Were PPI payments more of an impact on the UK economy than QE?

Yesterday brought news on a subject that has turned out to be rather like a vampire you cannot kill. This is the issue of compensation for miss selling of payment protection insurance or PPI. Yesterday it bounced back as this from the BBC explains.

People who were not mis-sold PPI policies may be able to claim billions of pounds more in compensation, following a court ruling in Manchester.

Christopher and Joanne Doran were awarded all the sales commission they paid plus interest for a policy, a total of £17,345.

They are the first people to have all of their commission payments refunded for a legitimately sold policy.

This made me think as a bit more than a decade or so ago I worked for the small business division of Lloyds Bank and recall one of the small business managers telling me that the commission on protection insurance for small business lending was 52%. So according to the BBC it now qualifies.

Under the Financial Conduct Authority’s existing guidelines, consumers who were sold their policies legitimately may still be entitled to claim back commission which is deemed excessive.

This means that policy-holders can reclaim any amount of commission that was in excess of 50% of the premium.

I am also reminded that loans could be cheaper with such insurance or to put it more realistically if you did not take it then your interest-rate was higher. As you can see the poor small business borrower was in quicksand pretty much anyway he or she moved.

As to the new development here is an estimate of the possible impact.

But the judge in Manchester ruled that the Dorans were entitled to receive the whole of the commission – in their case 76% of the premium – plus interest.

Paragon Personal Finance, which lost the case, is deciding whether to appeal against the ruling.

Lawyers have claimed the ruling is a new precedent that could mean that banks are liable for another £18bn in pay-outs.

That may or may not be true but does gain some extra credibility from this.

However, sources in the City were sceptical about that figure.

How much so far?

If we move to the total so far from PPI payments then the Financial Conduct Authority or FCA  tells us this.

A total of £389.6m was paid in March 2018 to customers who complained about the way they were sold payment protection insurance (PPI). This takes the amount paid since January 2011 to £30.7 bn.

Actually it is likely to be a little more than that as the FCA believes it only covers 95% of payments. If so the total is more like £32 billion which even in these inflated times is a tidy sum. We also learn something from the back data as whilst payments began in 2011 they really kicked into gear in 2012 and peaked at £735 million in May of that year. That sort of timing coincides very nearly with when the UK economy picked up as back then you may recall the fears of what was called a “triple-dip”.Moving forwards the boost from this source reduced but intriguingly so far in 2018 it has picked up again to just shy of £400 million a month on average.

Economic impact

This is in many respects straight forwards. As the money is the modern version of cold hard dirty cash as it pings into the recipients accounts. A bit perhaps like last night when I heard several RAF Chinooks over Battersea no doubt instructed by Bank of England Governor Carney to be ready to do a Helicopter Money drop should England lose to Colombia. Fortunately his crystal ball was as accurate as ever.The principle being that you get such money and immediately spend it and in the UK that does coincide with our enthusiasm for what might be called a spot of retail therapy.

Another route may well have been the way that car sales responded. Of course there is a mis-match these days between getting a lump sum and paying a monthly lease as so many now do but that does not seem a big deal. Actually measuring this is not far off impossible though. Back in January 2014 Robert Peston who was at the BBC back then had a go.

Over 18 months or so, banks have paid out around £12bn to those mis-sold the credit insurance, out of a total that they currently expect to pay of £16bn.

It represents an economic boost equivalent to circa 1% of GDP – which is big. It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.

Perhaps he had been reading some of my output as he also pointed out this.

 the UK’s car market last year returned to the kind of buoyant conditions not seen since before the 2007-8 crash.

There was a rise in motor sales of almost 11% to 2.26 million vehicles, according to the Society of Motor Manufacturers and Traders.

Another potential impact could have been on the housing market as whilst in London the effect may be limited because of the level of house prices elsewhere a PPI payment may well be a solid help in deposit terms.

