Will our banks ever recover and reform?

The last week or two has seen a by now familiar Christmas present from the banking sector to some of its employees. From the Financial Times.

The most recent came last week, as workers at Dutch lender Rabobank learnt of 9,000 cuts across their bank the day after Morgan Stanley announced 1,200 lay-offs, including at its ailing fixed income division.

These Christmas presents in the style of Scrooge followed the pattern of 2015 so far.

The 2015 cuts — which exclude the impact of major asset sales — amount to more than 10 per cent of the total workforce across the 11 large European and US banks that announced fresh lay-offs, according to analysis by the Financial Times.

If we look at the economic situation in 2015 it has been one where the theme has been one of growth and recovery overall even in the Euro area! Thus there is something to consider in the fact that not only are the banks still retrenching and deleveraging but apparently plan to do so next year as well.

Big banks in Europe and the US announced almost 100,000 new job cuts this year, and thousands more are expected from BNP Paribas and Barclays early next year, as the wave of lay-offs that began in 2007 shows no sign of abating.

Although to be fair there has been one public piece of recruitment. From Morgan Stanley.

Morgan Stanley (NYSE: MS) today announced that Alistair Darling has been elected to the Company’s Board of Directors.  His appointment is effective January 1, 2016.

There are obvious issues here as he was the man who was responsible for the UK’s biggest ever bank bailout taking a job at a bank. Also the accompanying statement does him few favours declaring him to have inside knowledge which the bank can benefit from.

We will all benefit from his financial, risk management and regulatory insights.

It has been a long time now

Lehman Brothers collapsed on the 15th of September 2008 so we could set the clock from there. Although in the UK the clock can be set from a year earlier when Northern Rock called for Bank of England help and saw queues around the block outside its branches. So over 7 years or over 8 years take your pick.

The UK like so many others decided on the Too Big To Fail or TBTF strategy and announced bank bailouts totaling some £1.162 trillion according to the National Audit Office (NAO). Of this some £133 billion was present and the rest was in the form of guarantees. This has now reduced to £115 billion according to the NAO and as there have been some share sales in Lloyds Banking Group recently is in fact slightly lower now. Along the way UK net public-sector debt rose to over £2.2 trillion although this number was at the bottom of the monthly data report and therefore missed by most.

Also we have the implicit costs of the bailouts which are more difficult to quantify and these come in two forms. Firstly is the way that even banks which did not get a bailout such as Barclays Bank benefited from the knowledge that they would be bailed out of required. The value of this is impossible to measure but the UK taxpayer was probably gamed to some extent by the Abu Dhabi Investment Authority which invested in Barclays knowing that there was in effect a put option in the offing should matters deteriorate.

Secondly there was economic policy which has been bent and twisted to benefit the banking sector. The opening salvo of interest-rates slash to and of course still at an “emergency” rate of 0.5% did not lack company. We had £375 billion of QE which is also still there and in the summer of 2012 we saw the Funding for Lending Scheme provide cheap funding for the banking sector. There have also been a litany of Help To Buy efforts from the government as I detailed on the 30th of November.

What has all this achieved?

Back in 2010 the National Audit Office highlighted a theme which has continued to this day.

While both banks (RBS and Lloyds Banking Group) met targets for mortgage lending, there was a shortfall of £30 billion against targets for lending to business.

That could pretty much be written right now. From November’s data.

Lending secured on dwellings increased by £3.6 billion in October, compared to the average monthly increase of £2.8 billion over the previous six months…… loans to small and medium-sized enterprises (SMEs) increased by £0.4 billion, compared to an average monthly increase of £0.1 billion over the previous six months.

So mortgage lending continues the boom kicked-off by FLS whereas business lending after a sustained period of falls seems to have stabilised and let us hope is now going to grow. Of course the UK economy has recently put on a strong performance on the aggregate level but per person one might have expected more with all the post 2008 effort.

GDP per head is now 0.9% above its pre-downturn peak in Quarter 1 2008, having surpassed it in Quarter 1 2015.

Even this very thing gain is dependent on our population statistics being accurate as without getting into the migration debate if they are wrong they are likely to be too low.

Another feature of the UK economy which benefits the banks is the push to create inflation especially in house prices.

What about reform?

We get told things like this as if the represent a real change. From the Bank of England.

The aggregate Tier 1 capital position of major UK banks was 13% of risk-weighted assets in September 2015.

Whilst it is good that the banks are running more appropriate capital levels the issue is really that behaviour has to change. In a real crisis the stock of capital is not enough and it is a change in banking behaviour which is needed to be a proper phrophylatic. If we have reformed our financial sector then by now we should be punishing and fining only rarely right. From the Financial Conduct Authority.

