Depending who you bank with, you may well have received a communication from your bank about "ring fencing", a government requirement to set investment, or so called "casino" banking, at arms' length from retail banking, the everyday services that you and I use. These requirements are costing the banks quite a lot. Actually, of course, they are therefore costing us all quite a lot in lower interest rates and higher charges.
Investment banking got a bad name for causing the financial crisis. After all, Lehman Brothers went bust and that triggered the shock wave. Plausible sounding, but not necessarily wise, politicians like Vince Cable railed on about "casino banking" even though the depth of the crisis was caused in several countries, Ireland and Spain in particular, by a good old-fashioned property bubble. Arguably that was the case here as well, with Northern Rock and Halifax. Actually, I have recently read an American take on the 2008 global financial crisis which, with classic introspection, called it the "American housing crisis". A bit like calling your beauty contest Miss Universe or a national baseball competition the World Series.
So none of this had that much to do with investment banking. Yes, RBS's problems surfaced after its acquisition of the Dutch bank ABN Amro. But RBS, in a consortium with 2 other banks, high on Fred the Shred's megalomania, simply overstretched itself, paying three times book value for ABN to make sure they outbid Barclays, even though the bit they had really wanted had already been sold to someone else. And, of course, there were toxic assets. But basically the whole thing wasn't remotely worth what they paid, so the RBS balance sheet was shot and at a bad time. After all ABN, bailed out by the Dutch government, has got back on its feet and is privately owned again, something that is not even on the horizon for RBS.
Under Stephen Hester RBS made good progress towards repaying the taxpayer and returning to the private sector. But after he fell out with chancellor George Osborne over future strategy, Ross McEwen took over and did what the government wanted, retrenching to retail banking. Which, as Hester realised would happen, has just locked the shares in "under water", i.e. permanently below the price needed to repay the government loan. Good job, George.
The RBS performance won't improve dramatically. Iain Dey* explained that, while recently retail banking has outperformed investment banking, that looks like a short term blip. After all, if the Financial Services Authority finds fat margins it would conclude that customers were being ripped off and take action. Meanwhile the "fintech" revolution threatens to disrupt consumer finance with upstarts picking off profitable chunks of retail banking business off the dinosaurs. You don't need to go to bitcoin to join in this revolution. If you use Apple Pay part of what was the bank's profit margin goes to Apple.
Of course, one British bank, Barclays, declined a government bail out, stayed independent and built its investment banking operation. And is doing well. Profits in Barclays corporate and investment division soared 48% in the first quarter, driven by a boom in its bond and equity trading businesses. The way Barclays escaped a government bail out by getting finance from Abu Dhabi and Qatar, much to the annoyance of Gordon Brown and the Treasury, was controversial. The authorities here seem to have hated Barclays ever since. Barclays took the rap for the LIBOR scandal and lost its top two board members but material published since makes it seem to me that they were only trying to do what they thought the Bank of England were telling them to do, i.e. frig the numbers. The Treasury's lapdogs then stitched them up for it.
I accept that the way the loan appears to have been arranged seems dodgy - a Serious Fraud Office case against the bank was thrown out a few days ago but charges against several senior Barclays executives are still proceeding. As I understand it the Qatari loan makers are alleged to have received back handers. While not defending fraud, I can understand why Barclays were desperate to avoid a government bail out. After all, had they been bailed out by the taxpayer, they would presumably not have been allowed to pick up chunks of Lehman Brothers and would have had to scale back their investment banking like RBS. Meaning that London, the world's biggest financial centre, would now be home to precisely zero major investment banks instead of just one - Barclays, of course.
So none of this had that much to do with investment banking. Yes, RBS's problems surfaced after its acquisition of the Dutch bank ABN Amro. But RBS, in a consortium with 2 other banks, high on Fred the Shred's megalomania, simply overstretched itself, paying three times book value for ABN to make sure they outbid Barclays, even though the bit they had really wanted had already been sold to someone else. And, of course, there were toxic assets. But basically the whole thing wasn't remotely worth what they paid, so the RBS balance sheet was shot and at a bad time. After all ABN, bailed out by the Dutch government, has got back on its feet and is privately owned again, something that is not even on the horizon for RBS.
