From Italy to interest rates, borrowing to branch closures, here are some of the biggest financial news stories of the month, compiled by Janet Hontoir, Academic Course Leader for ifs University College's BSc (Hons) Banking Practice & Management.
1. UK economy has deteriorated post-Brexit, while regions still claim their funding
The first significant set of data measuring the effect on business of the EU referendum have been published in IHS Markit's Purchasing Managers' Index (PMI) [PDF], a survey of more than 650 companies. The figures show that the UK economy has experienced a 'dramatic deterioration' in economic activity. Declines were experienced in both the manufacturing and service sectors, although exports rose due to the weaker pound. Further deterioration is expected in the short-term. IHS Markit says that the fall in activity is commensurate with that in the financial crisis in 2008/09, with the exception that this is a home-grown problem which could have a greater impact on the UK economy.
Daniel Wainwright of BBC News writes that one problem for a post-EU UK could be a loss of investment from EU funding. Between 2014 and 2020, the EU allocated €6.2bn to the UK under the European Regional Development Fund and European Social Fund. It is estimated that over the last 9 years, EU investment has helped around 25,000 start-ups and created 115,000 jobs. Proportionately more money has gone to less developed areas of the country, such as Cornwall, South Wales and NE England.
Leaders of local authorities and of local business groups are now seeking assurances that the EU funding will continue until the UK leaves and that the money will then be replaced in full by the UK government which, after all, will save the money it used to contribute to the EU funds.
2. UK government borrowing falls in Q2
The UK government borrowed £25.6bn in the quarter to June, which was £2.3bn less than the same period in 2015 and the lowest level since 2008. Receipts from taxes rose by 3.3%, with particular rises in stamp duty and national insurance but the gap is not closing faster because spending is not actually being cut. Reductions due to lower contributions to the EU and the lower debt servicing cost because of low interest rates were more than offset by rises in spending on welfare, especially state pensions, and in capital expenditure.
Since there is still a deficit, total public debt rose and now stands at £1.6bn, or 84% of GDP. It does not look likely that the previous Chancellor's target of limiting borrowing for the year to £55bn will be met. The figure does not reflect the impact of the vote to leave the EU since only one week of the statistical period was affected, the referendum having taken place on
3. RBS warns of the consequences of negative interest rates
The Royal Bank of Scotland, and NatWest which it owns, have sent a letter to their 1.3m business and commercial customers to say that, if Bank Rate falls to zero or becomes negative, they may have to introduce a negative interest rate on credit (positive) deposits. In other words, the bank would charge businesses for keeping money at the bank. Personal customers would not be affected but charities and community groups would, as they are classed as business clients. The Federation of Small Business, which has 170,000 members, says that this warning 'will be deeply concerning to small firms'. It has called on the other banks to state their intentions as regards their business current accounts and on the Bank of England to consider the impact of a negative Bank Rate on smaller firms. The RBS warning may be a reminder to the Bank of England of the adverse consequences of a negative interest rate. However, Governor Mark Carney has said that he does not favour a Bank Rate which is lower than 0.25% and that 'some monetary policy easing' might be required.
4. Italy's 'two lost decades'
The IMF has cut its 2017 growth forecast for Italy to 1% and does not expect the economy to return to pre-crisis levels until the mid-2020s. This is in contrast to the economies of other eurozone members which are expected by then to be 20-25% bigger than the 2008 levels. Italy's macroeconomic figures are not good. The unemployment rate is 11%, government debt is high and the banking sector is still burdened by huge bad debts and may need an injection of funds. The struggling Monte dei Paschi di Siena, Italy's third largest bank, has been told by the ECB to reduce its debt burden and it has been given until October to draw up a plan for reducing its non-performing loans. The IMF said that any recovery in the Italian economy is likely to be 'fragile and prolonged'.
