The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘economy

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

Tagged with , ,

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

Posted in Uncategorized

Tagged with ,

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

Tagged with , , ,

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

Tagged with , ,

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

Posted in Uncategorized

Tagged with , ,

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 , ,

Plan for Sound Banking – Conservative White Paper | analysis


Here is more on the Tory plan for banking outlined in the attached White Paper [57 pages]. Politics aside, lets take a look at the merits of this proposal and how it aligns with the problems I have perceived within banking and that are exacerbated over the last 2 years.

The core issues I have seen are these:

  • banks have become high dividend paying conduits due to protective regulation and tight association with Central Banks
  • the regulatory protection produced a ‘cannot fail’ mentality about banks’ and ..
  • this in turn resulted in no perceived need for a strong capital base, which …
  • gave us excessive leverage on all bank balance sheets, and that ….
  • leaves banks unable to withstand any economic hiccups, requiring …
  • government to in effect nationalise the large banks, in order to…
  • protect the economies of G8 countries from failing

Result: We are moving to an era of zombie banks otherwise known as financial utilities, leaving the question of which banks will rise above that and promote genuine innovation and better quality financial services for consumers. There are basic flaws I see in the banking business model, and observing the banking crisis has simply added validity to those – more to come on that. Meantime one of those flaws is a lack of capital retention in banks.

Banking 101 looks at retaining money for a rainy day. Banks have no money for a rainy day. Everything earned is re-invested in growth (new leverage) or paid out in dividends. Its a brilliant model in a perfect market – enough said.

Now that we have that out of the way, lets go to the Tory paper.

In the foreward we are off to a good start with this tidbit:

The crisis has also revealed that large parts of the financial sector had a free option at taxpayers’ expense. Profits were privatised during the good times, but because we cannot allow the banking system to fail, losses were socialised when things went wrong.

… and the crux of their solution

We will give the Bank of England the power to regulate the pay structures, riskiness, complexity and size of financial institutions, and require those with structures that put financial stability at risk to hold large amounts of capital as an insurance policy to protect the taxpayer. We will abolish the Financial Services Authority, and will create instead a strong new Consumer Protection Agency.

But then some things have a reek of political motivation and untintended consequences in this statement  ..

We will empower the Bank of England to use capital requirements to crack down on risky bonus structures. From the banks’ point of view this will effectively introduce a ‘tax’ on risky bonus structures that incentivise employees to seek short term profits at the expense of longer term stability.

It is really hard to see how that kind of regulation could be managed without government being owners of the bank and embedded in the governance structure.  But there is real support for Basle initiatives such as ..

We will introduce a “backstop” leverage ratio limiting how much banks can lend for a given amount of capital.

This one is awesome!

We cannot continue with a system where banks make huge profits in the good times but benefit from an implicit taxpayer guarantee when things go wrong.

And the punchline …..

If we are to minimise the chances and scale of future crises we need a policy framework that has both the analytical capacity to bring together these different factors and the corresponding powers to act decisively when risks are identified. In contrast Britain’s existing tripartite framework is confused and fragmented, with responsibilities, powers and capabilities split awkwardly between competing institutions.

This figure surprised even me … I know we have become accustomed to the word trillion, but do we really know how much money is involved here … our money!

The crisis has resulted in taxpayer support for financial institutions on an unprecedented scale. According to the IMF’s latest Global Financial Stability Report, central banks in the US, UK and eurozone have provided $9 trillion of support to the financial sector.

According to the Bank of England “total losses in financial wealth toward the end of 2009 Q1 were equivalent to around 50 per cent of the world’s GDP”.

And bearing in mind that US banks are not in good shape this comment on British banks is sobering ..

The end result was that British banks became amongst the most indebted, most leveraged in the world, with tangible assets 39 times tangible equity compared to only 17 times even in US banks.

What went wrong in our banks was therefore a reflection of fundamental imbalances that were allowed to build up throughout our economy over a decade. As George Osborne said earlier this year, “Our banking system is not separate from our economy; it is a reflection of it. Our banks hold a mirror up to the worst excesses of our society. And the unsustainable debts in our banks are a reflection of unsustainable debts in our households, our companies and our Government.”

This sentence summarises the context of the White Paper, and needs to be memorised imho:

The end result was a banking sector that was undercapitalised, dependent on unsustainable funding strategies, low on liquid assets, poorly governed by weak boards and driven by dangerously short term incentives.

