The Bankwatch

RBC have had their student blog up for a few months now, and thought I would check back in.

About RBC p2p - Everything students need to know about money

Ever notice that bank commercials tend to have a lot of grey haired people waxing poetic about retirement? Or suits conferring with more suits about leveraging assets?

This isn’t for those people.

The posts are smart and well written. Its difficult to know how much review occurs before posting but the result is a good collection of posts varying from speaker reviews, cultural events, to basic budgetting.

The main quibble I have is the dreaded “you are leaving this site” message. It appears the lawyers won that one, but all in all a good effort.

You are now leaving this Web site.

You will be entering a third party Web site, which is not owned or
operated by Royal Bank of Canada. Although we carefully select the Web
links we place on our Web sites, the content, products and information
contained on third party Web sites are not owned or controlled by Royal
Bank of Canada. Therefore, we make no representations about, do not
endorse, and are not responsible or liable for damages relating to the
third party, its products or services, its Web site, its privacy
policies or practices, or the content of the third party Web site.

Do you wish to continue?

The blogs get a few comments, some of which are internal, and that will take time to build up momentum. Coverage in google blogsearch is evident, but gets diluted by the RBC acronym having multiple uses.

Relevance to Bankwatch:
They key for RBC has to be in their learning from use of the tools, watching comments, and listening to others speak about their blog.

There is a fascinating, though apparently esoteric debate going on in Banking circles. It is worth understanding the high level points though because it actually matters to bank employees, vendors, and bank customers.

Libor (London Interbank Offerred Rate) is set daily, and represents the rate that banks will lend money to each other on the money market. It is one means of managing liquidity for Banks. Lately this rate has been much higher than expected and than historic rates. The going assumption was that Banks were afraid to lend to each other since the credit crisis due to inadequate risk identification relative to ABCP based on sub prime US mortgages.

FT.com / Companies / Financial services - Battle-scarred bankers lapse into a hoarding habit

Some observers blame this pattern on shortcomings in the way that Libor itself is calculated. However, behind the scenes, some investors are also starting to argue that it could be time to rethink what the Libor rate is telling the market.

Until now, bank analysts have assumed that the high cost of interbank
borrowing stemmed from a sense of mutual distrust. This would suggest
that, on two occasions in the past eight months, banks have been so
nervous of counterparty risk - the danger of one’s trading partners
failing to honour their financial commitments - that they did not wish
to extend funds to each other

The level of risk identification is getting closer to resolution relative to sub prime, yet libor remains steadfastly high. This is bringing anaysts to rethink the situation, and rather than replace libor as some suggest but observe and understand what the higher rates are telling us.

… … some observers are now thinking that the interbank, or money, market
has entered a new, third, phase, one that has less to do with
counterparty risk and everything to do with the risk that any
institution could face a run on its deposits or other short-term
funding.

Thus, the problem is not that banks are paranoid about
each other, or so the argument goes; instead, banks are paranoid about
their own funding state - not least because they have seen what a lack of liquidity did to Bear Stearns.

In simple terms … Banks are concerned about their own cash holding to protect against a good old fashioned run on the Bank. By holding on to cash, they are creating a scarcity in the market, hence higher libor.

An articulate summary of this thinking from head of the ECB, noting that one instrument validates the reduction of risk, yet libor remains high.

Jean-Claude Trichet, president of the European Central Bank, …. “That
would explain the simultaneous diminishing of credit risk as seen in
the [credit derivatives] market and the [elevated] spreads between
three-month money market and overnight swaps.”

The real effect of the credit crunch on once high flying London is now becoming apparent.

Finextra: Credit crunch to cost 20,000 City jobs

As many as 20,000 City jobs will be culled over the next two years as a result of the global credit crunch, according to a report from the centre for economics and business research (CEBR) which warns that the employment downturn will be worse than during the dotcom crash.

Banks and Credit Unions are getting all green over the last two years, and it risks becoming a fad.

I was surprised to see VanCity, whom I respect using what appears to be shadow accounting to accomodate a claim of carbon neutrality.

I have to call VanCity out on this one. Using a ‘Social Audit’ they have calculated their degree of carbon usage. No problem there. In order to become carbon neutral, they have purchased ‘offsets from five alternative energy projects’. Huh?

Vancity - Carbon Offsets

Vancity carbon neutral offsets

After all of this prep work, the time came for us to actually offset our emissions for the first time. We engaged The Pembina Institute, an environmental non-profit full of top-drawer experts to source offsets for us using the criteria outlined above.

They, in turn, worked with Offsetters.ca to purchase offsets on our behalf. Pembina and Offsetters were able to source half of the offsets we required from five alternative energy projects in BC (ground source heat pump projects to be specific). They sourced the other half from Climate Care in the UK. All of the offsets were verified by a third party, and our offset purchase was audited by our social auditor.

I get the whole desire to appear carbon neutral, but lets not lose touch with reality. The organisation is carbon negative by definition. Paper, people, computers are all carbon users, and that wont change. This can be reduced, and managed. But to claim a fiction by adding something to a “carbon balance sheet” to make yourself carbon neutral is ridiculous.

Every Bank could do that same thing, and I ask … would the world be safer, and less prone to climate change?

It made no sense, and now the reality is coming through. Its impossible for a set of mortgages to be worth zero. This article also hints that the original ‘almost zero’ valuation was an out for the US Government to not appear to bailing Bear Stearns out.

FT.com / Home UK / UK - How JPMorgan was forced into climbdown

But with large investors such as Joseph Lewis, the UK-born billionaire who stood to lose hundreds of millions of dollars on his 9 per cent stake in Bear, vowing to do anything possible to engineer a higher bid, the momentum began to turn against JPMorgan.

