. Seeing the work firsthand reminds me of how urgent the needs are as well as how challenging it is to get all the right pieces to come together. I love my new job and feel lucky to get to focus my time on these problems.
The impact of global fiscal stimulus is good for Canada | Bank of Canada
Canada has been receiving kudos for a job well done throughout the crisis of the lest 2 years. This analysis from Bank of Canada has a telling paragraph (highlighted) that suggests there are good classic economic reasons for Canada being where it is, and over-confidence would be a bad idea.
The Power of Many: Assessing the impact of Global Fiscal Stimulus | Bank of Canada
Table 4 shows that, on a regional basis, the United States, as a large and relatively less open region,
benefits the least from a global stimulus. Moreover, the impact of different measures depends on its
trade patterns. The United States is a net exporter of investment goods and commodities other than oil, but a net importer of consumption goods and oil. The United States therefore benefits more from a global stimulus when global demand is slanted towards its comparative advantage in trade (e.g.,
investment goods). Japan also has a relatively closed economy, but its trade patterns are somewhat
different: it is a large net exporter of consumption and investment goods, and an importer of oil and
commodity goods.In contrast, Canada is a small open economy and a net importer of investment and consumption goods, but a net exporter of oil and commodities. As such, it profits greatly from the global stimulus (Table 4), the multipliers being twice as large as in the case of an isolated stimulus, owing in part to a substantial improvement in its terms of trade derived from the increase in oil and commodity prices. For similar reasons, the commodity-exporting region also benefits from a global stimulus.
Emerging Asia is highly open to trade, a net importer of oil and commodities, and a large net exporter of consumption goods (Table 4). Thus, it experiences contradictory forces to its terms of trade under a global stimulus. Moreover, the presence of a large contingent of non-Ricardian agents results in almost no change in private consumption and investment under a fiscal stimulus, either local or global. The remaining countries benefit less from a global stimulus, owing to the large size of this region (39 per cent of global GDP).
