Tuesday, 2 December 2014

The 2014 Arcturus Christmas Banking Quiz 

So you think you know about banking? Just for fun, test your knowledge with this quiz. If you are a regular reader of this blog and My World of Plastic, you won't have any trouble!

All the answers are given at the end of the quiz, but no peeping!

1          In Banking parlance, what do the initials NSFR stand for?        .

2          In which country was the world's oldest bank founded?

3         What was the name of the so-called ‘Crystal Methodist’, the disgraced Non-Executive Chairman of the Co-op Bank who was forced to resign his post in June 2013 after a sex and drugs scandal involving cocaine, methamphetamine, rent boys and sex in a public toilet?

4          What do the letters ATM stand for?
5          What well-known Hollywood actor played the part of disgraced banker Jordan Belford in Martin Scorsese’s movie the Wolf of Wall Street?

6          What term is used to describe the monetary practice, sometimes resorted to by central banks in times of crisis, to to kick-start a flagging economy with a cash injection?

7          One of the first acts by new Bank of England governor Mark Carney was to announce a new design for the British £10 note. Which famous novelist is to replace Charles Darwin in the design?
8          What is the connection between the carob bean and banking regulation?
9          Who is the current Managing Director of the International Monetary Fund (IMF)
10        In Three Men in a Boat by Jerome K Jerome, which one of the three friends works in a London bank?
11        In a banking context, what do the letters LCR stand for?
12        What is the Wall Street Reform and Consumer Protection Act, President Obama's financial reform bill of 2010, more commonly known as?
13        What American bargain-store chain was infamously hit by a massive data security breach on Black Friday in 2013?
14        In the classic Frank Capra Christmas movie It’s a Wonderful Life, what is the name of the family-run bank that nearly goes under, when loyal but absent-minded employee Uncle Billy manages to lose the day’s takings on the same day as the Bank Examiner turns up to look at the books?
15        And, in the same film, what are the two alternative names of the small town where the action takes place?
16        When the United Kingdom banking regulator the Financial Services Authority was disbanded following recommendations by the Vicker’s Report, what two new bodies replaced it?
17        What is the name of the central bank for the USA?
18        In Islamic Law, Muslims are forbidden to make unjust profit in trade or business. What term is used to describe this sin, often translated into English as ‘usury’?
19        Founded in 1857, it was renamed BSCH in 1999. What has this well-known financial institution been known as since 2007?

20        In 1995, which bank collapsed in a scandal involving rogue trader Nick Leeson?


1         Net Stable Funding Ratio.  A Basel Committee standard, the Net Stable Funding Ratio seeks to calculate the proportion of a bank's long term assets which should be funded by long term, stable funding

2          Italy: Monte dei Paschi di Siena
3          The Reverend Paul Flowers. In the wake of this scandal the fortunes of the Co-op bank plummeted, and when Euan Sutherland took over as the new Chairman he found a £1.5 billion hole in its finances

4          Automated Teller Machine.  Also commonly known as a cash point machine.  If  you also know that it was invented in England in the 1960s by John Shepherd-Barron, give yourself an extra pat on the back. If not, read more about it in this posting from My World of Plastic   

5          Leonardo di Caprio. Jordan Belford was a real person, a Long Island penny stockbroker who served 36 months in prison for defrauding investors in a 1990s securities scam that involved widespread corruption on Wall Street and in the corporate banking  world  

6          Quantitative Easing

7          Jane Austen.  The announcement followed weeks of protest by feminists after Elizabeth Fry was banished from the £5 note in favour of a portrait of Winston Churchill
8          We still reckon the weight and value of gold in units known as ‘carats’.  Can you guess where that word originated? Yes, that’s right, the good old Carob bean!  It played a significant role in the currency of the Roman Empire, too, where the gold coin known as the solidus was measured at 24 carobs, or around 4.5 grams.  Read this blog posting for the full story
9          Christine Lagarde, French lawyer and Union for a Popular Movement politician has held the post since 2011

