The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘UK

UK to eliminate cheques by 2018

In what will be a boost for payments, UK is eliminating cheques by 2018.


The UK’s major banks have voted to stop clearing cheques by 31 October 2018, bringing to an end the 350 year old payment method.

Written by Colin Henderson

December 16, 2009 at 10:50

Posted in Uncategorized

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RBS pays out 10% of equity to investment bankers

In the banking business I think we all understand the point and motivational benefit of bonuses, however this story from a Bank that is almost a Government Department (70% government owned) takes insanity to a new level, if you are a taxpayer.

The sheer size of the bonus pool of £4 billion is astounding. That represents just under 10% of the banks equity!

I mention the government ownership because while we are used to investment bankers paying out such bonuses, one would have thought that their government overseers would have insisted on that £4 billion being used to boost capital, or repay Government assistance.

Nice work if you can get it.

Royal Bank of Scotland to give huge bonuses The Times

The average employee in its high-risk investment banking arm is likely to take home £240,000, with the top 20 staff in line for payments of between £1m and £5m.

Relevance to Bankwatch:
On a slightly more serious note, when I predicted the arrival of financial utilities in financial services, I did not expect such a hands off approach from government. Surely it will be a matter of time only.

Written by Colin Henderson

October 18, 2009 at 02:37

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.

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.


Written by Colin Henderson

July 20, 2009 at 16:01

BofE Governor in the dark on banking regulation

The management of UK banking/ financial system has become highly politicised reflecting the general Browns government style. This from the meeting yesterday between Mervyn King, Governor of the Bank of England and the Commons committee.

Governor in dark on banking regulation | FT

His comments to MPs on the Commons Treasury committee flabbergasted its members. John McFall, the committee chairman, said the lack of communication at the top level between the Bank, Treasury and Financial Services Authority was unbelievable. “The tripartite authorities are a communications black holes, which is worrying.”

Written by Colin Henderson

June 25, 2009 at 10:20

Posted in UK

Tagged with ,

Lloyds moves to regain independence

This is nice to see.  Lloyds is was the most risk averse bank before the crisis.  Yet after the Government intervention and Lloyds ‘takeover’ of HBOS with all their self inflicted mortgage problems, the situation altered dramatically.

I hope Lloyds will be a survivor, and can remove government ownership.

Lloyds repays £2.3bn to UK Treasury

Lloyds Banking Group has repaid £2.3bn to the UK Treasury after strong support for its open offer and placing aimed at repaying the government’s £4bn of preference shares. Lloyds is believed to be the first major western bank to repay state equity in the round of bailouts that began last year.

Written by Colin Henderson

June 9, 2009 at 00:45

Posted in UK

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The Aftermath of Financial Crises | study

A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes.  This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.

I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift.  It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear.  The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.

All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.

The paper outlines three core results of financial crises.  This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.

No real surprises here;  Low asset values, high unemployment, and high government debt.  Click through for details (13 pages).

The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)

First, asset market collapses are deep and prolonged. Real housing price  declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Written by Colin Henderson

May 25, 2009 at 09:44

UK government, RBS, and Lloyds begin the bad asset removal process

In the first real appearance of specific moves towards the inevitable Great Unwinding RBS announce plans to reduce their balance sheet by 25%.

RBS to cut balance sheet by 25% |

Royal Bank of Scotland will this week unveil plans to shrink its balance sheet by up to a quarter over the next three to five years as Stephen Hester, chief executive, sets out a strategy to return the state-controlled bank to the private sector.

Note the timeframe of three to five years – I suspect this will be on the shorter end of that timeframe or even less than three years.  More significantly I wonder if 25% is enough.  In any event the key is that it results in assets being valued at a level that is justifiable, and realistic.

The methodology for management of this writedown is to transfer loans to some “to be described” government vehicle.  Ths involvement of the government and allowing entire loans to be transferred has risks associated with the approach.  First of all which loans will be transferred and how will RBS owners and bondholders be made to pay for the benefit of removal of those loans?

Secondly, what of the loans that remain on the RBS balance sheet?  How will they be valued, and thus what is the true equity value of the new smaller RBS.

Lastly what of the derivatives, and how to unwind them.  With a world moving to less assets and less asset value these must have far less if any basis for existence.  Note RBS is the largest bank in the world measured by Assets and note the size of the derivatives that are more than double the base amount of loans.

At the end of June, RBS’s balance sheet had swelled to almost £2,000bn, the largest of any bank in the world. Excluding matching derivatives contracts, it currently has assets of £1,000bn-£1,100bn.

Lloyds are also going to be participating and above comments apply equally.

Lloyds Banking Group, which includes HBOS, is also expected to seek cover for hundreds of billions of pounds of assets. Treasury officials will over coming days finalise the details of the scheme, which is the centrepiece of the government’s plan to kick-start lending to the economy.

Relevance to Bankwatch:

The approaches here will have to be waatched carefully and focussed on the appropriate end outcome.  That outcome should be a realistically value bank.  In the event that bank value is negative which is the real unsaid issue here, then the government may need to stand behind the despositors to avoid unprecedented bank runs and chaos, but that cannot change the goal of getting to realistically valued assets.

As the extent of the value of derivatives for each bank relative to their loan totals, the real story of unwinding the ponzi elements of the financial markets will appear and we will get closer to a smaller yet more realistic world financial market.

Written by Colin Henderson

February 22, 2009 at 22:17

Posted in Uncategorized

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