The fundamental conclusion of the White Paper is that the problem is systemic and not personally accountable to the FSA staff. It is systemic because it was not physically possible for the FSA (or any of the other regulators) to aggregate and act on the range of risks that were appearing.

The senior management of the FSA have been commendably open about the failures of the tripartite structure in their own review of what went wrong. The FSA’s own report on Northern Rock stated that “some of the fundamentals of work on assessing risks in firms (notably some of the core elements related to prudential supervision, such as liquidity) have been squeezed out”.12 The problem with the existing arrangements is not the people at the FSA, many of whom are very good, but the inherent problems created by the current structure. Despite their efforts to improve the FSA’s operations since the beginning of the crisis, the FSA’s management remain limited in what can be achieved as long as the flawed tripartite structure remains in place.

In summary, Gordon Brown made five crucial errors in macroeconomic policy and financial policy as Chancellor: creating the flawed tripartite structure; removing the Bank of England’s historic role of calling time on the levels of credit and debt in the economy; removing housing costs from the inflation target; running an increasingly unsustainable fiscal policy; and consistently ignoring warnings on the risks building up throughout the financial system.

Solutions:
Moving ahead to solutions, these principles are outlined ..

There is an emerging international consensus on many of the solutions that are required to prevent a crisiof this magnitude happening again. These include:
• Increasing the quality and quantity of bank capital
• Increasing capital requirements for risky trading activities
• Introducing limits on banks’ leverage
• Improving the regulatory focus on liquidity
• Regulating risky remuneration structures

There is an interesting discussion on the “Too Big to Fail” problem. RBS is singled out with liabilities of £2.06 trillion which places it at 142% of UK GDP. This cries out systemic risk (remember Iceland)

The White Paper solution:

We will abolish the FSA and the failed tripartite system and create a strong and powerful Bank of England with the authority and powers to protect financial stability.

  • The Bank of England will be responsible for macro-prudential regulation, judging and controlling risks to the financial system as a whole. This will restore the Bank’s historic role in monitoring the overall level of credit and debt in the economy, and builds on existing Conservative proposals for a Debt Responsibility Mechanism.
  • This macro-prudential role will be carried out by a new Financial Policy Committee within the Bank, working alongside the Monetary Policy Committee, which will monitor systemic risks, operate macro-prudential regulatory tools and execute the special resolution regime for failing banks.
  • The Financial Policy Committee will include independent members in order to bring external expertise to bear on the problem of maintaining financial stability. It will include the Governor and the existing Deputy Governor for Financial Stability, who also sit on the Monetary Policy Committee, in order to ensure close coordination between monetary and financial policy.
  • The Bank will also be responsible for the micro-prudential regulation of all banks, building societies and other significant institutions, including insurance companies.
  • This micro-prudential role will be carried out by a new Financial Regulation Division of the Bank, headed by a new Deputy Governor for Financial Regulation, who will also be a member of the Financial Policy Committee.
  • The work of the Financial Regulation Division will be overseen by the Financial Policy Committee to ensure close coordination between macro-prudential and micro-prudential regulation.
  • We will create a strong new Consumer Protection Agency with responsibility for protecting consumers. This will create a new framework and culture for financial services consumer protection regulation.
  • We will simplify the system by moving responsibility for consumer credit regulation from the Office of Fair Trading to the Consumer Protection Agency, reducing the number of overlapping regulators responsible for consumer protection.

The remaining pages go into much discussion on derivatives, other countrys’ approaches and consumer protection. Thinking of innovation, there is an interesting section on new banks …

While it is obviously imperative to ensure that any new banks are sound and run by fit and proper individuals, we should look at how it might be possible to streamline the approval process in order to encourage new entrants.

Relevance to Bankwatch:
All in all, this is a thoughtful paper, with only occasional lapses into politics, but generally one that focusses on problems and solutions. There will be a hue and cry that it deals with yesterdays problems and that future crises will be different. I would argue that notwithstanding future problem types, there are obvious problems with the banking business model that requires attention while we sort out the nature of new problems we have not yet encountered.

The issue of unintended consequences is something I worry about, but this paper genuinely aims at known issues of bank leverage, regulatory fragmentation, and inadequate consumer protection. This is not a bad framework to begin.

PlanforSoundBanking.pdf

Written by Colin Henderson

July 20, 2009 at 16:01

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