Showing posts from April, 2013

Turning back the clock? The future of retail banking

In my last post , I commented that there is a fundamental problem with retail bank profitability about which regulators unwisely appear totally unconcerned. Various people have suggested that I am therefore calling for looser regulation. That is a misunderstanding. The issue runs far deeper. Really it calls into question the future of banking as we know it.  Many people would like to return to a supposed “golden age” of banking, when banks were small and local and bank managers were respected pillars of the community with real power to make lending decisions. And I understand their nostalgia. In some ways they are right. We need to restore trust in banking. But should we - or could we - turn back the clock? Retail banking began to change in the 1960s with the advent of non-bank lenders and development of money markets.  The UK’s banking cartel was ended in 1971 to level the playing field for banks and non-banks, encouraging competition to give a better deal for customers.  T

The profitability problem

The Co-Operative bank has pulled out of its proposed purchase of Lloyds branches, citing the bad economy and tougher regulatory requirements for banks. Various people have suggested that this said more about the Co-Op itself than anything else: "bad economy and tough regulation" easily translates into "business is weak and we are short of capital". Indeed they are. In February this year, the Co-Op shamefacedly admitted to a £1bn black hole in their capital . But Robert Peston points out that the Verde branches would actually be better capitalised than the Co-Op's own, and the deal would therefore have improved their overall capitalisation. So what is going on? The regulatory environment for banks is indeed tough and becoming tougher. The Prudential Regulatory Authority is determined to clamp down on risky activities and force banks to protect themselves and the financial system from failure through increased capital buffers and liquidity reserves. And the Fin

The real meaning of Fitch's downgrade

The credit ratings agency Fitch has downgraded the UK's sovereign debt by one notch to AA+ from AAA. This was not unexpected: the UK has been on "negative watch" for some time and was downgraded by Moody's not long ago. However, the terms of the downgrade are distinctly odd. Firstly, let's remind ourselves what the purpose of a credit rating is. For sovereign debt, it is supposed to give investors an indication of the risk of loss due to default. Therefore it will assess the conduct of fiscal and monetary policy in the country concerned in the light of key macroeconomic indicators. Neither the indicators themselves, such as the projected path of GDP, interest rates and debt/GDP, nor the economic policies alone are a sufficient indicator of default risk. Both are needed to give a reasonable assessment of the likelihood of sovereign default and/or debt restructuring. Credit ratings are NOT intended to give a general indication of the health of an economy. No

Reframing Reinhart & Rogoff

The economics world is aghast. Two distinguished economists, Carmen Reinhart & Kenneth Rogoff, have been shown to have produced shoddy work . I don't propose to comment on the details of the case. Suffice it to say that Reinhart & Rogoff were wounded by a paper that showed that their data was flawed. They defended themselves , and were also defended by numerous economists around the world who argued that although the data might be flawed, the economic analysis justified their conclusions. But the next day, the Rortybomb blog delivered the killer punch. Econometric analysis by Arindrajit Dube demonstrated that even with good data, the economic analysis was flawed and the conclusions unjustifiable. High public debt cannot reliably be shown to cause low growth. But low growth can reasonably reliably be shown to cause high public debt. This is a no-brainer, actually. There are two reasons for this. Firstly, public debt is normally quoted in relation to GDP. This is a ra

Bankers behaving badly

"The entire culture in bank executive management is one of irresponsibility. They play fast and loose with other people’s money, then wriggle out of accepting the consequences.  While people with this attitude remain in place at the top of banks, there will be no real change in culture.  And until the prevailing culture in banks changes, there can be no real change in banking." My analysis of the bad behaviour of bank executive management across the entire UK banking industry can be read here: Bankers behaving badly - Frances Coppola at

The extent of evil

This post is an attempt to piece together my thoughts on the role of what we might call "wrong", or "bad", human behaviour - not just things that are actually called "crime" and subject to civic penalties, but things that though not necessarily illegal, cause harm. Someone suggested to me recently that tax avoidance should be "stamped out". He wanted such severe controls on economic behaviour by firms and individuals that avoiding tax became impossible: among other things he wanted strict capital controls so that money could not flow out of the country into tax havens, and severe penalties for tax avoidant behaviour. I have used the term "avoidance" here deliberately: the narrower term "evasion" applies to practices that are actually illegal, but my correspondent was not referring to those. He meant any activity that deprived government of what he considered its rightful income. At the opposite extreme are a number of peop

Something's rotten in retail banking

The Parliamentary Commission on Banking Standards has released its report into the fall of HBOS. And it is damning. It paints a picture of HBOS as probably the worst-run bank in the UK - a poster child for how not to run a bank. Management incompetence and self-delusion, a highly aggressive and ill-thought-out expansion strategy, totally inadequate risk management and a culture that rewarded excessive risk-taking and silenced those who sought to raise concerns. It could hardly be worse. More importantly, the findings for the first time brought to light the fundamental misunderstandings of the problems in banking that have persisted, and even been encouraged, since the financial crisis. I have felt like a lonely voice pointing out that HBOS, Northern Rock and the other UK banks that failed, with the sole exception of RBS, were RETAIL banks, and that neither ring fencing nor reform of investment banking was going to deal with the problems. But it seems that in the case of HBOS, the C

Cyprus and the financing of banks

The final deal agreed to restructure the Bank of Cyprus involves the bail-in of senior bond holders and large depositors (over 100,000 Euros). What this means is that in return for the seizure of some of their money, bond holders and depositors will be provided with shares in the resolved banks. They will become part-owners of the bank. From the point of view of small depositors, this looks rather good. It ensures that their deposits are protected not only now, but in the future. I pointed out in a previous post that small deposits are only protected to the extent that their sovereign can afford them (or to the limit of the amount that can be raised from other banks): but if large deposits and senior bonds can be bailed-in, deposit insurance should always  be affordable - shouldn't it? That is, of course, assuming there are any. I shall return to that shortly. The Bank of England's Financial Policy Committee has recommended recently that banks should have more capital. Co