A feature of the credit crunch era has been that the needs of the banking sector have been prioritised over the needs of the real economy. Each time they come to a choice our political establishment chooses the banks and that has led to thoughts that we now live in a type of bankocracy. This theme stretches way beyond the boundaries of the UK as for example the Euro area bailout package for Greece has been more successful in rescuing the French and German banks involved there than the Greek economy or indeed the needs of the Greek people.
Privatisation of profits and socialisation of losses
This theme has reached so far that I recall the former English cricket opening batsman Geoffrey Boycott grilling Mervyn King who was then Governor of the Bank of England at the time on Test Match Special. It was probably the sharpest bouncer Mervyn has received at a cricket ground and he did not entirely take it in good humour. But whilst we have had protestation after protestation that this phase is now over, the truth is that we have allowed the banks to become ever more entwined around our economy. The “too big to fail” problem may even have got worse.
An example of this is a proposed scheme from the President of the European Central Bank Mario Draghi. From his speech at the World Economic Forum at Davos last month via the Financial Times.
What other assets would we buy? One thing is bank loans . . . the issue for further thinking in the future is to have an asset that would capture and package bank loans in the proper way.
If we were to step back in time then no doubt we could find regulators and bank chiefs describing the need to have such a market for mortgage backed securities in the United States! What could go wrong?
Plainly the first issue is that it turned out that the ”AAA” definition rather than the implied very high quality turned out to be any old junk at times. Indeed when the Bank of England had a similar scheme it got very worried about the number of what it called “phantom securities” which it feared had been created purely for its benefit. It got so worried about this it ended the scheme early. So Euro area taxpayers will face banks packaging up their dodgy loans to make them look attractive so that their central bank will buy them. If we consider who is likely to know and understand these loans best, it is clear that the central bankers will be exposing their taxpayer backers to yet more socialisation of losses.
Meanwhile the Financial Times was very bullish on the prospects for the banks involved.
The interest from Europe’s central bank will spur the financial sector into creating a market for such assets in anticipation of potentially vast profits if the ECB were to become a large purchaser.
In many ways this looks a direct transfer of funds from the taxpayer-backed ECB to the privately-owned banks. It was only yesterday I was discussing the problems of the banking sector in Italy and the fact that due to the high size of the national debt a state rescue package does not look feasible. Instead it would appear that the Italian head of the ECB may be about to shift the same liability to a different public-sector supported balance sheet. Ironic isn’t it that a problem created by private-sector off balance sheet operations is being responded to by a type of off balance sheet operation by nations as they shuffle the risk about?
Barclays Bank
We are often told that the banks have reformed and are now on their way to being model citizens who are now adding to value in our economy. However today’s figures from Barclays Bank expose a few holes in that agenda. For example these are the profit figures.
Adjusted profit before tax was down 32% to £5,167m due to costs to achieve Transform and a 4% reduction in income.
Profits falls always come with excuses (one-off etc.) don’t they? Whereas profit rises are presented as permanent. But at least it has made one, although these days we need the caveat that making profits does not mean that banks have any money when they hit trouble! Mind you perhaps they would be in better shape if they did not do so much of this.
Total incentive awards granted increased to £2,378m (2012: £2,168m) and incentive awards in the Investment Bank increased to £1,574m (2012: £1,394m)
So an inferior performance leads to higher rewards! It all begins to sound rather familiar. This was particularly true of the investment banking sector where a fall in profits of 37% was reponded too with this.
with the average value of incentive awards granted per Investment Bank employee of £60,100 (2012: £54,500).
As we mull the way that bonuses have morphed into incentive awards, one might respond by saying that a private business can pay its staff what it likes as long as its shareholders approve. However again we hit the nub of the question as the implicit taxpayer backing was valuable to Barclays even though we did not bail it out.
If we look to the wider economy we note that some (the recipients of the incentive awards) are more equal than others. Particularly the 10,000 or so foot soldiers likely to lose their jobs in 2014. Also there is this from City AM.
The details of at least 2,000 customers were given to the Mail on Sunday by a broker who claimed another 27,000 were also for sale. -
The British establishment responds
The former editor of the Financial Times and establishment grandee Richard Lambert has entered the fray with a plan to re-establish trust in banks. Sadly for him his report has emerged at a time when establishment grandees are having a rough run of it. For example Lord Smith at the Enviroment Agency felt it appropriate to accept the business model of the Scarlet Pimpernel in response to the floods in the West Country and elsewhere. The Defence Secretary Phillip Hammond seemed to develop a type of tourette’s syndrome today when confronted by an angry flood resident as he continually repeated the phrase “Gold Commander”. Soon emergency COBRA meetings of ministers will be more common than the ordinary ones!
It is not fair to say that no work was done as here is Environment Secretary Caroline Spelman from December 2011.
Britain faces a future of water shortages, and lasting environmental damage, with some rivers running dry, unless attitudes to water use change,
If we move to the situation regarding the banks I note it was they who appointed Sir Richard Lambert which is not the best of portents to say the least. He wants reform but apparently not now.
Over time the ambition would be to encourage the development of banking as a profession, along the lines of accountancy or the law.
Ah! Over time! Mind you it is unfair to state that nobody would benefit as the main proposal below would create plenty of jobs for people like Sir Richard Lambert.
A new banking standards board is set to create a league table of lenders’ ethical behaviour and staff qualifications.
It would appear that he has fulfilled the role of kicking any chance of reform well into the long grass. Sir Humphrey Appleby would be smiling appreciatively at his London club.
Comment
A continuing theme of this blog has been that we have yet to fully reform our banking system. Indeed the official response has been along the lines of this from the formal Vickers Report into the matter.
UK banks will need to comply with the changes by 2019.
Whilst we remain in this situation our attempts at an economic recovery will be like running with a hand tied behind our backs. We will be forever in danger of stumbling over another unexpected problem. It is a long way to 2019 and who can guarantee that by then the proposals will not be furhter watered down or dropped entirely.After all this time what has really changed?
In fact the Governor of the Bank of England wants to make us ever more exposed to problems in this area.
via:http://www.mindfulmoney.co.uk/wp/shaun-richards/we-still-need-to-reform-our-banks-six-years-into-the-crisis/By 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.
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