The reverse ferret here is something perhaps unique in the credit crunch era in that it hurts the banks or more specifically the shareholders. I do sometimes wonder if bank boards are not bothered because lets face it lower share prices may be good for their share options assuming they eventually rise. Also of course they have been on a drip feed of liquidity assistance from the Funding for Lending Scheme and then the Term Funding Scheme.

QE Impact

This is much more intangible. In theory there is a boost from asset reallocation and higher asset prices but that is somewhat intangible and is very different from the “money printing” theory of people getting cash and then spending it. That and the associated impact on inflation has mostly been redacted from the Bank of England website. There was a Working Paper in October 2016 which apart from demonstrating that the authors made a good career choice in not trading financial markets gave us these thoughts.

Bank of England estimates suggest that the initial £200bn of QE may have pushed up on the level of
GDP by a peak of 1½-2% and on inflation by ¾-1½% (Joyce, Tong and Woods (2011)).

And also this.

For example, consistent with Weale and Wieladek (2016), evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.

Perhaps they shift to the US because if you look at Appendix B you see that the UK impact is about a third of that and the Euro area impact even less.

Comment

There is a clear moral hazard with the majority of estimates of the economic impact of QE in that they are done by the central banks responsible for it. For example the research above is from the Bank of England and it quotes a paper from Martin Weale who is in effect presented as judge and jury on policies he voted for. So we are much thinner on evidence for its impact than you might think. You may also not be surprised to read that Martin Weale has been an opponent of my campaign to get asset prices represented in the inflation measures.

On the other side the impact of PPI is much more easy to see. The catch here is that of course we have seen a lot of things happen at the same time and it is clearly impossible to be exactly certain about which bit was at play at any one time. We are often more irrational than we like to think so who really knows why person A goes and buys X on day Y? But I think we can be clear that PPI compensation played a solid role in the UK economy recovering and seems set to continue to do so.

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House price rises are nothing to do with us says the Bank of England

Today brings inflation and in particular UK inflation data into focus and I would like to draw your attention to yesterday’s events. That is because the evidence given by Mark Carney and other members of the Bank of England to Parliament covered pretty much everything but that subject! Food for though for those who still believe it targets an inflation rate of 2% per annum as a priority. Indeed the whole process seemed to coin a phrase to be from an Ivory Tower “far,far,away” as we note one of the written questions.

What is your current estimate of the size of the output gap, the potential rate of productivity growth, the natural unemployment rate, and the equilibrium rate of
interest?

It wouldn’t take me long to point out that the evidence is that they are concepts which mislead rather than help. Moving back to the formal reply from Gertjan Vlieghe we did get an implied view.

 so that the economy will move into excess
demand over the forecast period and domestic inflationary pressure are likely to rise even as the fading contribution from past import price rises leads to a fall in headline
inflation this year.

Gertjan followed this up by suggesting this.

I think policy rates are likely to rise, in my central view, by 25bp to 50bp per year over the forecast period.

The problem for him is that he is like tumbleweed in the wind looking at negative interest-rates then swinging round saying they will rise to 2% so far managing to be something of a reverse indicator.

The UK Pound £

This has been in a weaker phase since the Unreliable Boyfriend Mark Carney did his public U-Turn on a May Bank Rate rise. In terms of the most important currency for inflation trends the US Dollar we are now at US $1.335 some ten cents below the previous peak. Thus we are back in a phase where this will add to inflation. Not all of the move is Mark Carney’s fault because there has also been a phase of what we might call “King Dollar” but he did give it a push down the hill. This means he has operated in the opposite direction to his inflation target.

The Oil Price

Whilst the overnight news is that we have seen a dip back in the price of crude oil the trend since late June has been higher and higher. Thus we face US $79 for a barrel of Brent Crude Oil as opposed to more like US $45 when this move began. Or if you prefer it is some 47% higher than a year ago. So we face some energy price inflation.

Today’s data

If we look we see the clearest example of the two factors above below.

Prices for materials and fuels (input prices) rose 5.3% on the year to April 2018, up from 4.4% in March 2018.