Under Stephen Hester RBS made good progress towards repaying the taxpayer and returning to the private sector. But after he fell out with chancellor George Osborne over future strategy, Ross McEwen took over and did what the government wanted, retrenching to retail banking. Which, as Hester realised would happen, has just locked the shares in "under water", i.e. permanently below the price needed to repay the government loan. Good job, George.
The RBS performance won't improve dramatically. Iain Dey* explained that, while recently retail banking has outperformed investment banking, that looks like a short term blip. After all, if the Financial Services Authority finds fat margins it would conclude that customers were being ripped off and take action. Meanwhile the "fintech" revolution threatens to disrupt consumer finance with upstarts picking off profitable chunks of retail banking business off the dinosaurs. You don't need to go to bitcoin to join in this revolution. If you use Apple Pay part of what was the bank's profit margin goes to Apple.
Of course, one British bank, Barclays, declined a government bail out, stayed independent and built its investment banking operation. And is doing well. Profits in Barclays corporate and investment division soared 48% in the first quarter, driven by a boom in its bond and equity trading businesses. The way Barclays escaped a government bail out by getting finance from Abu Dhabi and Qatar, much to the annoyance of Gordon Brown and the Treasury, was controversial. The authorities here seem to have hated Barclays ever since. Barclays took the rap for the LIBOR scandal and lost its top two board members but material published since makes it seem to me that they were only trying to do what they thought the Bank of England were telling them to do, i.e. frig the numbers. The Treasury's lapdogs then stitched them up for it.
I accept that the way the loan appears to have been arranged seems dodgy - a Serious Fraud Office case against the bank was thrown out a few days ago but charges against several senior Barclays executives are still proceeding. As I understand it the Qatari loan makers are alleged to have received back handers. While not defending fraud, I can understand why Barclays were desperate to avoid a government bail out. After all, had they been bailed out by the taxpayer, they would presumably not have been allowed to pick up chunks of Lehman Brothers and would have had to scale back their investment banking like RBS. Meaning that London, the world's biggest financial centre, would now be home to precisely zero major investment banks instead of just one - Barclays, of course.
I also accept that there has to be strong regulation of the banking system and wouldn't want the banks to take advantage of the fact that the Financial Services Compensation Scheme protects the deposits of private individuals by taking on too much risk. Or indeed, getting so exposed that there are serious risks to the country's financial stability, as happened to Iceland. After all as Iain Dey also pointed out, investment banking as a business is effectively a big bet on global growth. But, as a trading nation strong on financial services, like Dey I don't think this is a game we ought to sit out.
Dey says that the argument of recent years that retail banking has better margins seems trite. He says the short-termists appear to be those who oppose investment in "casino" banking.
Dey says that the argument of recent years that retail banking has better margins seems trite. He says the short-termists appear to be those who oppose investment in "casino" banking.
I have a simpler argument. Remember that, in a well run casino, the banker always wins!
Unfortunately for the prospects of the taxpayer getting back the investment in RBS anytime this side of never, Osborne and Cable didn't twig this simple fact.
*Iain Dey's weekly column is in Sunday Times Business, this one on 29 April 2018.
Unfortunately for the prospects of the taxpayer getting back the investment in RBS anytime this side of never, Osborne and Cable didn't twig this simple fact.
*Iain Dey's weekly column is in Sunday Times Business, this one on 29 April 2018.
I won't allow you to prod me over the 'wise' Vince Cable Phil, although you should read his book 'The Storm' as it's informative. But RBS, what a shower. I've already made 2 formal complaints about a business account and gained £100 in compensation from them but they have still not corrected their errors! They seem to be utterly shambolic, unable to process forms completed 3 times, writing to addresses of people they have been told are dead, not sending out duplicate statements etc. etc. They don't need saving so much as putting out of their abject misery.
ReplyDeleteRBS seem to be the biggest shower in a packed field. I would observe two things: highly regulated markets don't always function properly and, as RBS is owned by the taxpayer and can't go bust, the staff don't have to fear for their jobs in the way employees in private companies do, so have less incentive to perform. Having said that, the problems have all the characteristics of failure of management - I'm not trying to blame the foot solders. Anyway, if you have Cable's book I'd love to borrow it. Buying it might be a step too far!
ReplyDeleteDon't tell anyone Phil, but I'll lend you the book:-)
ReplyDelete