The Bankwatch

California might just be the forerunner of a trend here.  The single largest impact of the new smaller world we have entered is reduction in tax revenues, and with Government costs higher than before, the need for deleveraging applies to Government too.

MISH’S Global Economic Trend Analysis

California State Controller John Chiang says California 50 Days From Financial Meltdown.

….

Personal income taxes were $475 million below (-23.0%) estimates in the May Revision. Corporate taxes were down $84.4 million (-25.8%), and sales taxes fell by $109 million (-3.3%).

Researched by Nobuyo Henderson

The last time saw a graphic such as this was 2007, when the schedule for mortgage resets on US sub prime mortgages pointed to an inevitable crash beginning end of 2007 and through early 2008.

Well here is the next picture that is eerily similar with forward predictions of similar catastrophe in 2011.   The US option ARM.  Apparently these are not necessarily sub-prime at least right now.  The real danger exists in the event that interest rates increase meaningfully to co-incide with the reset dates.

Also we must look at this in the context of the Banks rushing to repay government TARP / SCAP money.  It is quite possible the reverse will be happening with some banks in trouble again in 2011.

Option ARMs: Paying $98 a month on a $350 Thousand Mortgage | Calculated Risk

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

…

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

This new report (12 pages) with the subtitle ‘Restoring Broken Markets’ deals with the new reality of frozen securitization markets and the renewal of traditional banking – re-intermediation – as the backstop point along with 5 others including industry consolidation, government ownership, and consumer protection.  This is the first in a series, and I for one cannot wait.

Its a fantastic read, and ideas just start leaping off the page as you work through it.  But before we get into design, lets look at current state.

The Deloitte Center for Banking Solutions

The Deloitte Center for Banking Solutions is pleased to present the first in a series of papers on the new financial services marketplace. Entitled “Restoring Broken Markets,” the current piece explores the emerging trends that signal a paradigm shift in the financial services sector and the resulting implications for institutions, corporate America and the consumer.

The report makes for a good backstop to add to the mix when considering strategic options for the next few years.  This is the time to consider the implications on product and channel development in the context laid out here.

The first paragraph sums up precisely how I see things at the moment (emphasis mine)

The global financial system is undergoing a dramatic transformation. A period marked by high leverage and ever more complex financial products has come to an end. In its place, a new financial services marketplace that is now emerging will require different strategies and different business models.

I highlighted words in that initial paragraph to emphasise a point that I have been harping on – recovery does not mean a return to 2007.  The fundamentals have shifted, and I see three core characteristics that apply to bank strategy:

1. Leverage is now too high relative to new asset values, be it homes, stocks or corporate asset values.  Asset values will not go back to 2007 values so debt must come down.
2. Products are not longer relevant to the new marketplace.  Bank products are largely established based on criteria that apply to 2007 securitization rules.
3. Trust is eroded and customers have lost what little faith they had in Banks to do the right thing.

The trends outlined in the report are critical trends.  It is essential that Banks take a close look at their reponse to those trends.  Already we see a shift towards even more online deposit gathering, including account opening and GIC gathering.  We see Ally Bank with a return to a simplicity, online only, no small print, approach, that is clearly aimed at the new marketplace.

Ally is a great start and a return to the simplicity needed in this new environment we are entering.  Even there though the offerring is predicated (today) on rates.  Notwithstanding the other attributes Ally offers it is clear to me and I am sure to them, they will need to shift beyond rates in terms of meaningful offerrings when other banks enter the fray.

This is what I find fascinating about the space we are entering.  We will see hosts of ‘me too’ offers from the financial utility banks, but it is the innovators that will design products that capture new market share.

One contention I have long held is that product definition and channel definition (online, phone, branch) are not mutually exclusive.  We can go further and look at product defintions between products as also not being mutually exclusive.  In 2007 it was important to have products with uniform definitions that formed contiguous bundles for shipping off to the securitization market.  Now, instead of designing for securitization, banks must design for customers.

Examples:

• Credit Cards are designed to eliminate bank origination costs and shift default cost to the consumer through high rates.  Surely there is a better model in there?
• Mortgages are designed to allow the consumer to, in effect, forget about an enormous debt burden, while interest is maximsed and principal reduction minimised.
• Chequing and savings accounts is a brilliantly successful method of ensuring free deposits by separating funds into a vehicle that customers manage by leaving extra cushions of funds to protect against monthly automated debits.
• Personal Loans (short term 2 – 3 year) are with their intrinsic predilection towards principal reduction are downplayed in favour of credit cards – see above.
• GIC / CD products are designed to match the mortgage securitization market precisely and at current rates the customer will be paying the bank to hold GIC’s soon.

