A decade after the credit crunch hit UK banks have made so little progress

This week has opened with an outbreak of cognitive dissonance in my home country the UK. It opens with a worthy enough spirit and principle from the Treasury Select Committee of HM Parliament.

Regulators must act to reduce unacceptable number of IT failures in financial services sector, warns Treasury Committee.

There is an obvious flaw in the “Regulators must act” opening as we so often see examples of them being fast asleep although of course the official term for this is “vigilance.” Indeed I note that in the comments section last week the issue of regulatory capture had arisen again which for newer readers is where an industry infiltrates and takes control of its regulator. It does not have to be an industry as we see how HM Treasury alumni are every single Deputy Governor at the Bank of England which is officially “independent” of er the Treasury…..

Moving back to the issue at hand the TSC summarised it here.

The Treasury Committee launched its IT failures in the financial services sector inquiry on 23 November 2018. It followed a series of high-profile service disruptions within the financial services sector, most notably the TSB IT migration in 2018. Issues following the migration caused significant disruption to customers for a prolonged period of time, and we have an ongoing inquiry into Service Disruption at TSB1. There have also been many
other incidents, including those at Visa and Barclays.

They do not say it but the prolonged failure at TSB was especially embarrassing as it was supposed to be a new bank but in reality was a bureaucratic exercise exhuming it out of the bloated Lloyds Banking Group. So it turned out to have all the same and maybe worse problems than the other banks as its IT meltdown showed.

It was far from just being the TSB though.

IT failures, or incidents (used interchangeably), within the financial services sector appear to be becoming more common. Over the past 18 months there have been major
incidents at TSB and Visa, along with a litany of incidents at other firms. This increasing trend is recognised by the FCA, which stated in 2018 that “outages in the financial services sector are becoming more frequent and publicised” and that “the number of incidents reported to the FCA has increased by 187 per cent in the past year”.

This matters more these days as we switch to banking online.

Research by UK Finance found that 71 per cent of UK adults used online banking in 2017, and that this trend has been increasing. At the same time, the number of high-street
bank branches has been falling, with a 17 per cent reduction in the number of branches between 2012 and 2018.

The Problem

The real issue here is the fact that the UK establishment have been happy to use taxpayer’s money and the policies of the Bank of England to provide a put option for banks and their management. The subsequent zombified banking sector has no great incentive to improve its IT which was so bad when the credit crunch hit that the Bank of England felt it could not cut interest-rates below 0.5%. This was because the creaking IT infrastructure could not handle 0% let alone negative interest-rates. When this did happen at the Cheltenham and Gloucester which was part of Lloyds Banking Group the work around was that the capital owed was reduced to save a 2001 A Space Odyssey HAL 9000 style moment from happening.

Next comes the idea of the Regulator acting quickly and decisively as Citywire points out.

Calls for the Financial Conduct Authority to offer ‘stronger and faster intervention’ are at least partially ‘justified’ the regulator’s chief executive Andrew Bailey has admitted.

There was this issue.

At the beginning of the year mini-bond manufacturer London Capital & Finance went bust after the FCA ordered it to freeze its accounts, following what appeared to be many years or warnings about the business.

Which led to this bit.

It remains unclear how the firm was able to promote unregulated mini-bonds via regulated Sipp and ISA wrappers for many years.

Sometimes it is so bad it is funny.

It also faced much ridicule after banning former Co-operative Bank chair and church minister Paul Flowers in 2018, five years after the organisation collapsed and the tabloids dubbed him  the crystal Methodist due to his drug use.

More recently this has hit the headlines.

The shuttering last week of Woodford Investment Management after a series of big bets went sour and put it in breach of FCA rules on liquidity limits will be freshest in the mind.

Also in a rather familiar fashion the regulator seems to have overlooked this.

Former star fund manager Neil Woodford and his business partner reaped close to £20m in dividends in the last financial year amid a crisis at their investment house, according to an FT analysis ( Financial Times )


The story here was supposed to be an HSBC boom driven by its involvement in the Far East. You may well recall its regular hints of its head office leaving the UK when it wants to put pressure on the UK government. Of course being a major bank in Hong Kong is not quite what it was so let me hand you over to the South China Morning Post.

HSBC, one of three lenders authorised to issue currency in Hong Kong, said on Monday that its third-quarter profit fell 24 per cent as it reported weaker results in its retail banking and global markets businesses.

The bank said its business in the city remained “resilient” despite a weakened business climate in its largest market, as months of protests and civil unrest have sent the city’s economy into a “technical recession”.

“Resilient” eh? I did not realise that things were quite that bad! The share price is down over 4% today at £5.90 and whilst HSBC has done better than other banks until now the future does not look quite as bright.

