When will the UK banks ever fully recover from the credit crunch?

We are now more than a decade away from the first real crisis of the credit crunch era in the UK. That came on the 14th of September 2007 when Northern Rock applied for and received a liquidity support facility from the Bank of England as customers queued at its various branches in an effort to withdraw their deposits. Let us have a brief smile at this from the statement back then.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

It was in fact so solvent that it was nationalised early in 2008! In fact we see another feature of the crisis highlighted by this from the BBC back then.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Hence the advent of more modern definitions of the word temporary as of course the bad part of Northern Rock still is in public hands.

Royal Bank of Scotland

In October 2008 RBS joined the bail out party. From the UK Government.

The Government is making capital investments to RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion.

“Successful merger” eh?! I will look at Lloyds later but let us continue with RBS which in a clear example of failure was never actually nationalised as the UK establishment indulged its fantasy that enormous investments could be at arm’s-length. Indeed as the National Audit Office ( NAO ) tells us below the government in fact ended up have to have other goes at backing RBS,

To maintain financial stability at the height of the financial crisis, the government injected a total of £45.5 billion into the Royal Bank of Scotland (RBS) between October 2008 and December 2009.

Oh and….

The government intended to return RBS to the private sector as soon as possible

The NAO also calculated a cost for the investment.

The overall investment was equivalent to 502 pence per share.

Although if all the costs are factored in the cost gets even higher.

We have calculated that if the costs of financing the intervention are also taken into account, the government would have had to sell the shares at 625 pence each to break even.

Still with the UK economy having had 4 years of solid economic growth and stock markets around the world at or near all time highs then RBS must be benefiting surely? No as the price this morning is 272 pence per share. This makes even the 2015 sale of some shares look good.

On 4 August 2015, the government sold 630 million shares in RBS (5.4% of the bank) to institutional investors, reducing government’s holding to 72.9%.1 The shares sold for 330 pence each. This represented a 2.3% discount to the market price and raised £2.1 billion.

So a loss but less of a loss than we would see now. Except let us return to a fundamental problem which is that things are supposed to be better now! Or as the International Financing Review put it back in 2012.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Still along the way some have at least managed to keep a sense of humour as I pointed out on the 30th of November last year.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS ( @BlueBullet January 2014).

Yesterday we saw a change in the official response as Sky News reported this.

RBS Chairman has told Sky News taxpayers will not get all of their money back from Government’s bailout following the 2008 financial crisis.

I have a real problem with this which is that any form of honesty takes about a decade. This is far from a UK only problem as foreign bank bailouts have seen their share of misrepresentations and outright lies as well. The problem is the cost as let us start with the £12 billion Rights Issue of 2012 which was based on a prospectus that must have had more holes in it than a swiss cheese. We have seen many scandals which never seem to quite come to fruition as official reports remain a secret. Yet we are forever told that the bailouts were to raise trust in the banks.

Lloyds Bank

This had a more successful effort at selling the shares previously owned by the UK taxpayer. We even got our money back although care is needed as saying that assumes the money was pretty much free which back then it certainly was not. However over the weekend other problems have dogged Lloyds Bank and we are back to bailed out banks behaving badly. Here is the Financial Times on the financial scandal that unfolded at the Reading HBOS  ( Halifax Bank of Scotland) branch.

Yet Lloyds showed little interest in finding out what happened. Not only did the bank brush off Reade’s warnings at the time, but other victims who unearthed evidence of wrongdoing were treated equally dismissively. Far from calling in the police or regulatory authorities, Lloyds maintained right up until the trial’s conclusion that its own internal inquiries had revealed no sign of any criminality.

In other words the bank was able to behave for quite a long time as it was above the law and in fact even now seems able to be its own judge and jury in spite of the fact that it is plainly unfit to do so.