It is easy for armchair bankers to criticize product design now, and I realise I was there through all of it.  All I am saying is that the current product design is obviously designed to match an environment that is long gone; this is an exciting time to be in product design. Read the Survival 2.0 section of the report, and I challenge you to not be both scared and excited.

One early step for banks would be to ensure that product groups are amalgamated during design exercises, and do not forget those lonely channel folks in ATM and Online banking.  Collaboration is good.

This report offers real context and implication for new designs.  Anything less will merely provide more of the same and we know where that got us.

As banks rush to repay TARP money, driven by the desire to remove government control rather than any reflection of improved financial standing, here is a sobering statement from Elizabeth Warren.  Just as GM didn’t ‘get it’ in terms of the world will look like on the other side of this recession, many banks appear to have similar blinders.  Instead of arguing that they are not in bad shape and that they are secure, why not make changes now that display the recognition that the future is not going to be anything like the past.  I say again, and blame the politicians for the use of the word recovery – recovery does not mean a return to 2007.

Repeat stress tests right now | MSNBC

The Congressionally-appointed panel overseeing the Troubled Asset Relief Program (TARP) recommends running again the stress tests on US banks, as economic conditions have worsened, its chair, Harvard University professor Elizabeth Warren, told CNBC Tuesday.

“We actually make recommendations to do it all over again right now,” Warren told “Squawk Box.”

“We’ve already blown past the worst-case scenario on unemployment,” she added.

Yahoo Japan notes the expected repayment of $68 Bn from 10 banks.

金融不安後退　大手１０社公的資金返済へ

6月10日1時53分配信 産経新聞
【ワシントン＝渡辺浩生】米財務省は９日、大手金融機関１０社の公的資金返済を認めると発表した。返済額は６８０億ドル（約６兆６６００億円）に上る。昨秋に金融システムの崩壊を阻止するために一斉注入された大手金融機関による返済は初めて。金融危機が最悪期を脱し、当面の金融不安は沈静化したと判断した。

Reported by Nobuyo Henderson

Lending Club are announcing today some new numbers that show they are gaining traction since their relaunch following SEC approval.  There is no-one else to compare them to now, but the trend is positive, and getting more so all the time.

LendingClub

53% growth in quarterly loan originations, from $5,374,850 in Q4 2008 to $8,239,950 in Q1 2009

From January 1st  to May 31st 2009:

• 60% growth in total loans issued by Lending Club, from $25M to $40M
• 70% growth in total Lending Club membership from 82,000 to 140,000
• 72% growth in loan applications, from $212M to $365M
• The average net annualized return earned by Lending Club investors grew from 9.05% as of December 18, 2008 (as reported by analyst firm Javelin Research) to 9.73% as of May 31, 2009

Just when we thought we were getting there with 3G here comes LTE in Japan, the next level.

Its not clear what the individual phone download rate would be, but it will be fast.

DoCoMo To Invest Y300-400bn In LTE Network

Tuesday, June 9, 2009

NTT DoCoMo President Ryuji Yamada

TOKYO (Nikkei)–NTT DoCoMo Inc. (9437) will spend 300-400 billion yen over the next five years to develop LTE (Long Term Evolution), the next-generation high-speed cellular network it plans to launch in the second half of 2010, said President Ryuji Yamada on Tuesday.

“The mobile phone market is entering maturity, but its functionality will keep evolving,” Yamada said during his keynote speech at Global ICT Summit 2009, an event hosted by The Nikkei and the Ministry of Internal Affairs and Communications.

Researched by Nobuyo Henderson

This is nice to see.  Lloyds is was the most risk averse bank before the crisis.  Yet after the Government intervention and Lloyds ‘takeover’ of HBOS with all their self inflicted mortgage problems, the situation altered dramatically.

I hope Lloyds will be a survivor, and can remove government ownership.

Lloyds repays £2.3bn to UK Treasury

Lloyds Banking Group has repaid £2.3bn to the UK Treasury after strong support for its open offer and placing aimed at repaying the government’s £4bn of preference shares. Lloyds is believed to be the first major western bank to repay state equity in the round of bailouts that began last year.