10        George. From Two Men in a Boat:
George goes to sleep at a bank from ten to four each day, except Saturdays, when they wake him up and put him outside at two…

11        Liquidity Coverage Ratio; a standard set up by the Basel Committee defining how much liquidity a financial institution must hold
12        Dodd-Frank

13        Target. The retailer admitted that as many as 40 million credit card and debit card accounts may have been compromised during Black Friday weekend, making it a real-life Nightmare Before Christmas for the Target management team. Information stolen included customer names, credit or debit card number, the card’s expiration date and CVV (card verification value), and 40 million in fact turned out to be somewhat of an under-estimate           

14        Bailey Building and Loan

15        Bedford Falls and Pottersville. After Clarence the guardian angel grants George’s wish to see how things would be if he had never been born, the town falls into the evil clutches of Machiavellian business man Mr Potter, and takes on his name.

16        The Financial Conduct Authority and the Prudential Regulation Authority
17        The Federal Reserve, AKA ‘the Fed’

18        Riba. Most modern, Western-style bank accounts pay interest, which is a complete ‘no-no’ for any practicing Muslim; hence the increasing requirement for a Shari’ah-compliant alternative, often referred to as ’Islamic Banking’
19        Santander

20        Barings. From 1992, Leeson made unauthorised speculative trades that at first made large profits for Barings: £10 million, which accounted for 10% of Barings'  annual profit and earned him a bonus of £130,000. However, his luck soon ran out and he used one of Barings' error accounts to hide his losses. The account was numbered 88888 – 8 being a number considered to be very lucky in Chinese numerology.  Until its unseemly demise Barings was the oldest-established investment in the UK.

Thursday, 5 June 2014

Inclusive Capitalism and Social Inequality

Its official: the rich are getting richer and the poor are getting poorer. The number of UK millionaires has doubled in just the last two years. According to Christine Lagarde (Managing Director of the IMF, so she should know) the 85 richest people in the world, who could fit into a single London double-decker bus, control as much wealth as the poorest half of the global population, that is 3.5 billion people

Christine Lagarde
The so-called Wealth Gap is hardly ever out of the news these days, since the Credit Crunch, the Occupy Wall Street movement and Barack Obama’s re-election campaign. So I was interested to read about the conference on ‘Inclusive Capitalism’ which took place recently at the London Guildhall and Mansion House. It was a glittering occasion attended by some of the richest people in the world, hosted by the Lord Mayor of London, and with keynote speakers including HRH Prince Charles, Bank of England Governor Mark Carney, President Bill Clinton and IMF leader Christine Lagarde.

The conference was part of the Henry Jackson Initiative for Inclusive Capitalism, a ‘non-profit initiative working towards a more Inclusive Capitalism’, according to its own blurb. The concept was largely dreamed up by Lady Lynn de Rothschild: a bit ironic, you may think, since the Rothschild family is a leading light in the world of international finance and banking, and virtually a by word for huge wealth.

Since the financial downturn, 'capitalism' has become a bit of a dirty word, with financial fat-cats and bankers in the City and on Wall Street taking the blame for causing the Credit Crunch with their dubious financial dealings.  The very system that brought security and success to many in the West has brought financial ruin and social exclusion to millions, and is now associated with greed and corruption.

Speaking at the conference, Christine Lagarde said
Most recently, however, capitalism has been characterized by “excess”—in risk-taking, leverage, opacity, complexity, and compensation. It led to massive destruction of value. It has also been associated with high unemployment, rising social tensions, and growing political disillusion – all of this happening in the wake of the Great Recession.
One of the main casualties has been trust—in leaders, in institutions, in the free-market system itself. The most recent poll conducted by the Edelman Trust Barometer, for example, showed that less than a fifth of those surveyed believed that governments or business leaders would tell the truth on an important issue.
This is a wakeup call. Trust is the lifeblood of the modern business economy. Yet, in a world that is more networked than ever, trust is harder to earn and easier to lose.

