The Bankwatch

I believe George Osborne has got it right with a refusal to accept the Euro bank fund levy (tax).  If we consider the notion of a ‘failing bank fund’ the idea arose because of the 2007 banking crisis.  One result of that crisis was that bank liquidity dried up following banks’ refusal to lend to each other.  The only solution adopted by all the western nations was to provide the necessary liquidity by purchase of bank assets for cash.  The cash was ‘printed money’ created by the central banks’.

Osborne rules out fund for failing banks | ft.com

The chancellor believes that setting up dedicated funds to protect against bank failures would create “moral hazard” and that banks paying a levy might think of the tax as an insurance fee, buying them cover in an emergency.

The amounts involved were horrendous.  In the US alone the Fed added over 1 trillion dollars to their balance sheet almost overnight in this exercise.  The Bank of England added $124 billion in reserves between Aug 2008 and today.  That proportion is roughly equivalent for the two countries based on relative GDP.

The lesson of that crisis is this.  For an individual bank to fail is less common and usually related to fraud (Barings) or bad investment decisions (LTCM).  The bank failures we see now are directly related to the causes of the banking crisis and is systemic in nature.  The lemming strategies of banks’ has meant they all participated and failed on the lending mania and asset bubble which burst in 2007.  There were differences between banks to some degree, but when the crisis occurred it affected every single bank and they were all able to survive only by the grace of government assistance. 

Banks’ operate in a quasi social contract between government (Central Banks) and citizens.  No bank or company for that matter can survive crises when equity represents less than 10% of liabilities. They do survive because people require a smoothly operating and liquid financial system.  Unless we all go back to keeping gold bars under the bed that is the system we have all accepted.

To suggest that a levy to manage failed banks can be set up is ridiculous and the Euro bureaucrats need to go back to the drawing board.  To use UK as an example you would need to tax each bank (say 5 of them) something like £20 billion each and wipe out any equity in so doing thus creating the very problem which the levy was designed to preclude.  If the government wants to tax banks to compensate for the bother and cost of propping up the banking system then that is a political call, but the notion of a fund is ridiculous.

The idea of moral hazard is that circumstances are set such that no risk is perceived, but in reality the risk is very real.  The euro fund would create real moral hazard and allow banks to create ever more crises.

A new paper from Deloitte explores the potential of banks shifting pricing methodology to bundled pricing using relationship pricing models.  It recognises the distinctions between telco’s who have long used this model and banks but feels its worth exploring. 

The next revolution in retail financial services marketing? | Deloitte

Relationship-based pricing is a system of pricing whereby the prices or products and services depend on an individual or household’s overall product and service purchases rather than being determined on a product-by-product basis (i.e., overall purchase levels do not impact individual product level pricing).

The goals of relationship pricing include:

• Attracting new customers who otherwise might not have made a purchase
• Expanding the breadth of products and services provided to existing customers
• Retaining existing customers when competitors offer similar relationship pricing programs

Relevance to Bankwatch:

Banking pricing and bank products are long overdue for a change.  The change needs to catch up with how people think and what people need in this post recession, deleveraging environment.  Options that aggregate services and enhance loyalty through use of more services ought to be a good thing.

An interesting two pager from the Bank of England in response to a freedom of information enquiry.  It includes this succinct explanation of Quantitative Easing (QE).

Where Does Money come from | BofE | FT Alphaville

Nowadays, it is central banks that have the ultimate role in creating money. They generally do so in
response to the demand for money – through both the issue of banknotes and the creation of
so-called ‘central bank reserves’ on the accounts of commercial banks (which use this money to
make payments to one another).

The demand for money is usually affected by the level of interest rates. You may be aware that the
Bank’s Monetary Policy Committee (MPC) is responsible for setting Bank Rate to meet the
Government’s inflation target of 2%, as measured by the 12-month increase in the Consumer Prices
Index (CPI). In addition, since March 2009 the Bank has been creating extra money by purchasing
assets in order to meet its inflation target. This is referred to as Quantitative Easing (QE). Under
QE, the Bank purchases assets and credits the relevant bank’s reserve account with the additional
funds. This generates an expansion in the supply of central bank money.

3396955-boe-money PDF

This from The Global Financial Crisis from the Central Bank of Chile.  The disparity that stands out is between Europe and US/ UK.  The alignment of Japan/ Germany/ France is interesting and surprising.

Source: BANCO CENTRAL DE CHILE

This is interesting.  Everyone assumes Blackberry is the gold standard for government and corporate communications.  It is hard to imagine why an iphone using 128 or 256 bit encryption would be any less secure.  I would think the main thing would be to restrict access from other apps to your emails, although that risk is identical in the blackberry when 3rd party apps are added so that risk is not permissible as an excuse 

Oh, and banks are now using iphone for online banking.