Deloitte have released a report based on a survey of banks and their approach to risk management, including the degree to which they have embedded risk into compensation decisions.  The survey includes financial institutions from around the world, with 27% being banks over $100 Bn.

Slightly more than 50% have not integrated risk across the enterprise and into compensation.  This is somewhat surprising considering the public attention paid to the matter, and the lessons learned over the last two years about the disassociation of compensation from negative results

Risk management in the spotlight | Deloitte

Recent developments in the financial markets have tested the capabilities of risk management across the financial services industry. Against this backdrop, Deloitte conducted its sixth biannual survey of risk management practices across the industry, receiving responses from 111 financial institutions around the world, with aggregate assets of more than $19 trillion.

Banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools. The survey’s findings include:

1. Risk management is not fully integrated throughout many institutions. Forty-nine percent of the institutions surveyed had completely or substantially incorporated responsibilities for risk management into performance goals and compensation decisions for senior management.
2. Overall responsibility for oversight and governance of risks rested with the board of directors at 77 percent of the institutions participating and 63 percent of these had a formal, approved statement of risk appetite.
3. Seventy-three percent of the institutions surveyed had a Chief Risk Officer (CRO) or equivalent position. As an indicator of the role’s importance, the CRO reported to the board of directors and/or the CEO at roughly three-quarters of these institutions.
4. Only 36 percent of the institutions had an enterprise risk management (ERM) program, although another 23 percent were in the process of creating one.
5. Many institutions may have significant work to do to upgrade their IT risk management infrastructure.  Roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk.

Read the full report to understand why the creation of a risk-aware culture, supported by specific methodologies, tools, and governance structures, is necessary for financial institutions to meet the competitive challenges ahead.

Some notable comments from the report:

• Roughly 80 percent of the institutions employed stress
  tests …  Among institutions that conducted stress tests of their structured product exposures, only 17 percent conducted them daily, while 68 percent conducted these tests quarterly or less often.
• Other operational risk methodology areas, such as key
  risk indicators, external loss event data, and scenario
  analysis, were said to be well-developed by 20 percent
  or less of the institutions surveyed.
• Only roughly 40% of executives considered their operational risk assessments and their internal loss event data to be well-developed

This is a 40 page report, with load of advice, criteria, and approaches towards organisation and accountability relative to risk.  Worth the read, if only to scare you into action, which it appears many FI’s need.  Who out there believes this is the last financial crisis we will see?

ETRADE have released a new Online Advisor service, and let me take a look at a demo on the US site to review.

It walks the user through a set of relevant questions that source and validate the users investment needs, then produces an asset allocation model at the end.  For the self service type who wish to move beyond gut feel, and assess one portfolio or their entire portfolio, this tool is a useful addition.  Its the kind of thing that is worth an afternoon, and taking the time to properly assess the approach you would wish to take.

These kind of tools are a good start in self service, but the key is how they maintain contact with the user over time.  In this case it is starting to do that and the allocation results can be executed simply as new trades.  They key however will be how this type of service provides ongoing feedback over time.

Here are sample shots from a demo set up.

The folks at Skygrid have a beta financial news site that is focussed on financial news, real time.  It has been written up by Scoble and Techrunch so that was enough to pique my interest further when I was introduced to the service.

To be clear it is probably not for everyone.  It is however useful for those who follow the markets closely and daily providing various filters for different news sources, including web, blogs, and EDGAR.  The interface is work in progress, and be sure to turn off the ‘bubbles’ so you can see what you are doing.  This is a beta, and lots of feedback is requested.

There are a limited number of invites for those interested, and a very simple sign up by clicking through here for anyone interested.

This is an invitation for your private SkyGrid account

SkyGrid is a web-based financial news platform that delivers high quality financial content from trusted sources, in real-time.  SkyGrid gives its members the ability to filter financial news in real-time with sentiment, source type, and even real-time clusters that show which companies are being discussed the most in the news.

People who see it LOVE SkyGrid – techie and news junkie Robert Scoble has compared it to crack, and BusinessWeek just named SkyGrid founder and CEO Kevin Pomplun as one of this year’s “Best Young Tech Entrepreneurs.”  SkyGrid’s first members included leading financial institutions like BlackRock, Bank of America and J.P Morgan.  Today SkyGrid is free, but by invitation only, and invitations have been hard to come by.

The people made happiest by SkyGrid are those who are passionate about stock market news, business news, and financial information.