Nothing else can explain the fact that the task of examining Lloyds’ conduct has been given to . . . Lloyds. The bank has commissioned a former judge, Dame Linda Dobbs, to review its response to the Reading incident and whether it complied with all applicable rules and regulations. When complete, this will not be made public and will go only to the board, with a copy being dispatched to the Financial Conduct Authority.

Simply shameful.

Barclays

Barclays escaped an explicit bailout via an investment from the Qataris. That investment provoked all sorts of issues as it appeared some shareholders (them) were more equal than others. As Reuters put it in June.

The SFO charged Varley, Jenkins, the ex-chairman of its Middle East investment banking arm, Kalaris, a former CEO of the bank’s wealth division and Boath, a former European head of financial institutions, after investigating a two-part fundraising that included a $3 billion loan to Qatar.

What could go wrong with lending to someone who buys your shares? Oh and you pay some sweeteners as well. Let us move on noting that Barclays is also in court with Amanda Staveley who arranged another share deal with Abu Dhabi. Added to this is the fact that the current chief executive Jes Staley responded to a whistle-blower by attempting to unmask the person making the claim, thus breaking the most basic tenet of how to deal with such a situation.

The current state of play is summed up by this in the Financial Times.

Two years ago, Mr McFarlane set a target of doubling Barclays’ share price. But since then it has fallen by more than a quarter. The chairman has told colleagues he aims to stay at least until the shares regain their lost ground.

The words of Lawrence Oates seem both appropriate and inappropriate.

“I am just going outside and may be some time.”

As he faced troubles with courage and self-sacrifice we watch bankers facing trouble with denial and self-aggrandisement.

Comment

The bank bailouts were presented as saving the economy but as time has gone by we are increasingly faced with the issue that in many ways “the precious” has been prioritised over the rest of the economy. The claim of building trust in the system has had Fleetwood Mac on the sound system.

Tell me lies
Tell me sweet little lies
If I could turn the page
In time then I’d rearrange just a day or two
Close my, close my, close my eyes
But I couldn’t find a way
So I’ll settle for one day to believe in you
Tell me, tell me, tell me lies
Tell me lies

Now we find that there has been some progress ( Lloyds back in the private sector and some parts of Northern Rock and Bradford and Bingley sold) but also a long list of failures. How was nobody at the top responsible for some of the largest examples of fraud in human history? We are forever being told the world was “saved” but the reality was that it was what continue to look like zombie banks were saved at the cost of ossifying our economic system. To my mind it is one of the causes of our productivity problem.

It is clear to me that this industry has seen one of the clearest cases of regulatory capture that you could wish not to see.

 

 

 

 

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It is always the banks isn’t it?

Perhaps the most regular theme of the credit crunch era is the problems of the banks and the finance sector. This is quite an (anti ) achievement as we note that if we count from problems at Bear Sterns the credit crunch is now into its second decade. In only a couple of months or so it will be ten years since Northern Rock began its collapse. We are regularly told by our establishment that there has been reform and repair along the lines of this from Alex Brazier of the Bank of England that I analysed only on Tuesday,

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Lloyds Banking Group

I pointed out on Tuesday that it was hard to know whether to laugh or cry at the “simpler and fairer” claim and this morning there is this announcement to consider.

This was after taking additional provisions for PPI and other conduct related issues which was disappointing. The Group is also currently undertaking a review of the HBOS Reading fraud and is in the process of paying compensation to the victims of the fraud for economic losses, ex-gratia payments and awards for distress and inconvenience.

Later we got some details on the monetary amounts involved.

The £1,050 million charge for PPI includes an additional £700 million provision taken in the second quarter reflecting current claim levels, which remain above the Group’s previous provision assumption. The additional provision will now cover reactive claims of around 9,000 per week through to the end of August 2019,

The good news from this is that the UK economy will get another £700 million of PPI style Quantitative Easing which seems to be much more effective than the Bank of England version.  The bad news is that the saga goes on and on and on in spite of us being told so many times that it is now over. Indeed the rate of provision has doubled from last time around. This means that in total Lloyds either has or is about to provide this in terms of PPI style QE. From Stephen Morris of Bloomberg News.