As we look into the detail we get more conformation of this.

 This was driven by crude oil prices, which have increased on the year at a rate of 19.9% in April 2018, 6.4 percentage points higher than in March 2018.

As to the second factor I am sorry to have to tell you that our official statisticians are looking in the wrong place.

The sterling effective exchange rate index (ERI) rose to 80.3 in April 2018. This is a 1.4% increase from March 2018 and is the largest monthly growth since September 2017 when it rose 2.1%……..All else equal, a stronger sterling effective exchange rate will lead to cheaper inputs of imported materials and fuels.

Anyway the month on month figures confirm my theme as well.

 On the month, inflation for imported materials and fuels was up 0.5%, after prices were flat in March 2018.

So we are seeing a turn in the inflation chain from lower to higher which has not yet reached the output data but will do so in the months ahead.

The annual rate of inflation for goods leaving the factory gate (output prices) remained at 2.7% in April 2018 . On the month, output inflation was 0.3%, unchanged from March 2018.

Consumer Inflation

There was better news on this front.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in April 2018, down from 2.5% in March 2018.

Where this particularly impacts on the economy is when we compare it with wage growth. This has been given a lot o media attention and we can now say that real wages have finally stopped falling on this indicator although I am more cautious about saying they are now rising unlike the Bank of England.

wage growth improves somewhat
due to reduced labour market slack, ( Vlieghe)

Perhaps they have found this from talking with Billy Bragg or from areas such as Spotify play lists. So let me help out by saying I have been playing Hold Me by Carly Rae Jepsen at the Fleetwood Mac Festival a couple of years or so ago a lot recently. Sadly the recording quality is not top-notch so if the Bank could help out I would appreciate it.

Moving to the factors giving us lower annual inflation we saw this.

The largest downward contribution to the change in the rate came from air fares, which were influenced by the timing of Easter.

Also the price of men’s clothing fell which provides a bit of gender equality as usually news from this area if from women’s clothing. Against that as I am sure many of you are aware the price of diesel and petrol at the pump rose as the factors I discussed earlier begin to impact.

House prices

We have a familiar drum beat and bass line here.

Average house prices in the UK have increased by 4.2% in the year to March 2018 (unchanged from February 2018).

Although we did get another in my series of updates on never believing anything until it is officially denied. From the Guardian.

Gertjan Vlieghe also denies that QE has fuelled Britain’s housing market.

He points out that many countries have used quantitative easing to stimulate their economies since the financial crisis – but Britain is the only one to have seen such as house price boom.

Ireland?Spain?Germany? Well anyway we could of course simply look at the impact of the Funding for Lending Scheme on mortgage rates which the Bank of England estimated at up to 2%.

Comment

The good news is that UK inflation has been moderating in 2018 so far but the not so good news is that the winds of change are now blowing in the opposite direction. We got a hint of this from the much maligned Retail Price Index today as well as a reminder of a blind spot in UK inflation measurement.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

The blind spot it highlights is illustrated below.

Other housing components excluded from the CPI, which increased the RPI 12-month rate relative to the CPI 12-month rate by 0.11 percentage points between March and April 2018. The effect came mainly from house depreciation and council tax.

House depreciation is an odd way of doing it but t has house prices in it as well as mortgage rates whereas the CPI has neither. When our establishment felt that they could get away with this no longer they chose to ignore this and assume that owner occupiers pay themselves rent when they do not. That is what an Imputed Rent is and the numbers are based on this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to April 2018; down from 1.1% in March 2018.

I hope to have the opportunity to explain this at the Royal Statistical Society next month at their public meeting. You reduce inflation by excluding things which exist and not only can be measured but are paid and replace then with ones you make up, Many have doubts that they can measure existing rental trends and suggest the numbers are too low by around 1% per annum. So let me credit the UK media who in general have roundly ignored the CPIH inflation measure as they have done exactly the right thing.

 

 

 

Is UK inflation rising or falling?