With these two quotes taken from various press, and summarised on the always complete Canadian Banks blog, it is clear we are entering a period of signficant mistrust amongst at least two of the Banks.

Canadian Banks & Insurance Blog

Canadian Imperial Bank of Commerce is putting its stock — and the fortunes of its shareholders — at the mercy of hedge funds and other sophisticated players because of the piecemeal way the bank is disclosing its exposure to investments in U.S. subprime mortgages and other complex securities, says a Bay Street analyst.

Also not fully explained yesterday was how CIBC, whose mantra for the past couple of years has been to de-risk the bank, got enmeshed in a variety of U.S. businesses that some other financial institutions avoided. In short, what was the culture of an organization that believed it could be an active participant in a U.Smarket with some of the smarter and major U.S. players? A partial explanation was that CIBC was in the structured-credit business, a business it deemed to be “low-risk” — while some of the others weren’t.

Canadian Banks & Insurance Blog

This announcement does not give us comfort that the headline risks that plague BMO are behind it, as we believe the bank is still exposed to more writedowns and many questions remain unanswered. Outside of these headline risks, the bank is weaker than its peers in retail banking, has more exposure to low multiple wholesale earnings, and more exposure to potential calls on liquidity if the financial services system sees more liquidity contraction.

At the core of these three points, is the earlier promise and history of risk avoidance that has now turned into an apparent willingness to take extreme risks beyond that which other Banks have done. Banks have a history of risk management, and the central tenet of risk management is to not take unnecessary risk. Presumably these risks have been taken to buoy earnings that may have been otherwise lagging in traditional bank products, but those decisions do not look so good now.

There is also the point, that some of those trusts have funds invested by some of the wealthiest Canadians, and they would not be happy to lose their investment, so to a certain extent, these Banks are caught in a classic trap of whether to satisfy analysts / markets, or customers.

The good news is that Canadian Banks are generally well capitalised, and will weather the storm over time with some careful stick handling.

With the stroke of a pen, the UK Labour Government takes us back to 3rd world thinking. Alternative offers from Virgin Money, and a management group were turned down in facour of a government takeover. A sad day for business.

Northern Rock is Nationalised
Alistair Darling will today introduce emergency legislation to nationalise Northern Rock after abandoning a five-month search for a private buyer for the stricken bank.

This is a fascinating statistic, especially when we see that the income levels of the participants are 50% higher than the average.

Net Banks Gain One in Five Internet Households - 02.01.2008 - Bank Technology News Article

The survey of 1,032 Internet households found the average age of an direct-banking user is 47.8, with an average income of $99,200 a year – compared to the average online banking user who is 52.1 and earns $60,300 annually

Pertuity strikes me as something different than the others we have seen, and their ‘anchor’ product, Dare to Compare is quite revolutionary, with potential to help people a lot especially as they build out the financial actions, that result. It would also fit nicely within or alongside something like Wesabe data for example.

Our anchor product for our initial launch is Dare to Compare; a peer to peer financial comparison widget. You can try it out on our website via a quick and free registration. Users can compare themselves (around income, savings and debt) to (i) their peers in their age group around the U.S. or (ii) a group of people that they select - this group could be friends, family, co-workers; really anyone that the user wants to put into their comparison group. Social Networking is an extremely powerful phenomenon that until very recently, has not stretched into financial services. Pertuity is one of the first companies to connect social networking with financial services

This is one to watch. It is in early beta, and I would like to see it more interactive. Right now its quite linear, in design. But the concept is powerful, and with good suggestions, for planning that could be actioned, it will be a winner.

PS .. yet again, here is another example of something Banks could do … so why don’t they. Thats why the Pertuity’s of the world will succeed.

Technorati Tags: wesabe, pertuity, financial+planning

This term paper is written by Tessa Johnson, dated July 20th, 2027.  [Ed note:  2027 is now the official date for the future]

GonzoBanker - Article

This term paper outlines a historical review of the banking industry and examines the underlying causes behind the turbulent past 20 years that led up to the Financial and Wealth Services Industry Act of 2024. This act has essentially eliminated “banking” as a distinct industry in the United States.

Looking back at banking 20 years ago, it is clear that this industry became entrapped in “legacy” issues that resulted in slow action, poor risk decisions and ultimately massive consolation during a time of innovation and change in the our economy.

There were apparently three key root cause elements that got us here over the last 20 years since 2007  ….

1. Root Cause #1: A difficult quarterly profit focus
2. Root Cause #2: Widespread commoditization without strategic adjustments
3. Root Cause #3: An inability to invest and innovate 
4. Root Cause #4: A “hollowing out” of skills and knowledge

Relevance to Bankwatch:
The classic quote from this somewhat tongue in cheek piece (only slightly somewhat though) is the following, and if this makes you squirm, then go back and reread the Gonzo post veeeerrrry carefully.

Quotes from this period in business are somewhat comical as bankers
write that they aspire to be “best in class,” “high performance” and
“customer driven,” but none of the historical strategic plans seem to
include what any of these terms actually meant.

Finally, this statement sums up the future for me  [think dis-aggregated financial services; debit card provider separate from bank account, separate from mortgage balance, separate from mortgage rate risk, separate from P2P payments, separate from P2P loans, etc etc]  …

……….  highly collaborative FINANCIAL MATRIX that drives most financial services activity across the network of specialists. To think that one company attempted to control the entire financial supply chain is hard to grasp in our time.

Nice one Gonzo!