This table contains information about fines published during 2015. The total amount of fines is £899,160,574.

It is better than last year but much worse than 2013 as we look for a pattern.

Meanwhile we review the PPI scandal on loans to individuals, the scandal over swap transactions sold to small businesses, the Li(e)bor and foreign exchange fixing scandals much of which happened in the supposedly new era. Still perhaps the Bank of England has developed a sense of humour.

In addition, the FPC places weight on the role of
pre-emptive, judgement-led prudential supervision
conducted by the Prudential Regulation Authority.

If it is fully implemented the Vickers Report will take more than a lost decade before it is in play in 2019. But you see it has only taken two years for other plans to start to fade, remember bank directors being made individually responsible? From the Guardian on the 15 th of October.

Senior managers now subject to a ‘duty of responsibility’ rather having to prove they had done the right thing.


The world banking sector has plenty of questions to answer even now. This is a particular issue for the UK because we are a large player in this industry in both absolute and relative terms. Indeed Bank of England Governor Mark Carney has proven to be a cheerleader for more,more,more.

By 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.

The catch is that unless the banks have genuinely changed we will become ever more exposed to banking crises. They however still seem to be singing along to J-Lo

Don’t be fooled by the rocks that I got
I’m still, I’m still Jenny from the block
Used to have a little, now I have a lot
No matter where I go, I know where I came from (South-Side Bronx!)
Don’t be fooled by the rocks that I got
I’m still, I’m still Jenny from the block

Putting it another way you know that something is afoot when the language changes just like the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. Well the TBTF banks are of course now Systemically Important Financial Institutions or SIFIs.







25 thoughts on “Will our banks ever recover and reform?

  1. Hi Shaun

    I understand that the PRA has said that large banks have to have a minimum leverage ratio of 3% from 2016.

    I understand the losses in the previous bust were 6% and I assume that this is a low figure because of forbearance by the banks; clearly the low IRs will have facilitated this so what the “real world” losses would have been is anyone’s guess, certainly higher than 6%.

    Let’s face it in the banks ideal world they would lever up to the maximum and get the taxpayer to pick up the pieces when it all goes wrong – as it must.

    3% doesn’t seem to me very much at all and I think the banks will resist this when it is to be implemented.

    The other thing that intrigues me is the position with regard to derivatives. I understand that the banks have lobbied to weaken treatment of these under the regulations but I can’t help feeling that this may be an elephant in the room where the banks are counter parties, yet the liabilities are not disclosed or counted against the capital position.

    The banks get money by leverage and I can’t see them reforming any time soon

    • ‘3% doesn’t seem to me very much at all and I think the banks will resist this when it is to be implemented.’

      3% would probably just about cover deposits at the CB and cash….like you say Bob,not a lot at all versus current accounts alone.

      If I remember correctly Northern Rock’s tier one was one of the highest of the High St banks at the time it went under but then as Shaun alludes,the quality of the capital ratio is directly/exponentially related to the quality of the loans on it’s mortgage book and the the accuracy of the risk assessment thereon.

      The reality was that much was being marked to model aka initial sale price than being marked to market.

      Again,have we learnt nothing?We’ve solved a housing bubble with an even bigger one.

      • Indeed. The FASB allowed a relaxation of “mark to market” rules and one could argue that in 2009, when the relaxation was introduced, that market signals were defective. However I suspect that real reason is that if the rule had been applied as normal then the banks in particular would be shown to be insolvent and should therfore be wound up.

        • That’s an excellent point about the market signals being defective Bob.One could argue that any amount of govt subsidy renders them so.I’d go with that.

          If we’d let RBS go in 2008 and the bond holders had taken a hit,then the housing market would have reset to a more sustainable level.

          The suspension of mark to market rules-which are hard to enforce on a daily basis anyway-shoudl always be viewed with suspicion to my mind.It wasn’t a good thing for us then and history has proved that.

  2. Shaun,

    I hate saying this but that’s a super post which encompasses many relevant issues in a 2000 words.

    Firstly,I feel bad for anyone who loses their job.However,you’ve outlined a number of mechanisms that have been used to flatter the solvency and profitability of many UK banks and on which basis,bonuses have been paid that may not have been justified by either the balance sheet they were meant to represent or the market they were made in.

    Secondly,the hiring of Darling is a scandal.Nothing short thereof.Socialism for the masses and capitalism for the select few.

