Tony's Ten: More probes

05 November, 2013
"A never ending cycle of scandal and investigations continue. This time a rather strange one; the setting or colluding over the foreign exchange rates. Suspensions of traders at a number of banks including Barclays, JP Morgan and Citibank have taken place while investigations are on-going and the authorities are looking into the allegations. What is odd is that there are so many participants in the forex markets it seems strange that enough traders could get together to move the price away from its market determined position. It will be interesting to read what has occurred if the investigation unearths anything substantial.

Royal Bank of Scotland

We now know that RBS will not be split into a “Good” and “Bad” bank as MPs were asking for, but instead to set up a new unit within the bank to deal with the remaining bad assets. It seemed a rather belated suggestion anyway. RBS now says its bad loan portfolio now amounts to £38bn, meaning it has already offloaded nigh on £200bn, so why create “bad” bank at this stage when the team undertaking this work has made so much progress. Of course, the idea of unburdening the “good” bank would be that it would then be free to start lending at an accelerated rate. Of course, the same MPs also suggested that the shares in the “good” bank could be given for free to tax payers. That seems to miss an important point, capital, i.e. the money raised from selling shares kind of underpins the ability of the bank to lend, so an obvious thing for the government to do to offload RBS is not to just sell the shares it owns in RBS, but to issue new ones as well to repopulate RBS’ capital base.

RBS has also announced a number of other changes. It will look to finally sell Citizens, its US banking arm and is reviewing its IT and Operations unit. The latter was quite influential when RBS established a centralised “manufacturing” group providing Operations and IT services to the rest of the bank. The new management is now talking about developing operations which are more customer focused, one wonders if more P&L (Profit & Loss) and operational responsibility will be returned to the operating group (if that has not already occurred).

Ireland’s tertiary credit crunch

Denmark’s Danske Bank and Holland’s ACC (part of Rabobank) have announced their exit from the Irish market amidst a general reduction in banking activity. Annualised household lending decreased by 4.2% in September while lending to businesses declined by 4.5%. Overall from a peak of lending in Ireland of around €400bn, the total amount of bank credit now stands at about €300bn, but within that, lending to non financial businesses has halved.

Speaking of Rabobank

Rabobank is a huge Dutch co-operative bank. A few years ago it seemed that politicians and academics were crying out for corporate governance structures which moved banks away from the drive to satisfy demands for short-term shareholder value. Sadly, a number of examples of poor governance have come to light from the UK to Spain and now Holland. Rabobank’s fine for its role in the Libor scandal has been set at €1bn, two and half times that of Barclays. Dutch Finance Minister Jeroen Dijsselbloem described Rabobank's role as “shameless fraud”. The scale of the fine reflected evidence gathered by the UK’s Financial Conduct Authority (FCA) that in 2009 Rabobank took no action after a Yen rate submittor told Internal Audit that the rate submitted was the rate asked for by the traders. Rabobank had the information to act and did not. Of course, one has to remember what was happening in 2008-9, no banker would have wanted to give signals that it was in distress, and that really is hard to condemn, but that should not be the decision of traders looking to make a turn, and indeed even if done for higher purpose, we now know such manipulation is wrong and illegal."