The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘economy

US deficit reaches world record levels, and rising


US deficit is now in Botswana and Russia territory in terms of record levels relative to GDP. The argument that this is not inflationary sounds to me like pushing water uphill.

$1.4 Trillion Deficit Complicates Stimulus Plans

WASHINGTON — The Obama administration said Friday that the federal budget deficit for the fiscal year that just ended was $1.4 trillion, nearly a trillion dollars greater than the year before and the largest shortfall relative to the size of the economy since 1945.

http://www.nytimes.com/2009/10/17/us/17deficit.html?_r=1&th&emc=th

Written by Colin Henderson

October 17, 2009 at 02:25

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The Economist Special Report on the World Economy coins the term ‘Gandhian Banking’


Under the heading ‘Gandhian Banking’ The Economist reveals the extent of worldwide government injection into banks at $432 billion by this spring and guaranteed bank debts at $4.65 trillion. Of perhaps even greater significance is the implicit guarantee that now exists for all banks.

By this summer 33 American banks had repaid the capital the government had injected into them. The new era of state ownership seemed to be passing almost as quickly as it had arrived. But the state still has a large stake in the financial system beyond its explicit ownership of shares. It now owns the risk of any of the bigger institutions failing. Governments will do their utmost to avoid a repeat of anything like the bankruptcy of Lehman Brothers and the ensuing chaos.

The piece is part of the Special Report on the World Economy. The broad theme of the report is one that has taken the media some time to catch up with, and that is the meaning of recovery and getting back to normal, or as they call in the ‘new normal’ and ‘normalcy’.

Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.

The reality of the new normal is that it does require significantly different planning and strategies and continuing with the pre 2008 strategies will not succeed. Again, and as noted yesterday (To Big to Fail and How Little the Concept is Misunderstood) it will be fascinating to see where the innovation in consumer banking products and channels comes from in banking.

Going back to my earlier ramblings on the future of banking lying in two camps:

  1. financial utilities
  2. innovators

… I remain even more convinced of this evolution. At the moment, the majority or all of TBTF’s (Too Big to Fail) are or will be in the financial utility category based on their fiddle while Rome is burning approach.

Written by Colin Henderson

October 5, 2009 at 22:16

Posted in Uncategorized

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Google Internet Stats


Although on the co.uk domain only, this is a very useful new site from Google. One to save for future reference.

Google Internet Stats

This Google resource brings together the latest industry facts and insights. These have been collected from a number of third party sources covering a range of topics from macroscopic economic and media trends to how consumer behaviour and technology are changing over time.

HT to ReadWriteWeb

Written by Colin Henderson

September 12, 2009 at 22:49

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Canadian Banks have a Productivity Gap relative to the US


Following up on the previous post covering the Bank of Canada’s view that Canadian Banks do not have a productivity gap [pdf 19 pages] relative to US Banks, here is the basis for that contention within a 2006 report.

The conclusion copied here in whole is in my view, woefully misleading and contradictory. It reads to me like someone with political motivations has turned facts into something that meets policy objectives. Analysis to follow.

This work examines the efficiency and productivity of Canadian and U.S. banks in three ways.

First, we compare key performance ratios and find that (i) the average Canadian bank employee produces more assets than the average U.S. bank employee, and (ii) in terms of producing net operating revenue, Canadian and U.S. bank workers are similarly productive.

Second, we investigate whether there are economies of scale in the cost functions of Canadian banks and a sample of U.S. BHCs. We find larger economies of scale for Canadian banks than for the U.S. BHCs. This suggests that Canadian banks are less efficient with regard to the scale of their operations and would have more to gain in terms of efficiency benefits from becoming larger.

Third, we measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic
best-practice institution). We find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs, and that they have moved closer to that efficient frontier over time.

Overall, these results do not suggest relative efficiency or productivity gaps in the Canadian banking industry. On the contrary, Canadian banks compare generally favourably.

Finally, as noted above, legislative and regulatory changes have benefited efficiency in Canadian financial services. This shows the importance of removing any remaining restrictions that inhibit competition and efficiency, but provide little (or no) benefit in terms of financial soundness.

