One of the long-running themes of this blog is that there is something rotten in the state of British banking. This does not make it alone of course as plenty of other banking systems have similar issues. It was only yesterday I was discussing the latest details of the economic collapse in Greece which has seen her banks collapse and have to be rescued with ever more money. This gives us a clear idea of the modus operandi of the “too big to fail” strategy which is that the bankers always win. A central tenet of my argument against that philosophy is that it gives the banks no real incentive to change and so we rumble along with many of the same problems and issues which contributed to the credit crunch. My contention is that so far we have only dealt with the tip of the iceberg of the problems with our banking system.
The Payments Protection Insurance Scandal
I wish to use this as an example of how so little has changed. I would like readers to consider as I outline the scale of this issue who has been actually punished for their involvement in this? I am struggling to think of anyone at all.
For those unaware of the details this was where loan insurance (PPI or Payment Protection Insurance) was sold with a loan or overdraft by a bank. Nothing wrong with that it itself except that it was often sold to individuals who could never claim such as the self-employed and pensioners as you had to have employed income to qualify for a payout. Why did it happen? The banks received juicy commission payments for selling this insurance. To give you an idea of the scale I worked for the small business section of Lloyds TSB for a time in the early part of the last decade and was told that the commission for its overdraft protection plan could be 52% of the total premium. It made me wonder how it could ever pay out on any scale as more than half the premium was “lost” at the start. But you can also see the attraction of this for staff as the commission was a large part of how they could earn a bonus via sales targets. Also in another bad influence it led to a growth in the management structure as they placed themselves in the chain of command and took the credit and also bonuses for themselves for being responsible for such large juicy commission payments. Management saw its role as “kicking ass” so to speak if commission payments were not high enough and taking the credit when times were good. You may have spotted that this had nothing to do with a relationship with a banks customers as many were exploited and was often a shocking way of dealing with staff.
This bubble eventually burst and we now see the scale of the cost. Which magazine has estimated this week that £12.3 billion had been put aside for provisioning against the claims. As Royal Bank of Scotland or RBS have added £400 million only this morning we can make that £12.7 billion and rising. I pointed out earlier that there had been a lack of punishment for this -as after all bank management had taken the credit and bonuses in the “good times”- but actually the situation is even worse as Which points out.
At the same time, senior Lloyds executives who presided over PPI are still due to get bonuses worth hundreds of thousands of pounds early next year.
As I said at the beginning of this article there remains something rotten in the state of British banking. Even worse the large amount of provisions is unlikely to be enough as Which has calculated that even with the extra £1 billion that it has announced Lloyds provisions will run out in March at the current rate of claims. So we see another theme of this blog which is that big mistakes are admitted piecemeal which we saw for example as the Irish banking crisis unfolded. As some must know the truth there needs to be an investigation as to why it is not revealed. Otherwise we will go on with a drip drip feed of more claims at each announcement of the latest bank figures.
If we review this section we may have a brief sigh of relief and think at least that is in the past. Unfortunately I do not believe that there has been any fundamental change in the sales cultures of our banks. Staff will be put under pressure to hit sales targets which on the upside bring bonuses and on the downside help avoid the sack. This pressure is one of the main drivers of miss-selling. I do not know what the next scandal will be but with the same culture it will be along. For those who cry that better regulation will help us I would point out that the track record of the 4,500 employed by the Financial Services Authority of FSA is that they do not know either, or perhaps more worryingly that they have been willing to overlook it.
Royal Bank of Scotland
Today’s figures have confirmed again my argument that our banks are in trouble and need fundamental reform. Please remember as you read the quote from the BBC website that out banks are supposed to be in a recovery period and improving.
RBS reported a pre-tax loss of £1.26bn for the three months to 30 September, against a £2bn profit a year earlier.
According to Chief Executive Stephen Hester this is called “making progress”. Has anybody checked if he walks backwards? Mind you the BBC seems to have accepted that line.
The mis-selling and other charges overshadowed underlying progress at the bank
Apparently all losses,charges and mistakes are temporary and profits are permanent and will exist to the end of time. I have updated my financial lexicon accordingly.
Also there are serious issues with the standard of and reporting of profits and losses. if you would be kind enough to glance up and remind yourselves of what the BBC reported now see the Daily Telegraph.
Royal Bank of Scotland has reported a £1.38bn third-quarter loss
I am glad that this is clear! Also we have the issue of this below which to my mind is a clear accountancy scandal but gets little attention because it is not understood. From the RBS report.
after £1,455 million pre-tax accounting charge for improved own credit
Yes that is correct if you do better you end up with a charge and if you do worse you end up with a profit. Regular readers may recall I have discussed this form of profit manipulation before.
If we take a step back and look at the situation I am left wondering how much actual banking RBS wants to do. The journalist Ian Fraser who follows it closely has recorded various instances of it withdrawing credit from small and medium-sized businesses. Also in echoes of what happened in Japan when lending targets were set some are seeing the company lending them money change. No doubt stale or reduced loans will not be in the numbers in the entity presented to the Bank of England’s Funding for Lending scheme. You may have spotted that the Bank of England has adopted the flawed target culture here too.
If all this has made you uncomfortable there is always in Matrix terms the blue pill and this from RBS Chief Executive Stephen Hester.
The RBS restructuring programme continues to make excellent progress as we take the action needed to make the bank safer and stronger
I wonder how many of the dreadful commercial property loans RBS made have been fully accounted for.
Libor and energy market manipulation
We now know some of what went on. The London Interbank Offered Rate or LIBOR manipulation enquiries will gather pace over time. Whilst Barclays took the initial flak it was not possible for one bank to manipulate such a market on its own there had to be others. Now we see Barclays -not its year is it?- threatened with a US $470 million fine for manipulating the energy market in California.
Due to its problems in its home country of Spain and according to its latest report bad debts in Brazil too Santander is no longer expanding its lending in the UK. Will it retrench more? We have to face that possibility that a (likely) deepening of the economic crisis in Spain where there were further poor numbers today will led to Santander being less willing to lend in the UK. I have argued many times that whilst it was politically convenient at the time we let her buy too much of our banking sector. Please do not misunderstand me Spain is a friendly nation and I have no issue with a Spanish bank buying a UK one, my issue is the scale of what happened, and it made us vulnerable.
I have managed to get to this point without revealing that due to the commercial property losses not fully revealed on our banks and likely derivatives losses that I think that they could easily be insolvent. Adding this to the list of problems above shows the scale of the problem that we face I think especially as there is little or no sign of a genuine change of culture. I gave my views as to what we should do just over a year ago in the article linked too below.
But as 2012 has developed let me give you a signal I have seen which has confirmed me in my view and hurt many of you in your pockets.
Co-operative Bank, Halifax and Clydesdale and Yorkshire Banks and Santander and Bank of Ireland and Royal Bank of Scotland
They have all raised standard variable mortgage rates this year on what are essentially captive customers. Interesting in a period where we keep being told interest-rates are low and in fact the official description of the ZIRP strategy is Zero Interest Rate Policy. How do you get to zero by raising them?