The Bankwatch

A new concern has arisen over the growth of ‘dark pools’ or private unregulated trading exchanges, where banks and large investors are trading derivatives off balance sheet. IT is significant enough to have come to the attention of this weeks G20.

Exchanges issue warning on spread of ‘dark pools’ | ft.com

The world’s stock and derivatives exchanges on Tuesday warned the Group of 20 leaders that the continued “proper functioning” of their markets could not be taken for granted because of a proliferation of alternative trading venues such as “dark pools”.

This is relevant because the near $ 1 trillion in worldwide derivatives remain a risk to some banks’ stability and survival. One company which failed because of derivative exposure was Lehman Brothers last September, and fear of another was part of that which brought us to the ‘too big to fail’ problem.

This is a significant survey with online banking leading over branches for the first time in consumer preference. (ht netbanker)

ABA SURVEY: CONSUMERS PREFER ONLINE BANKING
Survey shows shift in consumer preference away from visiting bank branches

WASHINGTON – A new survey by the American Bankers Association shows that for the first time, more bank customers (25 percent) prefer to do their banking online compared to any other method.

….

“This marks a watershed change,” said Nessa Feddis, ABA senior counsel and retail banking expert. “It tells us that for the first time, more consumers prefer the speed and convenience of conducting their banking transactions on the Internet than visiting their local branch. It also tells us that consumers now have confidence in the accuracy and security of online banking,” she added.

This is a dramatic situation for Moody’s and the state of the rating agencies.

NY Officials Cast Doubts on Moody’s | FT

US insurance regulators are expected to discuss dropping Moody’s Investors Service from a list of acceptable rating organisations at a meeting later this week, according to an official in the New York Insurance Department, reports Reuters.

This from the Reuters piece. They have not recovered from the credibility gap associated with the financial crisis. The insurance industry has $3 trillion in rated bonds in the insurance industry alone.

The three leading ratings firms — Moody’s, Fitch and Standard & Poor’s — have been criticized for fueling the financial crisis by assigning and maintaining high ratings on mortgage-backed securities, even as concerns about the health of the U.S. home market grew.

The big meme at the moment is the real-time web. I have a couple of points to make here, that might help understand the current state of internet. If like me you are fed up of hearing CNN reporters say "and over here on Twitter mightymouse says ….. " then read on, and hopefully this helps define your own perspective.

The broad notion of real time is that the internet is series of information snippets that can be pulled together from disparate sources across the web. By immersing yourself in this pool of information through tools such as twitter, Facebook, Posterous, Tumblr etc, you will elevate yourself to new levels of awareness and no doubt approach a zen like status! For more read the experts; Chris Messina, ReadWriteWeb | the definitive primer

This is all wrong. One thing the ‘leaders’ from silicon valley miss is that the next big thing does not replace all things that went before. How often did we read that social networks will replace blogging. To suggest that the real-time web will replace all else that went before is to suggest that conversations in coffee shops will replace universities. Perhaps my metaphor is not ideal, but you get the idea. Society requires all kinds of people and many types of approaches and interactions to move ahead.. And all those approiaches do not impact each person – each has their own approach. The proponents of real time suggest that 140 characters will replace document search online. The web will somehow gravitate from a web of documents and pages to a web of snippets.

This conversation cannot move forward without referring to the Semantic Web where the internet is a series of data that can searched, aggregated, disseminated as each person sees fit. When we think about the Semantic Web then the real time concept makes more sense as part of the larger whole.

So thats my take on real time – yes it is coming, but its not an end in and of itself, and it does not replace what went before. Actually it might replace what went before for those with attention deficit but I won’t go there

A related point is how the masses are smarter than the individual. The fallacy of the Wisdom of Crowds is pointed out here in new research addressed by Sarah Perez at ReadWriteWeb. Where is the Wisdom of crowds

This is something we all know intuitively. She refers to Wikipedia, Amazon, IMdb, Digg and BookCrossing. The conclusion is simple and frankly intuitive. The majority of people are lurkers and browsers. The contributors are a very small group, 1% in the case of Wikipedia. Jimmy Wales refers to them as the Wikipedia community. This is not necessarily a bad thing. The notion of authors and readers is as old as books. This is what makes the world work.

Back to real time web. The reason it is a misnomer, is that the real time web has two components. One is simple immediacy. Information is transmitted to all users immediately, versus the 20 minute +/- index delay with Google search or few minutes delay with RSS. The second component of real time is the simultaneous sharing. Everyone can see the same update at the same time because everyone is in twitter all the time :-/

Scoble himself creates a list of reasons that Twitter is now part of eveyones life, and he actually argues against his own point here:

8. If you don’t read tweets for eight hours, don’t worry, all the big stuff you missed will be on TechMeme. When I was the first to talk about Yelp’s augmented reality feature on Twitter and on FriendFeed it was quickly blogged by EVERYONE and was on TechMeme within a few minutes and stayed there for about a day. The same is true of ALL news. I have not found an example yet where something important is discussed on Twitter about a tech company or tech news and doesn’t show up on TechMeme within a few hours. What doesn’t show up? Small stuff like birthdays or launches of obscure technology that only a very small audience will use.