Lady Rothschild also addressed the conference, and proved that she does not lack a sense humour, as she admitted that the very concept of Inclusive Capitalism sounds like an oxymoron. She also has a highly developed social conscience and worries that the Great American Dream of making good by enterprise, civic responsibility and sheer hard work regardless of social background, may now be unattainable.  Growing up in a modest New Jersey home back in the 1970s, she managed to make the dream a reality for herself. After gaining a degree from the Columbia Law School she went on to study international law at the Graduate Institute of International Studies in Geneva and became one of the most powerful and successful businesswomen in the world. She expressed regret that many now distrust capitalism and business, and said that economic inclusivity is the only way to restore that shattered trust.
I don’t want to destroy the system. I want to balance the freedom that has brought me a wonderful life with personal responsibility. That is the only way to save capitalism for the sake of a future generation of girls who have dreams.

Prince Charles, in the news recently after his controversial remarks likening President Putin to Adolf Hitler, was another keynote speaker.  Apart from that political hot potato, and for being first in line to the English throne, he is probably best known as a campaigner for environmental issues and as a generous sponsor of youth opportunity through his Prince’s Trust organisation. He drew on both of these obsessions in his address, calling for a ‘fundamental transformation of global capitalism’ to halt ‘dangerously accelerating climate change’ and also calling on businesses to invest in young people and give to charity. 

Amen to all of those fine sentiments. I have no objection to people enjoying great wealth if they have earned it for themselves in an ethical manner (OK, I realise that criterion may exclude Prince Charles, however well-meaning as he is)  especially if they have a social conscience and are responsible enough to share their good fortune with others. Capitalism has been getting a bad press in recent years, and deservedly so, what with Liborgate, the Sub-Prime mortgage crisis, PPI mis-selling and obscenely high bonuses for bankers, to name but a few. All those things are deplorable, but could we really contemplate living in a society organised along non-capitalistic lines, such as we have witnessed in Russia and China? I don't fancy it myself.  We need to stick with the system we have got, but we need to clean it up.  The big banks should take heed of what Christine Lagarde is saying: banking reform is an essential element in preventing a future financial crisis, but it is not happening quickly enough, the new regulations are not tough enough, and financial supervision is not tight enough. Lets do the right thing, and get on with it.

Tuesday, 29 April 2014

Blowin' In the Wind: Deep Trouble at t' Co-op Bank

The Co-op's Four Leaf Clover Logo
The Co-op Bank has been in deep trouble for a while now, dogged by scandal and failing to make a profit, but this spring it announced record losses of over £2.5 billion and it is now in real danger of going bust.  The bank is part of the Co-operative Group, which spans supermarkets, funeral services, insurance, travel agencies, pharmacies, and farms. This puts the tin lid on another disastrous year for the group, with notable bad publicity including the Paul Flowers ‘Crystal Methodist’ drug scandal, a £1.5 billion bail-out, and disastrous take-overs of the Britannia Building Society and the Somerfield supermarket chain.

The Co-op used to be known as a quintessentially ethical bank: back in 2008 when the rest of the financial sector was in meltdown, the Co-op was riding high.  Western capitalism was in trouble and the Co-op Bank offered a decent and principled alternative.  It self-consciously tried to cash in on the backlash of anger against fat-cat bankers with a high profile marketing campaign voiced by actor John Hannah, of ‘Four Weddings and a Funeral’ fame. Their TV advertisement of 2009 featured a boy blowing dandelion seeds into the air to be wafted on the breeze from the iconic Angel of the North across a Newcastle United football match, a busy shopping street, a fruit farm, a wind farm and a polar expedition, to pickers on a coffee plantation, all to the tune of the Bob Dylan song Blowin’ in the Wind, and winding up with the slogan “Good for Everyone”.