Barclays and RBS

From CNBC.

The British lender posted £292 million in net loss attributable to shareholders for the three-month period ending Sept 30. Data from Reuters’ Eikon predicted a loss of a £19.2 million for the quarter. Barclays had posted a £1 billion net profit in the same period last year.

The shares have risen due to rising Brexit hopes recently but £1.70 is still very poor.

From City-AM.

RBS reports an operating loss of £8m for the nine months to the end of September 2019, falling from £961m in the same period last year.

A challenging quarter in the NatWest Markets division, where total income plunged by £419m to £150m in the wake of flattening yield curves, also dragged down the bank.

This leads to this response.

The mis-selling and other charges overshadowed underlying progress at the bank

Oh no sorry. That was from November 2nd 2012 on here!

Metro Bank

I hardly know where to start with this one, so let me point out that the £8 share price of this summer has been replaced by one of £2


The fundamental issue here is that we are now more than a decade away from the credit crunch. The major flaw in bailing out the banks was that they then had no incentive to change. Even worse that we would repeat the mistakes of Japan and end up with a zombified banking structure. If we look at the world of IT we see the Bank of England confirming it here.

The TFS was designed to reinforce pass-through of a cut in Bank Rate from 0.5% to 0.25% and in doing so
reduce the effective lower bound in the UK…….The existence of the TFS meant that the MPC reduced its estimate of the effective lower bound from 0.5% to
close to, but a little above, 0%. ( Governor Carney June 18th )

So in spite of a sweetener of £116.7 billion the banks still cannot cope with 0% interest-rates. Ironically they may be doing us a favour of course.

Next comes the way that PPI has been a type of Helicopter Money QE for the UK economy and here we get on a rather dark road. That a quid pro quo for the banking scandals and bonuses as well as the put option for bank survival is that they put some of the money in the hands of the UK consumer.





Of the next Bank of England Governor, Bank Rate cuts and Metro Bank

It is time for us to peer again through the clouds and remind ourselves of the mindset of a central banker. In this instance it is the current favourite to be the next Governor of the Bank of England Andrew Bailey who has been working hard to establish his credentials for the role.

A whistleblower has heavily criticised the head of the Financial Conduct Authority for failing to investigate her complaints against Lloyds Banking Group, despite his assurances about the seriousness of the case. Sally Masterton wrote last June to FCA chief executive Andrew Bailey — the bookies’ favourite in the race to succeed Mark Carney as Bank of England governor — to protest about her treatment by Lloyds. ( Financial Times)

Indeed if the writing below is accurate he seemed keen to keep the matter quiet.

Mr Bailey took a personal interest in Ms Masterton’s case, encouraging Lloyds to settle with her financially. But he did not act on the serious criticisms she made about the conduct of the bank and its senior managers towards her, according to emails seen by the Financial Times. These concerned alleged breaches of the FCA’s rules.

This all seems to be something that Mr Hollinrake,  the co-chair of the all-party parliamentary group on fair business banking, either does not understand or is willfully misrepresenting.

“Anyone under consideration for the role of Bank of England governor must be able to demonstrate a willingness to tackle wrongdoing in the banking sector without fear or favour,” added Mr Hollinrake.

After all Mr.Bailey does not seem that keen on whistleblowers.

Last year the regulator was attacked for its decision to only impose a fine on Barclays chief executive Jes Staley after he employed private investigators to try to unmask a whistleblower. The FCA was also criticised last year for revealing the identity of a whistleblower to Royal Bank of Scotland.

In case you are thinking this is something new here is Sir Frank from Yes Prime Minster in the early 1980s.

We believe that it is about time the Bank of England had a Governor who is known to be both intelligent and competent. Although an innovation, it should certainly be tried.

The Treasury has endured these City scandals long enough.

Plus ca change c’est la meme chose.

Central Banker Thinking

A research paper on the Bank Underground site is rather more revealing than it intends so let us start with the subject matter.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009.

If this worked then we would not have needed the subsequent QE ( Quantitative Easing) and credit easing, nor would we have remained at the consequent Bank Rate of 0.5% for so long. But according to this research it was something of a triumph.

Although UK unemployment rose by around 3pp in the year following the collapse of Lehman Brothers, the extraordinary monetary stimulus carried out by the MPC surely protected the aggregate economy from a fate far worse………But even for the least affected regions, I estimate that employment growth was around 1.4pp higher than it otherwise would have been solely through this channel  ( pp = percentage points).

There is a catch here as there is an obvious moral hazard in an institution being both judge and jury on its own policy. But having noted that there is something revealing in the the area that leads to this result. It is of course the housing market and combines the banks too!

Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others.

So we have a confession about exacerbating inequality which I guess they hope we will not spot and it leads to this.

Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009.

As far as I can see there is no mention of the impact of cheaper borrowing for businesses and I would remind newer readers that at the time this was often badged as boosting inflation as well. It is easy to forget that the Bank of England went into something of a panic as the Retail Price Index went negative and feared the CPI would do the same. The irony here is that the RPI was driven into negative territory by the large falls in mortgage rates as it has them in it ( currently at a 2.4% weighting but logically it would have been higher then).

Here is the more detailed prescription of what happened.

Some mortgagors received a cash-flow boost as their monthly mortgage repayments fell in lock-step with policy rates as the nights closed in at the end of 2008 . Many chose to go out and spend part of this windfall, on goods made (and services provided) both at the national and local levels. And, as people finally got round to fixing their cars, made more trips to their nearby corner shop and splurged on meals out, we might expect this spending on locally-provided services to have supported local employment in the face of the Great Recession.

This can be broken down at the individual level.

Those who went into the autumn of 2008 with a mortgage linked to Bank Rate (on a so-called variable-rate mortgage) received an average favourable cash-flow shock equivalent to around 5% of their annual pre-tax income the following year:

Also on a more collective level.

My results suggest that a 1 percentage point accommodative monetary policy change led to around a 3.5pp increase in annual employment growth of businesses that relied on local custom between 2009 and 2010. These businesses made up around a fifth of overall employment.



There is a lot to get though here so let us crack on.This is a sensible reflection by the author Fergus Cumming.

This point estimate should be treated with caution and monetary policy operates through a number of channels that work over different horizons.

But this is not.

There are also good reasons to think that the cash-flow effects I find would likely have been approximately symmetric if interest rates had instead increased.

Can you imagine the impact of a 4% Bank Rate rise at that time? Personally I would rather not.

Next we can see that 2008 came as a genuine shock or if you prefer the forerunners to Forward Guidance had a nightmare.

Survey evidence shows that only 10% of households in August 2008 expected policy rates to fall substantially in the coming months.

However you try to spin it there is a problem for future monetary policy easing from this channel.

After a sustained period of mortgage rates close to zero, more than 90% of new mortgages are now fixed-rate contracts and so the average time-to-refinance on the stock of mortgages is increasing over time. Although the effects I estimate are likely to be approximately symmetric, the evolution of the composition of mortgages means that the direct pass-through of changes in Bank Rate to household finances is likely to be slower in the future.

No wonder they are so keen to discuss anything other than monetary policy these days.

Metro Bank

My subject of Wednesday has been in the news today. It has raised an extra £375 million of capital which is welcome but more worryingly it has received the equivalent of the board of directors expressing confidence in their manager after a bad run of results. From the Bank of England website.

The Prudential Regulation Authority welcomes the steps taken today by Metro Bank. Metro Bank is profitable and continues to have adequate capital and liquidity to serve its current customer base. It has raised additional capital in order to fund future growth.

They need to follow the advice of Tears for Fears.

You can change
You can change





Barclays and Metro Bank highlight that the banking crisis is not yet over

The credit crunch has in many ways been a story of the banks and a major banking crisis. All these years later after a proliferation of promises about reform we find that we have not truly shaken the issues off. One of the worst cases of this is Italy that has a decade after all this began still not completed its round of bailouts as the developing Carige story makes clear. We keep getting investors supposedly prepared to put their money into troubled Italian banks when then pull out. What can it be about the heavy losses of the Atlante bailout vehicle that has caused this? In Germany we see that the position of its main bank Deutsche Bank can be highlighted simply by quoting its share price, which as I type this is a mere 6.82 Euros.

In the UK we got on with the banking bailouts which is both good and bad, The good bit is that if you are going to do it then it is better to be swift and decisive. The bad part is that letting Northern Rock fail would have sent a signal to the other banks that they are subject to the same laws as everyone else. Instead we have moved forwards with nobody in a senior position in a UK bank being prosecuted even when there have been signs of fraud and misrepresentation on a major scale. To my mind there were three major issues.

  1. The merger of Lloyds Bank and Bank of Scotland which was very expensive for shareholders and requited a bailout.
  2. The rights issue of June 2008 undertaken by Royal Bank of Scotland.
  3. The Qatari investment in Barclays at the height of the crisis that turned out to be a case of some shareholders being more equal than others.

The UK establishment was never going to address point one for the simple reason that it had its fingers all over it! Instead we saw a classic cover up and fudge with Victor Blank being Knighted. Point two was kicked into the long grass as there was no settlement of any sort until 2017 which to my mind did not get even close to addressing this. From the BBC back then.

“The rights issue deals with concerns over the balance sheet,” said David Cumming, head of UK equities at Standard Life Investments, which holds a 3.5% stake in RBS.

