What is wrong with our banks? After all the bailouts started seven years ago…

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?

Economic policy

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?

Today

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.

RBS

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….

Comment

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!

Later

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.

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20 thoughts on “What is wrong with our banks? After all the bailouts started seven years ago…

  1. The problem was, and still is, the bonus culture.
    Bonus-triggering targets became the be-all-and-end-all for top employees, regardless of whether these targets were hit honestly, and regardless of the long term profitability and health of the company (or economy).

    Your article yesterday asked why interest rates were so low, and even negative, in a number of countries, even though they were recording decent levels of growth; well these interest rates tell us that the banks are still insolvent, as they dare not have non-performing loans, but need the largest margins possible, for as long as they can get away with, in order to shore up their balance sheets.
    They are also a reminder of just whom the politicians serve.

    • Indeed!

      The banks are quite clearly insolvent, and should be put out of our misery.

      That there have never been any fraud charges shows just how corrupt are our political and financial leaders.

      • Everyone talks about corruption in Greece, but you don’t need to look beyond these shores to see plenty of evidence that it is thriving here too.
        The difference is, Greece is too small a country to fight back, so its people pay for the corruption.

    • Do you include the corrupt, post-career sinecures for politicians and senior public officials?

      http://www.bbc.co.uk/news/32527545

      “During Mr Bernanke’s tenure as Fed chief, the central bank had been criticised for being too close to Pimco, suggesting it may have given the Californian firm an advantage in understanding monetary policy.”

      They are becoming more and more brazen about their corruption.

      • and Iceland did not

        and now they are a pariah state

        did you see the look on Gordo’s face ?

        I had to smile , he gave the game away on who his boss was…….

        Forbin

  2. Hi Shaun

    You seem to attribute some of the so called profitability of the banks to the low interest rate regime in the sense of a cause/ effect relationship. It may be that this is the wrong way round.

    It seems to me that the biggest advantage the banks have is to create money ex nihilo; as they make money on the difference between what they may have to pay out and what they can charge why should they not leverage up ad infinitum, the somewhat ineffective Basle rules notwithstanding? In this case the low rates serve not so much as a causal factor but an enabling one as to underpin and accommodate the ability of borrowers to repay the loans the banks make; clearly the higher the rate of interest the less can be loaned on any realistic basis and the more the principal is at risk.

    Whilst this goes on, effectively unchecked, the banks will be TBTF. And if ordinary depositors are reassured because of the Euros100,000 guarantee I wonder if this would survive the collapse of a major bank or a systemic failure. Personally I think not.

    What also strikes me is the almost surreal position we have now reached where banks now report compensation and regulatory and criminal fines as part of there results! “We have spent so much as a result of breaking the law this quarter and this has materially affected our result….”!!! Lewis Carrol would have been proud!

    Furthermore it is not just the banks but the whole financial nexus which includes the offshore tax havens and the derivatives markets which has its tentacles deep into our lives. Whilst this survives it is a ticking timebomb and, unfortunately, the only way it will change is if we have a cataclysmic bust, which I think is odds on.

      • its not just the banks , it the governments , namely USA and UK

        with control of the interest rates via QE and other asset purchases you drive down the interest rates on you debt burden

        whats not to love ?

        That it will not continue is a worry for the next guy in power !

        kick the kan and doing a Tony and you’re laughing all the way to the bank !

        economics be dammed !

        Forbin

  3. until there is public outrage over this behaviour nothing will change

    the public are as aware as our MSM will let them

    keep watching footy and eating big macs

    its a great setup , isnt it ?

    governance of the people by the Banks for the Banks

    When our pollies get their cake taken away then maybe ….. hey who am I kidding ?

    and after the elections it will be

    meet the new boss , same as the old boss – the Who

    Forbin

    Ps time for some more popcorn !

    • Hi Forbin

      The whole saga goes on and on and on. This morning I read about Lloyds taking a £660 million loss on the sale of TSB. But with the outlook supposedly so good and TSB being sold as a “safe” bank with no rubbish on its books why was there a loss?

      Meanwhile Brent Crude Oil has pushed back above US $66…

  4. ‘My contention is that much of the recorded growth in banking was based on asset inflation based on debt rather than actual growth’

    ‘Those are extraordinary sums when you note the shortage of bankers in jail for all of this. ‘

    Couple of quotes that are good to hear confirming I’m not going mad.Your article begs the question of jsut how much dross is in what’s left of RBS’s balance sheet given that they’ll only have been able to sell the good stuff.

    7 years of losses in a ZIRP environment is some achievement,by any standards.Whether it deserves the rewards for ‘exceptional skill’,I’m not so sure.

    Keep rocking Shaun.

  5. The magnitude of wrong doing by banks is breathtaking. By definition fines and other penalties only relate to activities that have been discovered. How much is to come? And what is the effect of, as yet undiscovered, criminality on all aspects of the economy? Things are probably much worse than they appear

  6. Hi Shaun
    A reasoned,realistic and logical history of the last
    seven years none of which is admitted by TPTB.

    I notice that fellow bloggers have mentioned
    derivatives, with your knowledge on the subject would
    you consider writing a piece about them and are there
    really quadrillions issued?

    JRH

    • Derivitive prices depend on other market prices – a large sudden move sees them skyrocket in value. one side is in the money (in profit, assuming that the other side isn’t bankrupt), the other will be asking for a bailout.

      Derivitives valued against the rigged LIBOR look more crooked than Bernie Madoff’s little scam. (Yes, it’s probably tiny in comparison to what RBS will cost UK taxpayers when the brown stuff hits the fan …)

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