Lloyds Bank takes ANOTHER £700m in charges today, taking their total since 2011 to 18.1 BILLION POUNDS………This is the 17th time the bank has increased its provisions for the scandal.

This is a feature of the ongoing banking scandal where we are drip fed the news as a type of expectations management as another bit is announced and we are told it is the last time again and again. The issues are legacy ones from the past but the management and response cycle has not changed. Actually if we look at the total numbers for misconduct New City Agenda has some chilling ones.

has now set aside £22.5 bn for misconduct since 2010

If we go wider to the whole industry it calculates this.

Total amounts set aside for PPI redress now stand at £42.1 billion – around 4.5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 10 times over the past 3 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs.

If we return to the QE style impact it does make me wonder how much of the UK economic recovery has been due to this as we note for example its possible contribution to car sales. If we throw in every type of miss selling the total comes to £58.1 billion.

Before we move on there was also this. From the Financial Times.

The bank has also set up a £300m compensation scheme to repay 600,000 mortgage customers as a result of failings in its arrears policies between 2009 and 2016,

How can there be recent failings when everything is supposed to have been reformed?

Lending

On Tuesday Alex Brazier warned about looser lending standards. But according to Lloyds Bank in the Financial Times it is everybody else.

 

Mr Horta-Osório said the bank has been increasing its consumer lending — comprising credit cards, personal loans and car finance — at less than 4 per cent a year over the past six years, and remains under-represented in the sector versus its size.

I am very cautious about anyone who uses this sort of swerve “over the past 6 years” as no doubt 2011 and 12 are included ( remember the triple dip fears?) to get the number down. Still the Alex Brazier should be alert to that as it is exactly the sort of swerve the Bank of England uses itself.

Royal Bank of Scotland

We cannot look at UK banks and miss out RBS can we?! It did make BBC News earlier this month.

Royal Bank of Scotland has agreed a £3.65bn ($4.75bn) settlement for its role in the sale of risky mortgage products in the US before the financial crisis.

Also there is the on-going saga about the on and now off sale of Williams and Glyns. If I recall correctly around £1.8 billion was spent on this and the bill is rising yet again.From the BBC.

The European Commission has accepted a UK government plan to free Royal Bank of Scotland from an obligation to sell its Williams & Glyn division……..Under the new deal, which the EU has accepted “in principle”, RBS would spend £835m to help boost competition.

Deutsche Bank

My old employer has seen plenty of scares in the credit crunch era. For the moment it seems to mostly be in the news via its likes to both the Donald and his circle. From the New York Times.

During the presidential campaign, Donald J. Trump pointed to his relationship with Deutsche Bank to counter reports that big banks were skeptical of doing business with him.

After a string of bankruptcies in his casino and hotel businesses in the 1990s, Mr. Trump became somewhat of an outsider on Wall Street, leaving the giant German bank among the few major financial institutions willing to lend him money.

Well as this from the Wall Street Journal points out today’s results have brought both good and bad news.

The German lender said Thursday net income was €466 million ($548 million), compared with €20 million for the same period a year earlier. Deutsche Bank’s companywide revenues declined 10% from the year-ago period, to €6.6 billion.

Comment

There is much here that seems familiar as the claimed new dawn looks yet again rather like the old one. There has been a reminder of this from another route today as the establishment reform agenda has led to this.

FCA say Li(e)bor is to end in 2021 citing that the bank benchmark is untenable  ( @Ransquawk)

Good job there is no rush to do this like a big scandal destroying any credibility it had or something like that.  We need a modern benchmark for new trades starting now whilst a sort of legacy Libor is kept for the existing contracts that cannot be changed.

Still there is always an alternative perspective on it all as this headline from Reuters indicates.

Lloyds bank posts biggest half-year profit since 2009