    Thridly,you correctly identify the mechansms that have been used to flatter UK bank balance sheets eg ZIRP,QE,HTB1+2,FLS and raise the issue of the implicit puts.My point here is that if we hadn’t had these things then the housing market would have found it’s natural level probably at 2-3 times average salary instead of remaining at it’s financially levitated altitude of 7-8 times.So basically,we’re at a point where any sort of down draft is house prices will pretty much wipe out most of our mortgage banks tier one in the first 10% of the drop.Then the current crop of clueless Oxbridge academics will be wandering around the financial battlefield wondering what the **** they should do because this wasn’t in their neoclassical textbooks.

    Because that’s really where we are.We’re sat atop a ponzi scheme where the only way is down and our banks are no more ready for the hit than they were in 2008…….except the taxpayer has been hosed for bonus money for the last 7 years.Tha’s all that’s materially changed in that time.

    Personally,I think we have to go back toan earlier time,and reimplement cash reserve lending or find another mechaism of governing bank accounbting or money creation.

    Allowing banks to risk weight assets is like giving a drug dealer a kilo of smack,a bottle of talcum powder and saying
    ‘don’t cut the gear’……..

    Rant over.

    • Hi Dutch

      The problem is that those who lose their jobs are the foot soldiers mostly who have been only cogs in the machine. Whereas those who have responsibility for what has taken place mostly remain or if they do get get pay-offs more than many will earn in their lives. Virtually nothing has been done about this.

      We have wasted so much of the last 7/8 years on this front.

  3. Shaun, It is opportune of you to raise this subject just as the city has its worries about the Weds rate hike decision. Frankly none of them know whether our subsidized ZIRP habit can stand any rate rise however small. Great nervousness will ensue tomorrow and well know more by Thursday. I argue that these measures are all tosh, as other respondents suggest, with any kind of mark to mark approach the assets get valued some nominal percentage below the current one. But this process is heavily flawed, since the UK “economy” is so real-estate oriented there is no effective floor to values once they fall, the underlying productive and export base is quite low and would only support a much low4er average property price without the bubble. If we take the foreign investor contribution I do t believe they would stomach signifcant falls without attempting to exit. The Chinese are notorious for cyclical and story based investing. I am not aware of any transaction freeze, those foreign buyers are free to sell like they were to buy there is no way to suspend house sales I dont think….

  4. Hello Shaun,

    So the Banks still win ?

    Will no one in HMG do anything ? ( apart from collect big pensions and lucrative jobs in said Banks )

    Why is MSM so silent on this ?

    Has economics become politics and therefore as you dont do politics you’re out of a job ?

    countless billions and 8 years later why cant we have Glass/stegal back ?


    • Repeal of Glass Steagall 1998…legislation passed during the Great Depression to prevent another Great Depression…….and within ten years we have another Great Depression….

      Coincidence?Methinks not.

  5. Also,one last thing to add to my earlier rant about banking subsidies-fiscal deficits.

    The ones that subsidize employment,cover over gaping holes in our economy eg manufacturing and allow housing benefit to be used as some sort of BTL subsidy for deserving landlords.

    Back to work.

    • Hi Chrislongs

      Thanks for the link which is of course more of the same. It is classic Sir Humphrey style tactics where moves are announced but for in the future. Before we get there and they think we have forgotten then they are watered down and changed. Then when something goes wrong it is described as something which could not possibly be expected and repeat.

      I was reading some information on the Barclays bailout earlier and to use one of my song themes there were indeed more questions than answers.

  6. This watering down of banking regulation; you can’t seriously have been taken by surprise?
    It was coming whoever was in power, BUT, the banks will screw up properly next time.
    The corruption is so palpable that banks will take there cue from it, and let’s face it, TBTF is now every bank’s ambition.
    Unfortunately for them, eventually they become Too Big To Save.
    Sooner the better.

    • Hi therrawbuzzin

      Surprised no as someone who who is a big fan of Yes Minister this is a classic Sir Humphrey style situation. Disappointed yes as we needed a change from the same old song.
      This was for a foreign office situation but it applies to the banks too.

      “Sir Richard Wharton: In stage one we say nothing is going to happen.
      Sir Humphrey Appleby: Stage two, we say something may be about to happen, but we should do nothing about it.
      Sir Richard Wharton: In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.
      Sir Humphrey Appleby: Stage four, we say maybe there was something we could have done, but it’s too late now. “

  7. Great stuff Shaun, long may you keep banging on about this industry-wide scandal.
    Recover & Reform?
    I suspect the level and management of debt is such a huge task, they’ll never recover. And reform? Well, reform is OK by them as long as no one can ever actually be held accountable when things go awry.

    So it’s a “No” and another “No” from me.

  8. There is a simple reason why the banks will not be reformed – senior politicians, civil servants and regulators all get jobs with the banks when they retire!

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