The Bankwatch

An interesting survey of business reaction to the crisis, and which countries are least impacted.  Full ranking follows the map.  This explains a lot in terms of peoples reactions.

Time will tell if this reaction remains constant, and what were the contributors to and rivers of this reaction.

Countries that are Least Affected by Recession | digital inspiration

The data is based on the results of a business confidence survey that was done on international business people of 24 nations to identify which countries they believe are surviving the crisis the best.

Researched by Nobuyo Henderson

Could we see the state of California go under … ?

California – a nightmare vision of the future | FT

The Californian budget crisis is so severe that all public employees are having to take pay cuts. Public-health services are under serious threat, and there is talk of pushing Aids patients and the terminally-ill out onto the streets. It has proved impossible to raise taxes any further and the bond markets are in revolt. California is looking to Washington for help. But with the federal government running budget deficits of 12% of GDP, and the federal debt pushing up towards 100% of GDP – you have to wonder whether California’s present might, once again, be America’s future.

The President released the following much anticipated document today.  Item #10 is of particular interest to me.  This aspect has grains of what I happen to think embody the next step in internet beyond where we are.

Cyberspace Policy Review | White House

10. Build a cybersecurity-based identity management vision and strategy that addresses privacy and civil liberties interests, leveraging privacy-enhancing technologies for the Nation.

… …

And this …

The Administration should assist international financial institutions, such as the World Bank and the International Monetary Fund, with the necessary information, tools, and expertise and encourage their use of best practices to protect their information systems, which suffered a series of serious intrusions in 2008.  61

61

www.foxnews.com/story/0,2933,435681,00.html, World Bank Under Cyber Siege in ‘Unprecedented Crisis’, October 10, 2008; www.foxnews.
com/story/0,2933,452348,00.html, Cyber-Hackers Break into IMF Computer System, November 14, 2008.

It appears the weakness in the UK banks that showed first when the crisis hit, were foretold 5 years ago in a BoE simulation.

Northern Rock risk revealed in 2004 | FT

Banking regulators identified Northern Rock as the weak link in Britain’s banking system during secret “war games” held as long ago as 2004, the Financial Times has learned.

The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock’s business model, and its domino effect on HBOS, then the UK’s largest mortgage lender.

The latest FDIC QBP is out and contains some sobering information on the impact of the recession on bank results.

FDIC Quarterly Banking Performance – 31st March 2009

INSURED INSTITUTION PERFORMANCE

• Net Income of $7.6 Billion Is Less than Half Year-Earlier Level (61% less than previous period)
• Noninterest Income Registers Strong Rebound at Large Banks
• Aggressive Reserve Building Trails Growth in Troubled Loans
• Industry Assets Contract by $302 Billion
• Total Equity Capital Increases by $82.1 Billion

Looking behind the apparently positive net income of $7.6Bn we see that first quarter earnings were $11.7 billion (60.8 percent) lower than in the first quarter of 2008 but represented an apparently significant recovery from the $36.9 billion net loss the industry reported in the fourth quarter of 2008, however it included significant trading gains of $9.5 Bn which masked the continuing loan loss problems. Aggregate net income would have been in loss territory based on the business fundamentals.

While at first glance some recovery appears underway, the above along with industry asset contraction, reflecting pay-offs and write downs, suggests we are not close to being out of the woods on the banking sector.

I also note that the level of derivatives is has now increased in 2009 versus 2008, despite earlier commentary that derivatives were being unwound.  (Derivatives represent off balance sheet liabilities)

Mobile payments continues to grow worldwide, yet limited in North America so far.

Mizuho and NTT DoCoMo launch mobile payments service

Mizuho Bank, in partnership with NTT DoCoMo plans to launch a financial services and remittance services via mobile phone

ＮＴＴドコモがみずほ銀行と提携し、携帯電話を使った送金サービスなどの金融業務に乗り出す方針であることが２６日、わかった。

Researched by Nobuyo Henderson

Wesabe have introduced a redesigned site.  It appears to be more than a surface change with nice use of interactive ‘hover’ features with personalised information inside the hover.  The menu is simplified, yet takes you to everything required, including ‘Connections’ that includes iphone and twitter connections.