Some facts from their report:

  • Expense ratio Canada – 67 cents per dollar of revenue
  • Expense ratio US – 59 cents per dollar of revenue
  • Assets per employee Canada – $6.1M
  • Assets per employee US – $4.1M
  • operating revenue per employee US/ Canada same at $0.3M

This from the report:

Our analysis indicates that the difference in the expense ratios can be currently attributed to a higher labour cost component (wages and benefits) at Canadian banks. However, this differential does not imply disparities in productivity, which concerns how much output is produced per unit of input (typically, labour).

Relevance to Bankwatch:
Translation. Bank of Canada views Canadian Banks as productive by taking the narrow view of relative employee output. However that view excludes the overall budget of banks that includes real estate, and technology. The latter points explain the overall expense disparity per dollar of revenue earned at a significant 8 cents.

In other words productivity is a measure of investment not of employees. That is the entire point of automation. This further explains the contradictory point in he Tim Lane Kingston speech that wrote off StatsCan concerns for Canadian Bank productivity.

Productivity is a measure of inputs (expenses) and outputs (revenue). Any narrower view does a disservice to the country and the Banks, covering over potential areas for concern. Banks in Canada cover a large geography with relatively small population and while internet adoption is high the related savings in real estate and technology efficiency have yet to be achieved.

Written by Colin Henderson

August 29, 2009 at 17:25

Posted in economy

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The Canadian Economy Beyond the Recession | Bank of Canada


In this talk at Kingston last Tuesday, Tim Lane, Deputy Governor Bank of Canada lays out a quite lucid view [ 9 pages] of the opportunities and challenges facing Canada in recovery.

Highlights:

  • labour productivity and output is the fundamental challenge that existed before and will continue post recession
  • the size of the working population is to decrease significantly for demographic reasons, and neither immigration nor baby boomers remaining longer in the workforce will significantly alter that prediction
  • the financial services industry is critical to Canada at 20% of the economy
  • Canadian producivity has been dropping because of insifficient investment in technology and lack of innovation. Productivity is further hampered by por re-allocation of capital and labour across industries and this is exacerbated by the recession. Think auto employees in Oshawa having to move to mining in the prairies.
  • The financial services sector productivity is described as particularly worrisome:

How productive is the Canadian financial services sector? Data from Statistics Canada point to a possibly worrisome trend. Productivity growth in this sector has declined from an average of 2.8 per cent per year in the 1990s to just over one-half per cent in this decade.

  • Lane goes on to effectivley dismiss that StatsCan assessment with based on a BofC 2006 survey. I located the referenced BoC paper, and will review that later. It is also attached below. I note it is 3 years old, and thats an odd comparison to a 2009 StatsCan survey.

That said, if we compare Canada with the United States, our own research suggests that generally, the productivity of Canadian banks compares favourably with the productivity of U.S. banks.

Relevance to Bankwatch:
All in all the main concerns are the labour market, overall productivity, the financial services sector, and potential for inflation; he counters the latter with the Banks capability for Quantitative Easing which Canada has largely not employed yet.

recovery canada aug 2009 tim lane kingston r090828e.pdf
canadian bank productivity 2006 research_1206.pdf

Written by Colin Henderson

August 29, 2009 at 16:54

Posted in economy

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The Role of Financial Services in the Economy


A debate ensues in UK and to some extent in France, on the issue whether the financial sector is an underpinning of the economy, or a destabilising factor to the economy.

The debate is quickly moving to new taxes on transactions, but its unclear to me why that would solve either side of the debate, rather than merely be passed on to customers.

City regulator seeks to deflate financial sector with global tax | FT

… … a “swollen” financial sector paying excessive salaries has grown too big for society

Written by Colin Henderson

August 26, 2009 at 19:13

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Abandoned Schools in Detroit | no sign of recovery here


I have mentioned more than a few times my belief that recovery is not a return to 2007. The new normal will create damatic shifts and new paradigms for bank planning.

Detroit gets picked on a lot …. but these pictures are not pictures of a temoorary set-back. Prepare to be disturbed. This might go some way to explain why houses in Detroit can be purchased for as little as $5K.