This is simply another paradigm shift that people are finally getting over.

Apple’s iPhone replaces BlackBerry for some bankers

(Reuters) – British bank Standard Chartered is replacing the BlackBerry, currently its standard corporate communications device, with the iPhone, a move that could eventually result in thousands of bankers switching to the Apple device for business communication on the go

Carol at Glenbrook earlier made the classic point that  Memo to Bankers: A Customer is Someone Who Pays You in the context of the Durbin Amendment that is designed amongst other things to make interchange fees visible to consumers.  Interchange fees are those little understood fees which banks and card companies charge each other and merchants every time you use a credit/debit card.  Interchange is very convoluted but the bottom line is that it is a relative gravy train for banks. 

The update is that Visa claim that making interchange fees visible to consumers are somehow a bid by merchants to increase profits.  Translation … Visa do not want the fees to be reduced in any way.

Visa Statement on Durbin Legislation | Payments News

“At the direction of Congress, the U.S. Government Accountability Office (GAO) has twice examined the potential impact of proposed interchange legislation, and confirmed that there is little evidence to suggest that consumers would benefit. In Australia, where price controls have been implemented, consumers have not seen a reduction in retail prices, and instead have experienced reduced consumer benefits and increased costs.

“We hope Congress sees today’s amendment for what it is – an attempt by retailers to increase their profits at the expense of consumers.”

Relevance to Bankwatch:

Whenever a change of this magnitude is considered, the large issue is always untended consequences.  In fact the Visa statement refers to the Australian situation whereby the result was “.  My take is that this would be ok.  Visibility will alert people to where the costs lie and that will in turn set about changes in consumer behaviour and the opportunity for competitive forces to apply.  There has not been time for that to occur as yet in Australia.

2010 is on a pace at least as large as 2009.

One outcome of the new Lib/Con coalition is that the FSA will survive.  The suggestion is that systemic banking risk will be a specific responsibility of the Bank of England but that individual bank monitoring will remain with the FSA.  This will be welcome news to UK banks who remain concerned about relative competition with foreign jurisdiction banks.

Osborne aide says FSA might survive | ft.com

George Osborne, the new Tory chancellor, has been forced to water down plans to hand over banking supervision to the Bank of England under a five-year coalition deal struck with the Liberal Democrats.

Tory officials admitted that the Financial Services Authority could survive the planned shake-up of banking regulation, a move that will delight many in the City who feared that Mr Osborne’s original plan would lead to serious upheaval.

It was fascinating to follow the finale of the UK election today.  David Cameron is the new PM and Gordon Brown is already back in Kircaldy.  It was also a testament to internet that I could follow the entire thing online.

What struck me was the elegance, crispness and classiness of the transition notwithstanding the underlying political rivalries and personal desires to win and one cannot help but compare to the neverending American way.  The British have been managing transitions between governments for 100’s of years.  Indeed this Queen alone, has overseen every government transition since Churchill left in 1955.

The speed with which Brown left Downing Street and visited the Queen to resign, followed by Cameron meeting the Queen and being requested to form a government and arriving as the new occupant in Downing Street, all in the space of 2 hours was a marvel to watch, yet old hat to the organisers.  Downing St cannot be left empty and there is no room for minutes, let alone months of uncomfortable transition.  Out with the old and in with the new.

What was especially telling was the genuine respect and attention to the interests of the country and the lack of rancour towards each other between the two leaders and from their deputies such as the eternally classy William Hague.  Fittingly for the times, Hague announced the final deal with the Lib Dem via twitter today. 

The culmination of the these few days since Thursdays election with the sight of what was in each case a 3 car group escorted by the police in a few minutes between Downing St and Buckingham Palace was a fitting finale to what has been a gripping election. 

Anyhow … this will mean a better economic environment and one which will produce greater stability for banks.

Increasingly it appears the financial world toppled on the edge of global crisis last Wednesday on a scale that has not been seen since September 2008 when Lehman Brothers went down.

European banks in bonds plea to ECB | ft.com

Worried bankers from 47 European groups urged the ECB to become a “buyer of last resort” of eurozone government bonds to steady markets.

There was speculation that the central bank could be preparing a €600bn ($762bn) loan facility for one-year loans at 1 per cent to help more than 1,000 banks in their funding.

What was most interesting this week was the ‘stories’ of brokers making mistakes selling billions instead of millions.  These stories are imaginary.  The real story is that the crisis that began in 2007 is still playing out and there is more to come.  The financial press are looking for external threats [edit and here] to explain perfectly rational behaviour.  The automated trading systems that exist in the big broker houses combined with black swan type events are a more likely cause.