Its moral credentials were of course already well known and long-established. The Co-operative movement originated in a mill town in working-class Victorian Northern England.  The first Co-op store was set up in Toad Lane Rochdale, Lancashire, in 1844. The aim of the Rochdale Pioneers, as the Co-op’s founding fathers were known, was to combat the unfair and exploitative practices of shopkeepers who had virtually cornered the grocery market and were taking unfair advantage of hard-pressed factory workers, forcing them to buy food at extortionate prices.  As well as selling basic foodstuffs at a fair price, the Pioneers established the principle of the Co-op Dividend, a method for sharing the profits with its customers and members. 
Seal of the Co-operative Wholesale Society

From this modest beginning in the North of England, the Co-operative movement thrived and spread, and soon had more than 1000 branches.  The Co-op was always far more than just a retailer, however, and spawned its own political movement, known as the Co-operative Party.  This has long been affiliated with the Labour Party, sharing its aims and core values and sometimes fighting local elections on a joint ticket, notably the ‘The Feelings Mutual’ campaign of 2009.  In recent years support for Labour by the Co-op has also extended to about £18 million in low-interest loans, and a £50,000 donation. Now, in the light of the adverse publicity and increasing aura of scandal surrounding the Co-op, the Labour Party is at pains to distance itself from the troubled retail group, starting with moving its loans to another bank.

To wrap this posting up, I don’t think I can do better than quote my own words from a couple of months ago, in It's A Wonderful Life! Or at Least it Could Be..., so here it is again.

Before this scandal blew up, I would have said that if ever there was a bank with the ideal public image for blazing a trail for ethical banking, setting high standards and implementing reforms, that was the Co-op. Now even that squeaky-clean reputation has been tarnished.  Where do we go now to find a bank with high standards and decent moral principles?

If ever the time was ripe for banks to work hard to regain the confidence of their customers and the respect of the media, it is now.  How could they achieve that? How about knuckling down and getting ready for Basel III ahead of schedule, for example?  By accepting the need for change, embracing Basel III, Volcker and the Vickers Report and implementing the new reforms early, banks could not only restore consumer confidence, but also equip their managers with vital tools for risk management, data control and and improved management reporting to enable them to work more efficiently. Let's do it! Let's be more like George Bailey and less like Mr Potter. Let's save the banks.


Thursday, 20 March 2014

What is Money and Where Does it Come From?

What is money?  Where does it come from? How is new money created? Innocent and simple enough questions on the surface, but in fact they are not so easy to answer. Don’t just take my word for it: lots of people far cleverer than me have had a bash at explaining it; thousands of PHDs have been earned, and millions of words have been written by economists, financial gurus and journalists. If we could only work out some definitive answers to these questions, maybe we could start making a lot more money, spread it around a bit, and finally claw our way out of the ongoing global economic recession which has been crippling most of the world for more than five years now.   

Simple Money
Life in the Twenty First Century is complicated.  We are part of a global economy, and most of us are dependent on the activity of thousands of interconnected international organisations – energy providers, food producers, manufacturers, retailers, transport companies - for our very survival.  We need money to live, we need jobs to earn money, and in order to receive our salaries we need bank accounts. We need to build a good credit history to access funding such as credit cards, loans and mortgages, just to buy the basic stuff we need to function at all in today’s world, like cars and houses.

 I recently heard about a British chap called Mark Boyle, who decided, for political and personal reasons, to try and live without using any money at all.  He started off by giving away most of his possessions and finding a way to live rent and mortgage free. His solution was to move into an old caravan in an orchard somewhere between Bristol and Bath. Now that sounds like a pretty good start to me, and preferable, say, to living in a rickety shed somewhere in the Outer Hebrides. But I digress.  From the apples in the orchard, and from fruit and vegetables he grew there, Mark was able to feed himself a basic diet, and have cider and other produce for the purpose of bartering.  When he was travelling away from the orchard he subsisted by raiding the contents of supermarket skips.

