The Bankwatch

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.

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.

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

1. Changing finance and capital conditions
2. The decline of trust in business and markets
3. A less benign macroeconomic environment
4. Social and demographic change
5. Sustainability and resource issues
6. Technology trends

The Business Response

1. Capital and investment
2. Workforce
3. Organisation and location
4. 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.

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

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?

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):

1. 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.
2. 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.

1. 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.

turner discussion paper oct 09 dp09_04.pdf