Abandoned Schools in Detroit

Researched by Nobuyo Henderson

Written by Colin Henderson

August 14, 2009 at 22:33

Posted in US

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Financial markets did not detect the deterioration of structural productivity trends in the early 2000s early enough


A fascinating analysis of economic conditions prior to 2007, sugesting that dropping productivity and the concurrent increase in asset prices contributed at least in part to the economic crisis, yet was not picked up by the market.

Productivity and the crisis: Revisiting the fundamentals | Vox

Most narratives of the crisis start with problems in the financial sector that then spilled over into the real economy. This column looks at the real side first and shows that labour productivity growth declined significantly in the years prior to the crisis, particularly in the US construction sector. Financial markets may have failed in that they didn’t detect the deterioration of structural productivity trends in the early 2000s.

Written by Colin Henderson

August 14, 2009 at 15:29

Posted in economy

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China continues to display economic strain that will reflect on world economy


In the ‘how is the world doing’ category, this take (from the chairman of Morgan Stanley Asia and author of ‘The Next Asia’ (Wiley), due out in September) on China is consequential for us all. The west imported cheap labour from there for the 15 years preceding 2007, and the after effect is coming home to roost. What will matter to us all, and to banks, is the relative impacts on currency values as the historic imbalances are rebalanced to a different metric.

I have to keep going back to how banks in the west redesign their products and services. The old approach will not apply. Consumers problems reflected in high personal debt were the output of the crisis, and consumer reaction in the west and in China (where they are being laid off by the millions) will be a significant part of the nature of the recovery.

I’ve been an optimist on China. But I’m starting to worry | FT

This outsized bank-directed investment stimulus leaves little doubt as to how bad it was in China in late 2008 and early 2009. An unprecedented external demand shock, stemming from rare synchronous recessions in the developed world, devastated the export-led Chinese growth machine. That triggered sackings of more than 20m migrant workers in export-intensive Guangdong province. Long fixated on social stability, Beijing moved to arrest this deterioration. The government was determined to do whatever it took to restore rapid growth.

Written by Colin Henderson

July 29, 2009 at 14:43

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Is China the next Lucent?


This is an interesting article over at Foreign Policy. It is interesting because it fits in the meme of what recovery looks like. Regular readers will by know by now I am firmly in the space that recovery will be framed by a smaller economy, and slower growth of that smaller economy.

This piece compares the Chinese economy to Lucent during the dot com bubble. Lucent were selling to dot com company’s which disappeared. China was selling to US and to a lessor extent European consumers who have … disappeared. The minor distinction is that the consumers actually still exist, but the $64K question is what we can expect from their spending patterns. So the context for the article is whether China has a manufacturing infrastrucuture that is overbuilt for what the world requires?

Of course the articles point is the impact of a China crash on the world economy. My concerns are a bit more prosaic. I assume smaller economies and lower velocity of money.

How banks should orchestrate their product design and marketing stratagy. In a chat this week with a retired senior executive from a Canadian bank Thursday, he noted an increase of 200 basis points that banks were achieving in lending to prime corporate customers. These are multi million dollar loans. Lending and liquidity are not the issue anymore. The issues are risk and attractiveness of market segments. We have seen a dramatic explosion of growth in the consumer market over the last 17 years. That bubble is gone. How should banks design their approach going forward now?

My focus here is 100% consumer, and I will leave the corporate stuff to the experts. I remain convinced costs will have to be squeezed out of the Banks’ consumer delivery model, and that means in simplistic terms, less branches and more internet.

Interesting stuff.

[UPDATE:]

From the FT this morning

Chinese steel executive beaten to death

By Richard McGregor in Beijing

Published: July 26 2009 11:51 | Last updated: July 26 2009 12:17

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The privatisation of a state steel company has been scrapped after an executive was beaten to death by workers angry at the threat to their jobs from a takeover of their firm, according to a Hong Kong rights group.

The violent riot in north-east China late last week involved up to 30,000 workers, a reminder of the ongoing sensitivity about lay-offs from state firms in industries targeted for consolidation.

Written by Colin Henderson

July 25, 2009 at 16:43

Posted in economy

Tagged with , ,

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