Its clean, bright, and worth checking out.

wesabe

Wesabe Site Redesign

If you haven’t logged in to Wesabe lately, you’re in for quite a surprise. We’ve redesigned every single page of the site and have been getting some rave reviews about our new look!

President Kohn of the Kansas City Fed speaks at the ECB/De Nederlandsche Bank Conference conference in Frankfurt.  He argues for greater control by the Fed over the payments system.  While his outline of problems makes sense, they also describe the failure of the current system, and the lack of foresight from the existing controls, and its unclear that the proposed solution from them will have any impact other than exacerbating those problems.  The problems he describes are real and more importantly consumer facing.  They are also imho problems that large banks could address given their scale and the opportunity for customer loyalty.  I am thinking of BofA and Wells specifically, but that is for another post.

The Future of Retail Banking and Payments – President Thomas H. Hoenig

In light of the trend toward greater industry concentration and the existence of important payments system externalities, the Federal Reserve should play a larger and more active role in electronic retail payments if it wants to promote the efficiency and integrity of the payments system.

There are two broad categories of problems that he identifies with the payments networks

1. lack of competitiveness: In 2007 81% of the payments volume went over three networks, compared to 46% just few years earlier.  In addition the number of networks are down from 43 to 14.
2. integrity of the system(s): He sees single point of failure and prominence of non-banks as issues of concern.  The variety of systems introduce externalities that undermine the entire system.  His example is the continued use of mag stripe and the security implications of not shifting to chip card as the rest of the world has done.

On that last point I would add that the fact of holding on to the mag stripe is influencing the rest of the world with  counter productive results.  For example in Canada banks are issuing cards with stripe and chip which makes no sense.  So long as the stripe exists the flaws associated with strip exist.  But the sheer size of the American market pressures the issuers to continue with stripe for the forseeable future.

Then he makes this statement:

Historically, the Federal Reserve’s role in both checks and ACH reflects a preference to operate within the market rather than as a pure regulator. We are well aware that industries can – and do – quickly develop methods to exploit any regulatory loopholes and avoid the intended outcome. By competing with the private sector on a level playing field, the Federal Reserve can encourage efficiency and integrity from an “on the ground” position.

That statement reads to me as rationalisation of inaction and continuation of the status quo.  His conclusion is that the best form of regulation and solution to the aforementioned problems is to compete with the other networks.

Thus, in my view, the Federal Reserve’s future role in retail payments should be built around its current position in ACH. For example, in its operator role, the Federal Reserve could augment its ACH products and services, with the aim of enhancing competition and safety within the ACH industry.

… … …

Finally, the Federal Reserve could enhance competition in payment card markets by positioning ACH services as an alternative to debit card payment networks.

It certainly is a strategy and we can debate whether government ought to be engaged in payments systems directly, as regulators, or not at all.  All I know is that consumers (and banks) will suffer from the real problems he identified at the outset, and its not at all clear that the Feds 14th network will address those problems at all.  This reads as a recipe for disaster in American payments.  For example the very issue he outlined of underinvestment in security and integrity will only accentuate as the other 13 networks work to compete with the Fed, and protect profits.  Expect continued data leakages, network outages, and identity theft.

Umair continually presses us to think about new types of corporations that are creating genuine value.  The definition is evolving, and you can check back with his earlier posts about the companies mentioned, but the final sentence in this paragraph is a great objective.

An Open Letter to 20th Century Business | Umair Haque

Who are some of those innovators? We’ve discussed lots of them – Apple, Google, Tata, Threadless. What makes them different is simple. They are more profitable and valuable than rivals because, well, they do stuff that counts. Instead of extracting value, they create it.