Anyone that works in banking, as I do, has been on tenterhooks over what the Independent Banking Commission would report from its interim recommendations. And, well, now we know.
There are over 200 pages in today’s IBC report but the main outcome seems to be the suggestion that banks should ringfence its retail operations (mortgages, current accounts) from the supposed ‘casino’ operations of investment management (the part of the bank that gets people a decent return on their pension).
I have had a few scattershot thoughts about this result and I just thought I’d throw them out there:
– The main priority at the moment, and presumably into the future, is to get banks lending again to boost the economy and boost employment. This suggestion of effectively splitting banks within banks will require separate pillars of capital structures and consequently achieves the exact opposite. With more money going towards capitalising ringfenced areas and a bank’s inability to use deposits on one side to fund loans on the other, the cost of funding will increase significantly. That cost will be passed on to a bank’s customers and begs the question – who wins?
– The Scottish Government did away with ringfencing in 2007 as it allowed greater flexibility and greater efficiency. If that logic applies for public spending, why should not apply for banking entities?
– I can’t help but wonder how many of the people who jeer that banks are too big have their mortgage/loans with RBS or LBG or Barclays. The quickest and cleanest way to realign a market is to pick a favourite and reward it with consumer power. That link doesn’t seem to be coming through at the moment, going by the apparent level of disgust at certain banks.
– From some of the rhetoric coming from Danny Alexander today, I am concerned at who is leading who. The Lib Dems do seem to be trying to leverage public ill-feeling towards banks, irrespective of the level of understanding that is tacked onto that ill-feeling. The strategy seems to be: ‘banks don’t like these proposals, the public doesn’t like banks, therefore we will support the proposals, irrespective of what they mean’. A dangerous game but thankfully, speaking of capital, Danny Alexander and Vince Cable don’t have much political capital left.
Yes, bonuses are too high and yes, the bluff on bank’s threats to leave the UK should be called; but we need many, well capitalised, strong banks filled with technically-minded, professional people who, yes, can command higher salaries. Unless we ditch Capitalism altogether which even in a leftie’s wildest dreams is unlikely to happen. You’d struggle to find anyone volunteering to be an accountant in a Communist state.
For me, banks will no longer be ‘too big to fail’ if we simply have more of them and we are already moving in that direction. Lloyds has to create and sell a bank under EU rules, Santander is an aggressive new entrant to the UK market, so too is Metro Bank, the Swedish Handelsbanken is quietly going from strength to strength, Edinburgh-based Tesco and Virgin seem to be gaining a foothold and mutuals, the Co-ops and Airdrie banks are always options too.
So ringfencing within banks? All things considered, I’m not yet convinced the advantages outweigh the disadvantages.
#1 by Douglas McLellan on April 11, 2011 - 10:06 am
Interesting post Jeff, even with the dig at the Lib Dems,
1. Agree on lending. My understanding of this, based on my limited time working in corporate banking several years ago, is that it is not the savings/loans that need to be in separate pillars but the retail/commercial activities need to be separate from the capital market activities. Can each pillar have different capital structures and therefore the loans to businesses be easier and quicker to be recapitalised?
2. Ring-fencing risk for the banks is different from removing ring-fenced spending. The banks have shown to be poor at managing risk so need to ring-fence it from peoples savings. I would argue that councils have failed to spend effectively since being given a free hand.
3. I have a Co-op Bank account but my mortgage is HBOS as that was the best deal. But then I dont hate bankers per se so I go for the best product.
4. Your point caller?
The only advantages that needs to be sought from these proposals is that risk is better managed and that people savings are protected. This can then excuse the taxpayer from rescuing any bank that vastly over extends themselves.
#2 by Aidan Skinner on April 11, 2011 - 10:06 am
I agree the cost of funding for the investment side will go up, but when Vickers is talking about “investment/wholesale banking” it’s explicitly not about SMEs (4.53, p77). It’s conceivable that because of the increase in perceived stability of the wholesale/retail side their funding costs might actually fall.
It might increase the cost of funding for loans for large corporations, but I’m not overly concerned about that since they can typically access the bond market directly and it would put a more permanent stop to highly leveraged private equity buyouts.
I’m disappointed Vickers doesn’t do more on incentive structures or OTC derivatives but I’ve only partially digested it and it may not have been in scope. Don’t get me started on Dark Markets… 😉
#3 by Jeff on April 11, 2011 - 1:30 pm
Good points Aidan, it wasn’t very clear to me what or who would be affected by the “investment/wholesale banking”. Do the JP Morgans have much of a retail arm? Do LBG/RBS have much of an IM arm? It’s not really that clear. However, extra costs for funding tend to get considered at a group level and then recharged out across an institution as a whole. So an indirect impact on SME business should be expected, fairly or unfairly. Further to that, the costs involved in splitting up systems and back-office support between ‘banks within banks’ would have its costs spread across a bank as a whole which, again, would impact on the simple objective of getting lending out to businesses.
Never heard of ‘dark markets’, sounds a bit Harry Potter to me…
#4 by Aidan Skinner on April 11, 2011 - 4:12 pm
JP Morgan has a massive retail arm in the US (even before it acquired Washington Mutual and a few other bits and pieces in the crises) and does some high net worth stuff here but is mostly investment banking, prop trading and credit in the UK. It was one of the earlier proponents of the universal bank model since the repeal of Glass-Steagal in 1999 made possible the mergers of the pure-IB JP Morgan with pure-retail Bank One and Chase Manhattan.
Lloyds is slowly shutting down it’s investment arm, but it was large enough to have lost ~£40bn in 2008-2010. RBS lost ~£60bn in the same period. That’s pretty substantial exposure, approximately 4x of Lloyds current market cap and, err, 30x RBSs.
Dark Markets are used to hide market operations that might have a significant impact on price: http://en.wikipedia.org/wiki/Dark_liquidity
#5 by Jeff on April 11, 2011 - 7:23 pm
Nice, thanks. All news to me and I, er, work at one of the mentioned institutions.
#6 by Allan on April 11, 2011 - 8:50 pm
A few thoughts.
1) Yes, the banks do need to begin to lend again, not in a haphazzard way but to the sober businesses that they were lending to and here happy to lend to up untill 2008. However the problem within the banking sector was not the linking of the retail banking with the “casino” banking but that the banks were poorly regulated. To date, there is no indication that these regulations will be tightened up.
2) I think people go where they think the best product is, and where they think they are treated properly. banking with RBS doesn’t stop me critisising them. The critisism of Barclays shouldn’t be that they are too big, but prehaps that their size has got them out of situations that smaller banks failed to avoid. For example they were borrowing from the Bank of Last Resort in 2007, yet Northern Rock was the bank that was reported to be recieving loans.
3) “Lib Dems do seem to be trying to leverage public ill-feeling towards banks” – yet they are not really doing anything towards regulating the banks. It’s the same tactic as with tax avoidance – they claim that they are closing loopholes yet the last budget gave a covert thumbs up to tax avoidance – the 5.75% tax on overseas treasury operations.