The Bankwatch

Tracking the consumer evolution of financial services

A status report on the banking crisis 3 years on and evidence of banks as financial utilities

This headline caught my attention this morning.

Three Years on, Is the Financial Crisis Over? | Yahoo Finance

Three years ago to the day, BNP Paribas, the French banking giant, suspended redemptions on three funds, marking the beginning of the credit crunch.

Sure enough it was 9th August, 2007 I posted on it and noted that the US sub prime problem was going international and pointing to deeper rooted problems with banks.

Relevance to Bankwatch:
Two sets of recent events underscore the heightened risks Banks are taking to improve profits.  Speculative investment in commodity markets amongst a few Banks earlier in the year, and now the international impacts of the US Sub Prime all suggest that some Bankers are losing sight of that primary Banking mantra – ‘know your customer’.

On the weekend there were two significant developments affecting American banks that result from the last 3 years of fallout.

US to pay big sums for Wall St tip-offs

Banks’ reports speak volumes

Much of the turnaround reported this week is down to tighter cost management, disposals and a lessening of the worst news, such as impairments. On the plus side for investors, the new business trickling in is more profitable because of the fatter margins it offers. More than one chief executive this week has bemoaned the lack of appetite for fresh loans.

The FT’s point is that the length of the 4 UK banks interim reports are over 800 pages in total.  The RBS one is 303 pages alone.  This is indicative of the focus on maintaining the governance associated with government ownership and supervision and the associated costs and time commitment for a quarterly report that is longer than many annual reports.

Relevance to Bankwatch:

Banks’ response to the crisis has really been as expected and quite defensive to date.  It has been one of continuing with branding strategies and manage costs down.  Stay below the radar and hope it all gets better.  My take back in early 2009 was that we would see a ‘great unwinding’ of debt problems in banks.  I had no idea how back then but the answer has been Quantitative Easing or central banks taking over banks loans and in the UK case taking over bank ownership in lieu.  My prediction then was:

This will effectively split the financial community into two distinct sets:

  1. financial utilities – significant operating restrictions in light of implicit and explicit government guarantees underpinning the business
  2. risk takers – not clearly defined as yet – will be dependent on regulation applicability

We have seen lots of 1. and the RBS report highlights the workings of a bank as a regulated utility.  The word ‘innovation’ appears no-where in the document.  A search for ‘new product’ shows once as a “we continue to focus on new products to diversify …etc etc”.  It is generally a stuffier than usual document and one that reads to me as written for the regulators.

There are some germs of evidence of 2. showing finally with the likes of Metro Bank and Virgin Finance springing to mind.  Less evidence in the North American market to date, and backwards progress with the demise of Wesabe.  In terms of significant players, Lending Club and Mint spring to mind as some evidence.

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Written by Colin Henderson

August 9, 2010 at 12:15

Posted in Uncategorized

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  1. […] This was posted in the CommunityLend blog in error.  If you are interested the original post is here, where I actually intended to post […]

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