Something to think about at a personal level – do you feel smarter because of your twitter feed? Do you every wonder what you are missing? Can we be just as smart by following a simple aggregation tool, and save ourselves a bunch of time in the meantime?

Then from a bank strategy and marketing strategy perspective, if we think through the above, the inputs to Twitter that are read by the lurkers will be represented by two components.

1. the 1%
2. marketers

Relevance to Bankwatch:
Banks should definitely not ignore the trends, and should participate in these platforms – the above does not mean anything here will disappear, merely that further evolution is inevitable, and it is essential to be part of that evolution. We are a long way from end of job in terms of defining how markets and marketing will play out here. The 1% thing is worrisome though, and is something that brings into question the validity of the social platforms for marketing purposes; the lack of widespread input will lead to consumer disaffection and lack of trust very quickly if people can see platforms being gamed by marketers.

Although on the co.uk domain only, this is a very useful new site from Google. One to save for future reference.

Google Internet Stats

This Google resource brings together the latest industry facts and insights. These have been collected from a number of third party sources covering a range of topics from macroscopic economic and media trends to how consumer behaviour and technology are changing over time.

HT to ReadWriteWeb

CapGemini have come out with their World Payments Report – 2009 [pdf 60 pages]. Lots of statistics, but the one that leapt out at me is this.

Japan stands out as a growth leader, despite being a mature economy.   Certainly their growth potential is large given the traditional consumer cash economy, but I have to look at the North American lowly 5% and wonder that lack of innovation in payments is not a driver. Certainly there remains lots of cash transactions to convert to payments but nominal innovation in the works to migrate to electronic.  The report notes that cash in circulation continues to growth in the Eurozone.

There is an interesting section reviewing the payments innovation in Asia, and a chapter devoted to summarising the state of SEPA.

World_Payments_Report_2009.pdf

It was 1 year ago Sept 15th when Lehman Brothers did the previously unthinkable, and dissolved in inglorious bankruptcy. This Reuters piece catches up with Dick Fuld who commutes from his mansion in the Rockies to Manhattan 3 or 4 times weekly for expensive lunches and some consulting work.

With the combined $310 million package and sale of Manhattan spot for $25 million he is managing. The observation of ex Lehmans emoloyee is illustrative of his approach though.

Google Earth

Fuld says being “dumped on” for Lehman failure | Reuters

Lawrence McCarthy, who was head of distressed bond trading at Lehman and works for Rafferty Capital now, told Reuters he quit after warning, several times, that the real estate market was living on borrowed time and that Lehman was becoming too leveraged.

“Other than six or seven people, no one really knew him. It was like he was in his own world on the 31st floor,” McCarthy said of Fuld. “He was never in touch with the troops. In my four years there, he never came down to the trading floor. Not once.”

Researched by Nobuyo Henderson

The G20 Finance Ministers meeting in London concluded some new principles for Bank supervision, that follows the predictable path we have been seeing. Here is a summary from BIS, and some additional analysis from Financial Times.

The key points that will drive banks to seek additional efficiences to compensate, are raised capital and liquidity requirements. Another key one is #4, the countercyclical buffer; in other words during good times put money away for a rainy day. These changes in particular will constrain new investment in lending and in anything that does not drive higher profits.

In any event this will require a serious strategy review, and again, this does not sound like a return to business as usual.

Comprehensive response to the global banking crisis | BIS

The Central Bank Governors and Heads of Supervision reached agreement on the following key measures to strengthen the regulation of the banking sector:

• Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.
• Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.
• Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
• Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses.
• Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.

The Committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.

Here is a clear review of the current state of ATM fraud in Europe. It summarises the methods in some detail (refer below) as well as the overview of chip cards impact on fraud, and those countries that are not fully EMV compliant yet.

EU agency ‘alarmed’ by rise in cash machine fraud | Finextra

In April 2009, a 33-year-old Microsoft employee, who lives in New York City, stopped in the closest Chase bank to get some cash to pay his barber. When he inserted his ATM card in the machine, he noticed a bit of resistance. The screen said the machine was unable to read his card. So he tried again. But a second time, the machine gave him an error message.
He was about to give up and try another machine, when a thought popped into his head. He had heard about devices that fraudsters attach to the outside of card readers on ATM machines and, though it seemed unlikely, wondered if that was the source of his problem. He tried to pull on the green plastic surrounding the card slot and found that it peeled right off. Behind an extra mirror attached to the machine, he also found a hidden camera positioned right over the key pad, to capture the PIN codes as victim‘s type them in

ATM_crime.pdf

This paragraph from the report below, succinctly summarises the growth prospects for Banks, and the backdrop to planning. Again, a plan that looks like the plan for 2007 is destined to fail. This is the time for breakout product design, and a dramatic cost reduction through shift to reliance on internet and online banking for a far greater breadth of service delivery.

Global banking trends after the crisis | Deutsche Bank Research

Lean years lie ahead for US banks. Performance improvements during the last 15 years have often been due to strong lending growth and low credit losses. As private households reduce their indebtedness, revenue growth in some European countries but especially the US may remain depressed for several years. With weak loan growth and a return of higher loan losses as well as a fundamentally diminished importance of trading income and modern capital market activities such as securitisation, banks may be lacking major growth drivers.

global banking trends after the crisis