It has been a huge few weeks in banking. Among the many things that have happened was the publication of the report from the Parliamentary Commission on Banking Standards on 19 June. Called ‘Changing banking for good’, it clearly has major implications for the ifs if it is implemented in full (unlikely I would guess) or in part (likely). It calls for the replacement of the current Approved Persons Regime, focusing the scheme covering senior people on fewer individuals, but placing much more targeted responsibility on them. Matched to this would be a much broader licencing system than is currently practiced. Whatever form this takes, it will require more people to understand their responsibilities and that could have implications for the ifs.
In general the report, as we have seen consistently from politicians and central bankers, places blame on the mechanism of banking and wants greater protections put in place to stop banks from creating asset price bubbles. The role of politicians and central bankers in creating the monetary environment in which three bubbles took place within a decade (the dotcom bubble followed by the housing debt bubble and the Eurozone debt bubble) is only partially acknowledged – actually hardly acknowledged. There is always a strong emphasis on the failure of institutions and individuals elsewhere and little acknowledgement of what we actually know about the working of the economy and dire management of it which we saw during, what appeared to be the halcyon days of overblown markets and uncontained borrowing.
The report strongly pushes the idea that the new global regulatory environment, Basel III, sets solvency standards which are too low. Specifically, while we have in the past calculated bank capital requirements as a proportion of “risk weighted” assets, Basel III requires banks to have a minimum 3% leverage ratio. This is a un-risk weighted measure of absolute assets to capital. The Commission is asking for the UK to have a much higher ratio – meaning of course suppression of bank lending and a reduction in the ability to grow money velocity. This is an example of one set of policy tinkerers asking for rules which will work in direct conflict with other tinkerers who wish to see money supply increase not decrease.
Also, it is notable that two of the MPs on the panel are backed by the Co-operative movement. The leverage ratio and its implications for co-ops and mutuals should be thought about, as while the Commission calls for much greater levels of competition and extols the benefits of different ownership mechanisms (they call it diversity, and ignores much of the evidence from Europe about the poor governance of such structures), their call for improved leverage ratio will make alternative providers’ lives more difficult (see below).
Bad few weeks for banking sector “diversity”
Well, we have discussed the difficulties the Co-operative Bank has had in a number of issues. On the 25th S&P, the rating agency, put it bluntly. Marking down Co-op, it said that in the previous month the Co-op had come within a whisker of failing and that the holding company had only just managed to stave off collapse through a £1bn capital injection plan and shaking down the junior bond holders for £500m. S&P also pointed out that in the future, state backing for a non-systemically important bank which has little potential for contagion, could in fact be allowed to fail. Well, maybe technically yes, but politically it would be a nightmare.
Less worryingly, but still important, Nationwide is smarting because the Basel III leverage ratio (see above), is going to be applied and the Bank of England is pushing banks to get ready for this early. Traditionally, mortgage lending has always had a generous treatment in risk weighting, primarily because the loans are backed by the houses themselves. Of course, this has made the housing market too attractive on occasion with bubbles developing.
The Bank of England’s Prudential Regulatory Authority have recently completed a review of bank capital adequacy, including looking at bank leverage ratios. Barclays and Nationwide Building Society seem to have fallen short on this measure and have to come up with plans to rectify the short fall (other banks have fallen short on the risk-weighted traditional measures). There seems little direct concern here; both banks can deal with the issue. However, it is interesting to hear a building society arguing the cause of more sophisticated risk measurement as the way to assess capital requirements as it is more than covered on a risk weighted basis.
It all adds to the general dampener on banks’ ability to lend, although conversely the UK banking industry will be stronger.
BUT the biggest thing in banking this week has to be….
The Anglo Irish Bank Tapes
It is a spectacular performance. When the CEO of a commercial bank starts telling his treasurer to get all the deposits he can from Germany and to exploit the deposit guarantee offered by the Irish government before anyone realises the real mess that exists, and when challenged starts singing the German national anthem, we are in a world more reminiscent of the foreign exchange trading room (or “cage”) than the boardroom of a commercial bank.
So, while I have huge doubts about the economic implications of the ‘Changing banking for good’ report, I do feel there should be real consequences for any UK bank leader who acted with the same contempt for their customers, counterparties, institution, industry and tax payers as the leaders of Ireland’s Anglo Irish…though the tapes are huge amounts of fun.