5. EBA publishes the 2016 EU-wide stress test
The London-based European Banking Authority has published its 2016 EU-wide stress test of 51 banks to test their resilience to adverse economic developments by estimating how much capital each bank would use up in bad economic conditions. RBS performed poorly, with its capital levels falling by 7.5% and being left with a capital buffer of just over 8%. Barclays capital buffers would fall by 4%, leaving it with 7.3%. The informal benchmark is that a minimum of 5.5% is considered healthy. The Bank of England stated that the results for the four big UK banks are consistent with previous stress tests carried out by the Bank and show that UK banks 'have the resilience to maintain lending to the real economy, even in a macroeconomic stress scenario'.
6. Treasury Committee suggests splitting up the FCA
The House of Commons Treasury Committee has been very critical of the way that the then Financial Services Authority handled the failure of HBOS in 2008. It says that the FSA was responsible for both supervision and enforcement and that this arrangement continues in today's Financial Conduct Authority. The Committee says that this is'outdated and can be construed as unfair' and that giving the enforcement function to a separate regulator 'merits reconsideration'. This would mean setting up a new enforcement body, something which had previously been proposed by the Parliamentary Commission on Banking Standards in 2013 but later rejected. The Committee now believes that 'a separate statutory body would bolster the perception of the enforcement function's independence'. But the FCA believes that its ability to be an effective regulator would be reduced if enforcement were taken away from it
7. Lloyds to make more job cuts and branch closures
Lloyds Banking Group is to cut 3,000 jobs and close 200 more branches, on top of the 9,000 jobs and 200 branches already decided on. It says that this cost-cutting exercise is the result of changes in people's banking habits, with more people switching from branches to online and mobile banking. And it is keen to cut costs in a low interest rate climate.
Interestingly Lloyds has just announced a 100% increase in its pre-tax profit for the half year to June - £2.5bn compared to £1.2bn during the same period last year; but CE Antonio Horta-Osorio is expecting growth to slow following the UK's decision to leave the EU. But he has been quick to stress that the bank is in a 'strong position to withstand the uncertainty'.
8. National Housing Federation urges government help for rentals sector
In the wake of the uncertainty over the UK's departure from the EU, the CE of the National Housing Federation, David Orr, has joined other housing sector leaders in urging the government to divert resources from the owner occupier market to the rentals market. The £7bn set aside for financing home ownership schemes, such as government discounted starter homes and shared ownership schemes, could be used instead to finance social and affordable rented housing. The building of private houses has already been falling amid this uncertainty and Mr Orr says that giving a boost to the rentals sector will not involve any extra money but will improve the living standards and opportunities of many working people who cannot afford to buy their own home.
9. Former pensions minister calls for triple-lock pension guarantee to be scrapped
Former pensions minister Baroness Altmann has said that the triple-lock guarantee on pensions should be scrapped from 2020; this means that pensions rise annually by the highest of the rate of inflation, average earnings or 2.5%. Baroness Altmann says that the cost of this policy will become 'enormous' after 2020 (it has been promised up to that date) and the money saved if it is dropped could be used to better purpose. She says that the policy is 'totemic' but doesn't make sense and argues for a double lock where pensions would rise in line with either prices or earnings but where the 2.5% would be dropped. She argues that the 2.5% would not make sense in a period of falling prices, for example. The government has no plans to review the policy and Age UK believes that the triple lock is important because it provided older people with financial security, especially since the State Pension is the largest single source of income for most older people in the UK.
10. Rent-to-own companies criticised for selling to 'vulnerable customers'
In the BBC2 programme Victoria Derbyshire, Ed Miliband carried out an investigation into 'rent-to-own' companies, who are selling products to (among others) vulnerable customers with mental health problems and learning disabilities. The Financial Conduct Authority has regulated the sector since 2014 and says that 'if companies have reason to believe a customer has a learning disability they must take reasonable steps to assist them in making an informed decision, and decide whether it is appropriate to lend'. But Ed Miliband does not believe that the current regulation goes far enough; he wants the firms to be regulated in the same way as payday loan companies and for there to be a cap on interest and charges.