The Bankwatch

Tracking the consumer evolution of financial services

Where are the bank visionaries when we need them?

As we watch for bank stress test results in the US and other countries efforts to deal with Banks’ asset valuation and capital levels, its useful to keep a track on the economic back drop, and assess the bank’s efforts to address their real problem, which is over-valued assets.

The US stress tests specifically address the impact on banks under certain sets of future assumptions for economic growth and stability.

Spring forecasts 2009-2010 | European commission

The Commission forecasts a sharp contraction of the EU economy by 4% in 2009 (relative to a positive growth of 0.8% in 2008). Almost all EU countries are severely hit by the worsening of the financial crisis, the sharp global downturn and ongoing housing market corrections in some economies. However, with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010 (annual growth forecast for 2010 stands at -0.1%). Figures are essentially the same for the euro area as for the EU as a whole. These figures represent a significant downward revision compared to the autumn forecast and the interim forecast of January 2009.

spring-forecast-2009-publication15048_en [pdf]

So far the news is not good.  We have US, Japan, and now EU all noting significant downward adjustments to their forecast for 2009.  Magically, they all seem to agree 2010 will be just fine.  2010 aside, the consensus for the big three are 2009 GDP drops in the 4 % – 6+ % range.

Here is an extract of the baseline forecasts used by the Stress tests, contained in their methodology document for SCAP (Supervisory Capital Assessment Progam).

SCAP Economic Assumptions

The short view is that the assumptions for GDP growth in 2009 are approximately 1/3 of the latest forecasts.  Put another way 2009 is going to be 3 times worse than the forecast used in SCAP.   This is only May, so one can only assume that on a probability scale the opportunity for additional downward revisions are as possible as any other prediction at this stage.

The debate amongst BofA, Citi and the government on whether they ought to raise $5Bn in capital is ridiculous, and counterproductive.  As the economic forecasts show, the amounts required are not going to be debated in the $1 Bn range – this needs vision that produces 10’s or 100’s of billion in improvement such that the organisation can leap ahead of the economic crisis and look out 10 years, not 1 month, which seems to me to be the current landscape for banks.

Incidentally, to place $5Bn in perspective, Merrill Lynch paid out $3.6 bn in bonuses at the end of 2008.  Geithner should not even take a phone call from any bank who wishes to discuss anything thats less than $20 bn.  A debate over $5bn is ludicrous.

All this to say, that banks are stuck in a classic rat hole and surrounded.  Which bank and which leader will step up with vision for the future that carries banks on beyond 2011?

Relevance to Bankwatch:

Banks need to take a leaf out of Sergio Marchionne, Fiat chief executive’s book.  He is in Germany this morning proposing a deal that will take advantage of the current climate, and look to take advantage of infrastructure provided by Vauxhall, Chrysler, Opel and Fiat to structure an effective platform around car types that consumers actually want and need, ie smaller, cheaper and more efficient.  Already he is getting positive reaction to his plan, and these meetings only took place today (Monday).

He hopes to complete the transaction by the end of May, and list shares of the new company, tentatively called Fiat/Opel, by the end of the summer.

Mr Marchionne said Fiat and Opel would reap synergies of €1bn a year by merging their small B and midsize C segment car platforms, and absorbing Fiat’s ultra-small A platform and Opel’s upper-middle D platform.

Note the timing – he is going to do this in one month. This new conglomorate will involve hard decisions and layoffs.  This is the hard reality of the adjustment required for the new economy.  Getting through the crisis is not a return to 2007.  It is a fundamental shift to a smaller and different economy.

Where are the bank visionaries now?  Are they becoming so bogged down worrying about beaurocratic discussions with their new government masters and defending bonuses and perks that they have lost sight of the real goal?

Written by Colin Henderson

May 4, 2009 at 09:09

One Response

Subscribe to comments with RSS.

  1. […] a comment » As predicted yesterday, the amount of capital the banks need is far in excess of the amounts they were […]


Comments are closed.

%d bloggers like this: