I could not agree more with this quote from Niall Ferguson. The problem is leverage, and securitization is nothing more than leverage that is not appropriately recorded on the balance sheet. There is no amount of regulation, bank taxes or bonus taxes that will decrease the propensity for the next crisis until that simple recognition is agreed.
"I don’t think it was really the banks’ involvement in hedge funds that were nearly as much of a problem as banks involvement in securitized MBS collateralized debt obligations."
I happen to believe in the L shaped recovery theory. Recovery will be based on a stop in the reduction of growth, and will flatline there. We will not go back to the GDP $ levels of 2007 ( a return to 2007 would require a V shaped recovery). This post from Mish summarises why, quite well.
However, the clock is ticking on many things at once: Leveraged loans, boomer retirements and subsequent downsizing, Pay Option ARMs recasts, Alt-A recasts, and last but certainly not least, a jobless recovery that ensures massive credit card defaults. Such structural problems in conjunction with changing consumer attitudes towards debt all but guarantee an L-Shaped Recession. The recession will end, but don’t count on a recovery.
Managing leverage combined with sound lending practices are essential for Banks | Wachovia failed on both
The Wachovia situation is a good example to illustrate the point I have been making insufficient capital at Banks, and their extended leverage.
Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
They are saying in effect that the $312 bn loan portfolio has significant bad debts and that Citi will absorb up to $42 Bn. If we look at the last balance sheet here, Wachovia’s capital base was $74 Bn at the last quarter. If the $42 Bn is correct, then Wachovia’s capital would be more than cut in half. If the losses are greater, then the entire capital base could be erased.
Managing leverage and sound lending practices are essential for Banks, and Wachovia is a good example of how bad lending practices combined with high leverage is a disastrous combination.
In view of the strategic and financial benefits of Internet banking, Brazilian financial institutions have aggressively pushed their online services, making Brazil one of the most developed countries in Latin America in terms of e-banking practices. In the process, they are expanding their customer base and providing opportunities for Internet service providers (ISPs) and telecoms service companies, according to a recent report by Pyramid Research, the Economist Intelligence Unit’s Internet and telecoms consultancy.
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There is a lesson here for Banks. In 2012 just over a year ago, FaceBook went public. At the time the largest doubt was FaceBooks ability to leverage advertising in the mobile space.
Since then FaceBook has turned that corner. It has done that by making mobile important.
But how did FaceBook accomplish this and how did they accomplish this in just over a year.
Facebook used to be a website translated to mobile by a tiny team, but over the last two years it’s reorganized to make every department in the company mobile-first, as revealed in two new org charts it shared today at a small press conference “Whiteboard Session” at its Menlo Park HQ.
I don’t totally understand the org charts TechCrunch shows, but the more important point is that the new organisation has focus on mobile first. This focus has led them to develop their own tools that support their scale.
The new company structure also gives Facebook the resources to build critical mobile development infrastructure. For example, Legnitto showed off xctool, a replacement for Apple’s xcodebuild that makes it easier to develop iOS and Mac products. Legnitto said “Apple’s tools are good but they’re designed for the individual developer. Their tools started to fall over at our scale” referring to its 874 million monthly mobile users and 507 million daily mobile users.
Banks have their own scale issues. They have legacy deposit and loan systems that must interact with new CRM systems then finally with branch, web and mobile platforms for customer access. This is no small feat. Hidden in that system diversity is the disconnect between branch, web and mobile. Bank system development has traditionally focussed on branch first. Gradually web has received priority but you get the picture.
In early 2000’s I was a strong advocate that we should build for web first, and let that development improvements flow into the branch. I was lone wolf on that view.
Now today I say the answer ought to be development for mobile first. Going back to the FaceBook example the key is to make development of the next platform the most important. Dedicate the resources there and share the results.
Apple are another example of this. The laptop OS is now picking up design elements from iOS. This is the perfect example of designing for customers and their needs first, but it requires internal shifts that are difficult and awkward. It will require changes that will be strongly resisted by the status quo.
The status quo will pull towards the classic Microsoft / IBM model of building once and presenting out to multiple platforms simultaneously. This approach may be logical but it is not what FaceBook with 50,000 employees did when they turned the company on a dime in 12 months. Maybe its better for the product and the clients to drive for the goal first and sort it out later.
There are lessons to be learned here.
I clearly remember my first Blackberry in 1998 +/-
There were only a few hundred out there and this was bleeding edge when a few tens of us at mbanx got one.
Email connection in your pocket. Before that I used a Psion 5c while others use Palm Pilots. Those devices were powerful but the frustration was lack of connection to the grid. There were modems being sold to work around that, but the magic of connection in your hand was not there.