In this way he managed to survive for two whole years: an impressive achievement, I think.  Mark says he regards those two money-free years as the happiest time of his life, but I think he also realises it was an anomaly, a kind of time-out from reality and normal life.  Whilst it is possible to subsist like that when you are young, healthy and unattached, it is certainly impossible to continue indefinitely, especially if you want to acquire a spouse and children.

It was an interesting experiment, however, and sometimes I even dream of trying it out myself, especially on a warm summer’s day when the idea of living the life of a New-Age Traveller and drifting around the British Isles in a gypsy caravan seems romantic and appealing. This is just a fantasy of course, as I am sure that a single week of living in a confined space without electricity, a plumbed-in toilet or running water, in close proximity to my better half’s socks, would dispel it for ever.

So, tempting as it sounds to have a go at creating my own version of The Good Life, the harsh reality is that I am forced, like everyone else, to conform to social norms, get a job, earn a living and pay my taxes, mortgage and bills.  My entire life has been built up around the acquisition, husbandry and deployment of money.  Which brings me back to my original question: what IS this stuff called money, that apparently makes the world go round, that people lie and cheat for; kill each other for, and give up the best years of their lives to earn?

Unfortunately even senior bankers, financial experts and economists would be hard-pushed to give a definitive explanation.  In fact, they are likely to come up with an extremely complicated explanation, with lots of figures, statistics and graphs that most of us would struggle to understand.  In the past it was simpler: for most of us, money came in the form of hard cash, and was acquired on a weekly basis, in a brown-paper pay packet.  You earned it, you spent it, and when it was gone it was gone.  Simple!

Now our relationship to money is more complicated. We do not often get to see our entire monthly salary in the form of actual cash, let alone our life savings and other financial assets. We know how much money we have from figures on a bank statement, or more likely these days, just from flickering characters on a screen. The theory is that, at the end of the month our salary is transferred from our employer’s account into our personal bank account.  Obviously, no physical transfer actually occurs, it is just those elusive, flickering electronic characters on our computer screens that change. 
Complicated Money

In order for this system to function correctly, a lot of complex mechanisms need to be in place, working accurately and talking to each other.  That is a hell of a lot of technology, all in the hands of the commercial banks, a hell of a lot of assets based on trust in the financial institutions, their personnel and their technology. When you stop and think about it, there is an awful lot that can go wrong.  Just thinking about the last five years, much of this financial infrastructure HAS gone wrong already, hasn’t it?

Think about it: the sub-prime mortgage crisis in the USA, rogue traders who have managed to bring some of the longest-established banks to their knees, numerous financial mis-selling scandals, LIBORgate, computer systems that have malfunctioned and crashed, hackers and fraudsters who have broken into our accounts and into banking databases and stolen our identities and spent our life savings.  The list is endless, and yet life goes on.  We still entrust everything we have and everything we hold dear to the current financial and social system.  Because that is what money is, isn’t it? A social system based on trust.  

Most of this economics stuff is very dry and boring of course. Personally speaking, when faced with a long-winded document rammed with technical financial jargon, and worse still, lots of incomprehensible diagrams, charts and graphs, I tend to panic and break out in a cold sweat. So I was delighted to come across a couple of interesting articles in the Bank of England’s recent Quarterly Bulletin that I could actually understand.  There are two related articles, Money in the modern economy: an introduction, and Money Creation in the Modern Economy, both by Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.  At last!  The definitive answer!  OK, maybe not the last word, but two great articles well-written, jargon-free and easy to understand.  I recommend you read them for a better understanding of some economic basics, including Monetary Policy, and the roles of the Central and commercial banks.
Here is a link to the Bank Of England’s own website where the full text is available to read and download. 

