The story of the credit crunch has been one of our banking industry. Who would have thought that more the seven years after the collapse of Northern Rock and nearly seven years after the collapse of Lehman Brothers that there would be so much doubt about the state of our banking industry? If we look back to before then we saw a UK banking sector which bestrode the world stage like a colossus with Royal Bank of Scotland (RBS) in particular making ever grander deals and becoming the largest bank in the world by assets and the fifth largest by market capitalisation. Sadly for RBS it bought a share of the ill-fated ABN Amro just in time for the crash to happen in a disastrous move and many of the spinning plates crashed to the ground. Were we fully aware then that banking life would not be the same again?
Economic life was also affected back then because in my opinion profits and economic growth were recorded which were in fact more accurately described by the band Imagination.
It’s just an illusion, illusion, illusion
Could it be that it’s just an illusion
Putting me back in all this confusion?
There were all sorts of economic impacts from this. In the banking sector there was over-recording of profits which of course subsequently turned to dust and in some cases stone but there was also over-recording of economic output. This poses a problem for knowing where we stand as the conventional analysis released on Tuesday is therefore wrong.
In Quarter 1 (Jan to Mar) 2015, GDP was estimated to have been 4.0% higher than the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008.
That peak was, in my opinion, not as high as officially recorded back then and this has other consequences. If we return to the Financial Times research on productivity that I discussed on Tuesday we see that pre credit crunch growth cam from five main areas.
professional services, manufacturing, banking, retail, and information and communication.
My contention is that much of the recorded growth in banking was based on asset inflation based on debt rather than actual growth. This no doubt would have knock-on effects for professional services and communication. Thus the present “productivity gap” can be partly explained by fact that the previous peak relied on conjuring tricks and of course the magic show then ended. As our establishment of all political hues sucked up to our banking establishment then -you can invariably find politicians bathing near the money flow- there is no appetite for proper reform and what we have in the form of the Vickers Report was like a can kicked to 2019.
Together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007.
Too little too late?
To cover up the lack of reform our establishment has twisted economic policy so that it favours the banking sector. We still have an emergency Base Rate of 0.5% and we still have some £375 billion of QE (Quantitative Easing) which the Bank of England added to try to reduce longer-term interest-rates. Ironically the latter would have fallen anyway in the dash for yield and indeed almost any yield we have seen in the last couple of years.
However even such moves were apparently not enough so we got the Funding for (Mortgage) Lending Scheme or FLS introduced by the Bank of England in July 2012. This provided a multitude of subsidies for the banking-sector.
The FLS incentivises banks to boost their lending by reducing bank funding costs
Well it did the latter bit anyway! You see in its original form they got some £41.9 billion of cheap funding in return for increasing lending by £10.3 billion. As the economy was expanding they may well have done that in the normal course of events. But by allowing them to lower mortgage-rates a boost was given to mortgage business. Also the overall effect was to drive up house prices which improved the position of the banks loan books. What was not to like if you were a bank?
So after all this help our banks should be bursting with vim and vigour. After all we have had two years of pretty solid economic growth to back up all the aid and subsidies they have been receiving.
This morning however the promised nirvana of a future of profits and gains saw yet another setback.
An attributable loss of £446 million for the first quarter of 2015
When you factor in the positive economic situation and the subsidies both explicit and implicit which have been poured into the banking arena we should not still be having disappointments. So what was the cause?
restructuring costs of £453 million and £856 million of litigation and conduct charges.
As ever our banks are pouring out money in fines for past bad behaviour. A bit much 7 years after the “reform” was supposed to have happened! An odd situation as we as taxpayers bail them out and then fine them and take money back. Would it not be better if the individuals responsible were punished for their actions? Sometimes it gets even stranger as international fines mean that in effect the United States for example is fining the UK taxpayer who owns the bank. And the responsibility of the average UK taxpayer for all of this is? The word responsibility only applies these days to individuals who are not members of the establishment.
We might think from the report that today’s numbers are a freak but if we look back we see this.
RBS reports an attributable loss of £3,470 million in 2014, compared with a loss of £8,995 million in 2013…….2012 pre-tax loss of £5,165 million, after £4,649 million
Most of these came with promises that a corner -presumably into profit – was about to be turned whereas the road has proved to be ramrod and indeed Roman straight. Back in 2013 we were told this.
Since 2009 RBS has cleaned up the world’s largest bank balance sheet by removing more than £1 trillion in assets. This was a remarkable achievement, born of absolute necessity, but delivered with exceptional skill.
You may note that bankers always refer to themselves as delivering “exceptional skill” even when they are making or correcting a mistake. The customers do not seem to agree at least in Scotland as the satisfaction ratio in today’s results is a measly 10% there and there is a lack of ambition as the target is a mere 11%. Still target achieved bonuses all round?!
If seven years of losses which total in the mid-forties an oddly similar number to the original taxpayer bailout are getting you down why not try the red pill?
Finance director Ewen Stevenson said: “Overall, we’re very pleased with progress.” (The Guardian)
Adjusted operating profit(2) was £1,634 million, up 16% from Q1 2014.
Adjusted presumably means if we do not count any losses….
If we look at the overall situation we can see that for RBS the beat goes on where promised profits turn to stone and become yet more losses. In the current favourable economic climate that is quite an anti-effort! Also there are mines in the water awaiting our banks. From Reuters.
Britain’s biggest banks face another 19 billion pounds ($29 billion) of charges relating to past misconduct over the next two years, ratings agency Standard & Poor’s (S&P) said in a report on Monday.
S&P said Britain’s banks and customer-owned lenders had incurred 48 billion pounds in misconduct and litigation charges over the past five years.
Those are extraordinary sums when you note the shortage of bankers in jail for all of this. That is a rather round number especially when we consider that vastly smaller amounts of fraud in the benefits arena do lead to prison terms. Also there was a discussion earlier this week in the comments about an economic depression, well UK banking is stuck in an economic depression and shows little or no signs of escaping.
So we plough on but with a feeling that nothing has been resolved and that Johnny Mathis was right to sing that Too Much (help) has been given to banks in return for Too Little Too Late. Or as South Park gloriously put it about money put into the banks “It’s gone”
Bank Clerk: Hello Mrs. Farnickel. How are you, today? Making a deposit, are we? Greeeat. We can just put that into your retirement account and make it go to work for you aaaaand it’s gone.
Mrs. Farnickel: Whaaat?
Bank Clerk: Sorry, yeah, it’s gone. Please step aside for people who actually have money with the bank. Next please!
Newsreader: Just how far will the economy fail? We asked economic reporter, Dan Banks, for his assessment.
[Dan pulls out a gun and shoots himself, followed by a loud thump as he falls]
Newsreader: [pause] We’ll have the rest of Dan’s interview tonight at ten.