The Blackberry introduced that magic. It used the pager network as a workaround to get connectivity. It was slow but the innovation was clear. Every morning I got an email with todays news from Yahoo and the potential was becoming clear. Probably most people who read this blog had a Blackberry of one type or another.
It took 8 more years and Apple introduced the iPhone.
Between 2011 when flip phones were prevalent and today smart phones have become pervasive.
Back to Blackberry and the company … what should they do. Today they basically gave up when they announced the desire to sell the company, go private and (unsaid) provide the cover from shareholder opinion to radically alter direction.
So here is my opinion. Blackberry should focus on software and forget about hardware. One of the aspects of Blackberry that only geeks will know is that they have a superb infrastructure that provides tight security. Blackberry software is installed on the email servers of all the banks and governments of the world. That software routes messages through the Blackberry infrastructure in Waterloo Ontario. This closed structure and the breadth of implementation across countries and companies is a unique point of leverage for Blackberry.
Everyone at government and large banks and corporates has two phones these days, Their Blackberry and their personal smartphone.
I say to Blackberry, forget about hardware. Blackberry should focus on software that works on iOS and Android and levers their secure infrastructure. Make it easy for companies and governments to implement the only devices that matter and lever your strength. Companies will pay for security.
The new CapGemini/ Efma World Retail Banking report is out today. This is the 3rd annual.
A link to the full report, press release and infographic can be found here. Its 40 pages and worth the study for anyone in bank channel strategy and management.
Paris, New York – April 23, 2013 – Within the next six months, ten percent of retail banking customers surveyed globally will likely leave their bank and an additional 41 percent of customers say they are unsure if they will stay or go finds the tenth annual World Retail Banking Report 2013 (WRBR 2013) released today by Capgemini and Efma. To re-build the customer-bank relationship, opportunity exists for banks to become more customer-centric by leveraging vast amounts of customer data and by further developing mobile capabilities to create more personal interactions. The cornerstone of the WRBR 2013 is its extensive customer survey and Customer Experience Index (CEI) which measures perceptions of 18,000 customers in 35 markets about the factors that matter most to them across channels, transactions and products.
The report is an interesting of assessment of banks customer experience around the world, and development of potential solutions.
The is a great definition of the problem banks face in the commoditization of their products.
Banks have historically had difficulty distinguishing
their products from one another, and in recent years the
problem has only intensified. The look and feel of basic
banking products has remained largely the same, with
very little innovation forged in terms of linking products
or developing them outside their traditional silos.
Attempts to differentiate on price too have been curtailed
in recent years due to regulatory and cost pressures that
are keeping rates universally low.
As new channels have become available, the industry has
moved in lockstep to add them, creating an environment
in which most banks have at least a presence in every one.
The sole exception may be mobile, which the industry
is currently in the process of broadly adopting. The
retail delivery ideal has evolved into being able to make
any product available through any channel at any time.
However, banks often bolted on new channels instead of
fully integrating them with existing ones.
It then goes on to speak about what interests me and the various channels and how banks can improve their customer experience there, versus what many have done and merely bolted on new channels, particularly mobile and merely presenting similar offerrings.
Where the Customer Experience Index (CEI) improved the most, credit is given to improvements in mobile and telephone. (Philippines & Portugal).
Next is the positive correlation between understaning of customer needs and customer experience.
Finally the link is made between knowing the customers needs through data and using that data to support the channels appropriately.
The focus really turns to mobile and rightly so.
The correlation between age and positive experience seen
for branch and internet banking does not hold true in the
case of mobile banking. Because they are less familiar
with the full array of mobile functionality, customers of
all ages have a lower tendency of positive experience with
mobile. In addition, increasing age appears to have little
relation with more positive outcomes in mobile as in the
other channels. In North America, for example, 34% of
older customers have positive experiences with mobile,
compared to 41% of younger ones. As banks continue to
make investments in improving their mobile capabilities,
the overall number of customers with positive experiences
associated with the channel is expected to grow.
There is determined to be a direct correlation between Customer Experience and Product Channel fit.
The report assesses the digital maturity of banks based on their finding that:
The study found that a firm’s level of digital maturity
is strongly correlated to its profitability and efficiency.
Banks rank high with 35% in the upper right quadrant. Mind you that means 65% are not there.
Interestingly the challenge facing banks is quite similar to that facing FaceBook and Google. But banks have an important asset that those two do not … customer specific data.
The next frontier for mobility is to use the mobile
platform to enhance marketing and sales. Banks already
are using mobile messages to welcome customers and
inform them of new products.