I give the final word to Mark Boyle, the cash-free man. This is an excerpt from a posting by him on the Guardian’s GreenLiving blog. Talking about ecological problems including environmental destruction, sweatshops, factory farms, and wars over resources, he makes this point:-

One of the critical causes of those symptoms is the fact we no longer have to see the direct repercussions our purchases have on the people, environment and animals they affect. The degrees of separation between the consumer and the consumed have increased so much that we're completely unaware of the levels of destruction and suffering embodied in the stuff we buy. The tool that has enabled this separation is money.

Food for thought! Thanks Mark, very interesting.  

Footnote to my boss: just because I seem to have established in theory that money no longer actually exists, don't think you can get away without paying me this month.

Thursday, 30 January 2014

Animal Spirits, Wolves, and a Nasty Stench

Years have passed since the credit crunch of 2007-2008. In the intervening years we have witnessed multi-million dollar bailouts, an anti-bank media storm, and widespread public distrust and anger against the banking community. Politicians have vowed that they will not allow anything like this to ever happen again.  So here we are at the start of 2014, and what practical steps have been taken, what laws have been passed?  Have we done enough to stop a future credit crunch? Some of the new measures include:-

  • Basel III is gradually being rolled out worldwide, albeit with a lot of backing down and back-pedalling
  • In the USA Dodd Frank has forced banks to increase their capital holdings, and the Volcker Rule (preventing banks making risky trades with customer deposits) has been adopted
  • In the UK the Vicker’s Report and the Financial Services (Banking Reform) Bill are overhauling the banking regulatory structure, bringing in ring fencing and larger capital buffers
  • Higher levels of compensation for private depositors have been introduced (from 31,700 to 85,000 per person)
  • It is now easier for customers to switch accounts from bank to bank
  • Restrictions on bankers bonuses have been introduced
 Speaking at the World Economic Forum in Davos recently, Barclays boss Antony Jenkins said he thought that although a lot of useful work had been done, and banking regulation was now much tighter, another crisis is still possible.  He raised the interesting and alarming theory that although the current generation of bankers have learned their lesson, it could all happen again when they retire! Perish the thought!  “We will have another problem like this when all the people like us who carry the scars of this have retired or died,” he said. “What we need to do is find a way to box in the animal spirits through profound change.”

Animal spirits? That epithet  is probably way too kind for the type of arrogance, selfishness and greed that has made banks so unpopular. In spite of all the new controls that have been put in place and all the efforts that have been made to reform the banks, it is obvious that bankers are still profoundly distrusted.  Without even trying very hard to find an ‘I-hate-bankers story’, a quick look at the news media over the last few days brought up these few classics.

 For example, Singapore-based British banker Anton Casey created a storm of outraged indignation after making ill-judged online social media postings in which he joked he would have to "wash the stench of public transport" off himself during a period of separation from his normal mode of transport, a Porsche.  Mr Casey, who is married to an ex-Miss Singapore, also published a picture of his young son using Singaporean public transport, along with the caption: "Daddy, where is your car and who are all these poor people?"

He received death threats and faces disciplinary action from his employers, the wealth management firm Crossinvest.  Mr Casey has apologised to the people of Singapore, and a Crossinvest spokesman has stated that his boorish behaviour contravened their code of conduct, but the incident just reinforces the public perception of bankers being a greedy arrogant bunch.  Not exactly the good impression the WEF was hoping to project at its Davos bash.

This story broke at the same time as Martin Scorsese’s film The Wolf of Wall Street hit our screens.  This black comedy was inspired by the real-life story of disgraced banker Jordan Belford, a  high-living, womanising, cocaine-snorting Wall Street broker who served 22 months in jail for securities fraud.  OK, this is a film and an entertainment, but it serves to highlight and perpetuate the bad public image, at a time when the banking industry is desperately in need of some good publicity.