This was how it was presented so how only a few months later did it collapse as highlighted by FN News below.

The investors bringing claims against RBS allege the bank omitted crucial financial information from the prospectus for its 2008 rights issue, which raised £12 billion. A few months later, the bank collapsed, requiring a £45 billion taxpayer bailout.

Frankly I find it hard to think of a more open and shut case and yet it went on for years.


The Financial Times summarises the issue here.

The charges turned on £322m of side deals and a $3bn loan the bank extended to Qatar in 2008, as Barclays twice turned to the Gulf state in emergency cash calls that kept the bank from a government bail-out.

Again on a prima facie basis that looks completely clear-cut as management paying someone to back the share price is misleading shareholders, especially as the truth was withheld for quite some time. In some ways they may as well have revealed it as nothing seems to ever happen about it anyway.

The charges against the bank were ultimately scrubbed by the courts last year and the bank has not had to stand trial. Related proceedings have been pursued against its former chief executive, John Varley, and three former top bankers, who all denied the charges against them. A jury trying the case was recently discharged.

Even the Financial Times finds itself mentioning this.

The SFO’s decision represented a rare example of a major bank facing UK criminal charges. ( SFO is Serious Fraud Office).

In my career the SFO has had a simply dreadful name symbolised by the way that Ernest Saunders got his prison sentenced reduced via a diagnosis of Alzheimers something from which unlike everyone else who gets it he subsequently recovered.

Where was our watch-dog the Bank of England? Well rather than representing us it found itself crying “The Precious! The Precious!”

The Bank of England warned prosecutors that a criminal charge against Barclays could present an existential threat to the lender, showing that regulators still worry about large banks being “too big to jail”. According to people familiar with the matter, in 2017, Sam Woods, the BoE’s top banking supervisor, told David Green, the then-director of the Serious Fraud Office, that there could be unpredictable consequences if there were charges against Barclays over crisis-era payments to Qatar.

This is classic Yes Prime Minister style action as of course “unpredictable consequences” cannot be challenged. Or if you prefer a type of what has become called Project Fear. It is perfectly safe as you cannot be specifically questioned because you have been deliberately vague. It is another form of regulatory capture as Sam Woods found itself mimicking the case made by Barclays itself.

Mr Woods questioned whether a corporate criminal charge would be in the public interest as officials believed it would present a small – but not insignificant – threat to Barclays’ safety and soundness. Barclays itself made similar arguments to the PRA, according to other people familiar with the situation.

Yet the problem is again highlighted by a share price of 160 pence which is not much of a return on the dark days of the credit crunch and some 26% lower over the past year. Putting it another way the share price suggests we have seen a fair bit of zombification at Barclays.

Metro Bank

The cases above relate mostly to past issues but Metro Bank brings us more up to date. This week has seen something of a mini bank run triggered by social media scaremongering such as this tweet from Emily Barthlow.


Whilst Metro Bank plainly has problems highlighted by a share price of £5.70 such tweets ignored the fact that the deposit protection scheme is there for deposits of up to £85,000. Why is Metro Bank vulnerable to such rumours? City-AM explained yesterday.

Metro Bank also attempted to reassure customers that its £350m capital raise – in response to a major loans blunder – was “well advanced.”

Despite today’s bounce, the bank’s stock is down 77 per cent since the lender admitted in January that a swathe of commercial loans had been wrongly classified and should have been among its “risk-weighted assets.”

As to the classification error it was yet another triumph for the prescience of Yes Minster.

Sir Desmond: “Well, they placed their own interpretation on Treasury regulations. Someone has to interpret them.”
Sir Humphrey: “What about the Treasury’s interpretation?”
Sir Desmond: “It didn’t seem appropriate.”

The modern twist is that we had what I think is the first bank panic via Whatsapp.


In some ways we have been on a very long journey and in others on a very short one. In terms of time passed it is the former but it terms of approach it is the latter as the banks seem to remain above the law. We get thrown the occasional tit-bit such as some Libor or foreign-exchange riggers but nobody at the top seems to ever be held accountable let alone punished. Indeed establishment figures seem to develop a habit of being ennobled as we note that Paul Tucker of Li(e)bor fame at the Bank of England is now Sir Paul Tucker. I cannot avoid the thought that this is a reward for keeping quiet.

So whilst banks are pressed to keep more capital we are left wondering what has really changed? After all in a real crisis capital will be seen as insufficient anyway due to the nature of banking. We are left with bank directors provided with Star Trek style deflector shields in any crisis and in my opinion that is  partly why we rumble on with a zombified banking sector and weak economic growth. Putting it another way what Keynes called “animal spirits” are weakened by all of this.