Finally the report follows through to the logical conclusion
Becoming a Customer-Centric Bank by Leveraging Data
Banks have access to more customer data than ever before and this must be more effectively
utilized for relationship-building to succeed in the future.
- Banks today have tremendous amounts of customer data available to them, but are able to
successfully leverage only a small fraction of it for delivering actionable business insights.
- Extraction and cleaning of data is as important as analyzing it to gain customer insights.
- Before technology investments are made, firms need to be more successful at defining business
objectives and aligning the necessary technology to support those goals.
The remainder of the report provides a useful discussion on the nature of data that Banks’ possess and makes the case for a more rigorous and scientific data driven strategy to support customer experience in the channels, and particularly mobile and online.
New CCPA report | Several Canadian banks drew government support (in 2009) whose value exceeded the bank’s actual value
I have written here at length about Canadian banks and how the world impression that they are industry leading in strength is at best coloured by superb behind the scenes co-operation between the banks, the government and the Bank of Canada. The biggest example I could write about was the 2008 freeze on interbank and inter institutions derivatives hastily forced on the banks in 2008.
Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.
But if you flip through the Canadian Banks search on this blog there is a general theme that Canada’s banks are not materially better capitalised than other banks in the world. And now we have the ammunition many of us knew existed but had no evidence.
Todays bombshell from the Canadian Centre for Policy Alternatives, authored by chief Economist David McDonald, provides clear evidence of the extent of Government assistance to the Canadian banks during the crisis. The amount of that assistance is $114bn. This is several times total Canadian Bank equity.
The report begins;
The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.
However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their cE Os, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.
Now some details;
CCPA Report (pdf)
The first point of interest in the report is the extent of support as a percentage of the banks’ market capitalisation. This one should be read in the context of the high leverage that banks enjoy courtesy of government support through deposit insurance and liquidity advances from the Bank of Canada on a day to day basis.
In the reports own words;
Three of Canada’s banks—ciBc, BMO, and Scotiabank—were at some point completely under water, with government support exceeding the value of the company. In March 2009, ciBc stood out for receiving support worth almost one and a half times the value of all outstanding shares. It would
have taken less money to have simply bought all the shares in CIBC instead of providing it with support.
The irony of CEO remuneration during this period is not lost on the report;
To top it off, the CEO of each of Canada’s big banks ranked among the highest paid 100 CEOs of Canada’s public companies and at the height of government support between 2008 and 2009 each CEO of each bank received raises in total compensation. For instance, Edmund Clark of TD Bank saw his overall compensation jump from $11.1 million in 2008 to $15.2 million in 2009.
The total support to Canadian banks and the surprise that CMHC was the primary conduit.
Individual bank support;
And the reports conclusion which most would support;
A healthy financial system cannot be based on massive government support for which the details remain secret. It is only through an honest and transparent examination of what occurred and how it can avoided in the future that a stronger financial system can be built, which is in everyone’s best interest.
Relevance to Bankwatch:
This is a stellar piece of work and probably the best report on the Canadian bank system of the 2008 banking crisis. Recommended reading for anyone interested in banking and how it really works. There is no magic Canadian bullet.
One of the key learning’s and outcomes of the 2008 banking crisis was the need to tighten up control over bank leverage, which in turn promotes de-leveraging and reduces rapid increases in debt. This is primarily centred in Basel 3 which curtails off-balance sheet lending, and requires debt to to be first risk adjusted and have capital held against that risk.
As with anything financial there are always unintended consequences, and those that seek to bypass the new rules. Enter JP Morgan.
JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity
Trade Finance or the financing to provide working capital for imports and exports is experiencing reduction in lending capacity as a result of Basel 3. Trade Finance accounts for trillions of dollars per annum, and will a significant revenue source for JP Morgan.
The interesting shift in this new idea is that Trade Finance would in effect be funded directly by Institutional Investors. The regulators have acknowledged the problem JP Morgan seek to solve, but are hesitant to make more than minor changes to allow banks any dispensation.
It seems to me what JP Morgan are doing is rational, and supports the idea that banks are over levered so locating additional sources of smart funding supports the target of de-risking banks. I keep going back to the idea that banks have become such broad based credit vehicles and deposit taking vehicles that some separation of high volume and high risk from regular peoples finances is a good thing.
There remains plenty of money in the world and if JP can develop new method of wholesale access to it, then that seems in keeping with the spirit of the regulation design.
Someone I know was walking through shopping malls in Washington DC last month and there were many closed stores, including a Banana Republic. That would be unheard of in Canada. The effect of the 2008 crash is still with us especially in US and parts of Europe. The target of re-building a safe banking industry is not easy and will require big adjustments.