Where are all the positive role models for bankers? Look at my previous posting on this blog, It’s a Wonderful Life: what we need is a George Bailey for the 21st Century. Who will step up to the plate?  How about Mark Carney, the dashing new Bank of England Governor?  Antony Jenkins?  How about the Co-op Bank for a good example of an ethical bank?  Oh no, I forgot about  Paul Flowers. Help me out here readers, I am struggling!

Tuesday, 17 December 2013

It's A Wonderful Life! Or at Least it Could Be...

It is now a full five years since the Credit Crunch, when the global banking system was just a whisker away from total collapse.  In the USA the first sign of what was to come occurred when the housing bubble burst.  Sky-high house prices, fuelled by reckless ‘sub-prime’ mortgage lending, eventually crashed, causing lenders to foreclose on over a million hapless home owners. In the UK we witnessed the dramatic downfall of Northern Rock, and the dismal spectacle of worried depositors queuing round the block to withdraw their funds. This was a classic example of a run on a bank, and the only one I can think of in recent times.

James Stewart Facing a Banking Crisis

To understand what a run on a bank truly means, you could do a lot worse than sit down and watch that classic Frank Capra movie It’s a Wonderful Life.  After all, it is nearly Christmas!  In this film, the family-run building society of Bailey Building and Loan, nearly goes under thanks to the absent-mindedness of long-serving employee Uncle Billy.  On his way to the bank to deposit a substantial amount of cash, Uncle Billy meets up with the Machiavellian Mr Potter, gets distracted, and manages to lose the cash.  Unfortunately this happens on the self-same day that a bank examiner arrives in Bedford Falls to carry out a routine financial audit at the Building and Loan.  Word gets out that the company is in trouble, and frantic investors mob the bank to withdraw their cash.

In It’s a Wonderful Life there is a guardian angel on hand to sort things out, and in a climactic, heart-warming scene the Building and Loan company is saved by the generosity of the local townspeople, who all like and respect the owner of the company, George Bailey, and who chip in to help him out.  In the real world of the 2008 financial crisis, there was no guardian angel and the resolution was not quite so joyful: global economic meltdown was only averted by governmental intervention and the bailout to the big banks with billions of dollars of taxpayers’ money. Check out this link for a list of the big name banks, and how much bailout money they received.

Not surprisingly, bankers have been somewhat unpopular ever since then. Nobody wants a repeat performance of the crisis and the bailouts, and financial regulators around the world have been busy trying to sort out the mess. In the US, the Volcker Report recommendations have just been approved by  the Federal Reserve and the Federal Deposit Insurance Corporation,  and enthusiastically endorsed by Barack Obama.  In Europe the regulatory framework known as Basel III  is in the process of being rolled out, along with other, separate national initiatives such as the UK government’s Vickers Report.

So everybody’s savings should be a lot safer now, right? The truth is, it’s still very hard to be optimistic about the state of our banks.  Since 2008 we have had the fallout from Liborgate, the PPI mis-selling scandal, and lately the record £28 million fine imposed on Lloyds TSB  for ‘serious failings’ around their staff bonus scheme, to name but a few.  Even the good old Co-operative Bank has fallen from grace. Previously a by-word for ethical banking, the Co-op has gone through its own crisis in recent months.  

First, following a massive annual loss in the year to December 2012, we saw its value plummet when it was downgraded to ‘junk’ status by ratings agency Moody’s.  Now it has been rocked by a sex-and-drugs scandal involving ex-chairman Paul Flowers, a Methodist minister.  How on earth did this character contrive to become a pillar of his local church, and then get put in charge of  a respected institution like the Co-op Bank?  You really couldn’t make it up! 
Rallying round to save the Building and Loan

Before this scandal blew up, I would have said that if ever there was a bank with the ideal public image for blazing a trail for ethical banking, setting high standards and implementing reforms, that was the Co-op. Now even that squeaky-clean reputation has  been tarnished.  Where do we go now to find a bank with high standards and decent moral principles? 

If ever the time was ripe for banks to work hard to regain the confidence of their customers and the respect of the media, it is now.  How could they achieve that? How about knuckling down and getting ready for Basel III ahead of schedule, for example?  By accepting the need for change, embracing Basel III, Volcker and the Vickers Report and implementing the new reforms early, banks could not only restore consumer confidence, but also equip their managers with vital tools for risk management, data control and and improved management reporting to enable them to work more efficiently. Let's do it! Let's be more like George Bailey and less like Mr Potter. Let's save the banks.

Thursday, 7 November 2013

Basel III and the Credit Landscape

Financial regulation has been with us for a  long long time.  Basel III is just the latest development in a tradition of financial services rules which can trace its history back to the fifteenth century, when The Great Council of Geneva was created.  By 1713 the Great Council was already formulating laws requiring bankers to keep financial records and maintain client confidentiality. 
The Credit Landscape: Looking Bleak

Today, in the face of the ongoing global financial crisis and rapidly developing technological advances, the world of banking is changing too. Back in 1974, following the collapse of the Herstatt bank, there was a serious crisis in the international currency and banking market, and the G-10 responded by setting up the Basel Committee.  Its first meeting took place in 1975 and it continues to meet on a regular basis to discuss national supervisory arrangements for banks, and to promote international understanding and the quality of banking supervision worldwide. 

The original regulatory guidelines developed by the Basel Committee in 1988, known as the Basel Accord or Basel I, caused a lot of work for the banks, and took a long time to come on-stream.  Since then global financial innovations and changes in the practice of risk management led to a more comprehensive set of guidelines known as Basel II.  Many countries are still in the process of addressing the challenges of Basel II and still sorting out the changes in working practices and banking systems required to achieve Basel II compliance.

Meanwhile the financial crisis of the early twenty first century has led to yet more guidelines and regulation, in the form of Basel III, which was developed between 2010 and 2011.  The core of Basel III is a standard on bank capital adequacy, stress testing and market liquidity risk.  The Committee acknowledges that in an uncertain world there are likely to be future economic crises, or ‘future global shocks', but aims to improve the ability of the global financial community to absorb such shocks by ensuring there is an adequate financial buffer in place. 

The new rules are not due to come fully into effect until 2019, but they are already making an impact. Ratings agency Fitch has just published a new study assessing the effects of Basel III on the European Systemically Important Banks (SIBS).   Fitch's study, called 'Basel III: Shifting the Credit Landscape'  is interesting in that it attempts to quantify the effects of banks' Basel III preparations on credit flows and lending patterns. 

The report notes that Basel III appears to be influencing the big banks in three main areas: capital management, exposure allocation and credit strategies. It describes these changes as a ‘shifting landscape’ affecting a huge range of asset classes, sectors and financial markets traditionally intermediated by banks.  Most of these changes are entirely predictable, but there is a warning of some unexpected and less desirable side-effects, such as ‘reductions in credit availability or market liquidity’.

An interesting report, but these findings will come as no surprise to any would-be first-time house buyer struggling to get a mortgage, or a small business unable to obtain funding for expansion.  Of course the intention of Basel III is not to make the banking and credit system grind to a halt, but to prevent any further crises and bail-outs occurring in the future, and hopefully it will be successful.

As the banking community struggles to come to terms with the new regulations and to achieve Basel III compliance, life carries on.   The new compliancy rules are just one part of a complex global financial picture which includes the Euro zone crisis, and a near economic collapse in the United States.  Will Basel III be the complete answer to the current crisis and to any possible future regulatory issues?  I very much doubt it!  Watch out for Basel IV.

Footnote: Some more information about Fitch (from their website)

For 100 years, Fitch Ratings has been making the future a little more predictable through independent and prospective credit ratings, commentary and research. …Fitch Group is a global leader in financial information services with operations in more than 30 countries.

The full text of the study is available at www.fitchratings.com