Today brings UK inflation data in to focus but before we get there we have received almost a message from the past from Nigeria. What I mean by that is that the inflation rate of 15.37% it has just reported for December is a reminder of past problems in the UK. Whilst it is a reduction on November consumers in Nigeria will be focusing on food price inflation of 19.4% no doubt whilst their central bank tells them it is non-core. We even have a hint of a consequence of hyper inflation as I note three different unofficial estimates for its inflation appearing and they are 600%, 3000% and 5067%. Aren’t you glad that’s clear?!

The trend

This year has started with inflation concerns as a theme and they have come from two sources. One seems to be something of a rehash of the tired old “output gap” theory. This has perhaps been given a little more credence this year as the world economy has been doing well and finally as unemployment falls in so many places we will then supposedly see some inflation as the Phillips Curve leaps from its grave like Dracula. Or something like that. Putting it another way there are overheating fears based on similar lines. William Dudley of the New York Federal Reserve was expressing such fears last week in remarks and in the Wall Street Journal. The problem for such thinking is that “output gap” style theories have been consistently wrong in the credit crunch era.

What we actually have as I looked at on the of this month is rises in commodity prices. Another example of this was seen overnight as the price of a barrel of Brent Crude Oil nudged over US $70. It has dipped back below that today but the underlying message is of an oil price around US $14 higher than a year ago and US $25 higher than the  recent nadir of late June 2017. There are various ways of looking at the impact of this but below is one version.

The New York Fed has a go at measuring inflationary pressure as shown below.

The UIG derived from the “full data set” increased slightly from a currently estimated 2.96% in November to 2.98% in December. The “prices-only” measure decreased slightly from 2.22% in November to 2.18% in December.

This is a better method than the attempt to look at core measures ( which for newer readers mostly means excluding the most important things like food and energy). What it shows us is some upwards pull on inflation right now albeit that some of that is from financial markets and maybe self-fulfilling.

Shrinkflation

My theme that the UK is particularly prone to inflation gets another tick. From the BBC.

Coca-Cola has announced it will cut the size of a 1.75l bottle to 1.5l and put up the price by 20p in March, because of the introduction of a sugar tax on soft drinks from April this year.

Today’s UK data

Let us open with a welcome piece of news.

The all items CPI annual rate is 3.0%, down from 3.1% in November.

The only person who may be shifting in his seat is Bank of England Governor Mark Carney who has yet to write his explanatory letter to the Chancellor about it being over 3% and now of course it isn’t! Embarrassing.

The reasons for the dip are based on air fares and something parents will have welcomed.

The largest effects came from prices for games and toys, which fell between November and December 2017 by more than they did a year ago.

The air fares move is intriguing as it is a technical move based on them having a lower weighting or the implied view they are relatively less important. So they rose by a similar amount but had less impact, curious.

What happens next?

If we look a producer prices we get a glimpse of what is coming over the hill in inflation terms.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to December 2017, up from 3.1% in November 2017.Prices for materials and fuels (input prices) rose 4.9% on the year to December 2017, down from 7.3% in November 2017.

As you can see the immediate impact is a small pull higher but behind that there is less pressure than before. On the latter point we see yet again the impact of the oil price.

The largest upward contribution to the annual rate in December 2017 came from crude oil, which contributed 1.69 percentage points (Figure 2) on the back of annual price growth of 10.6% (Table 3), down from 26.9% last month.

If we look at what has happened since the numbers were collected the oil price is up around US $4/5 but in a welcome development the UK Pound £ is up around 4 cents against the US Dollar. So we can conclude two things. Firstly the impact of the lower Pound £ is quickly washing out of the system and in fact as we look forwards it will be a reducing factor on inflation if it remains at these levels because as I type this it is around 13 cents higher than a year ago. Meanwhile the higher oil price I looked at earlier is moving things in the opposite direction. So if you prefer we are moving from an individual phase to more of a world-wide one.

There is a long section in the report on the trade-weighted £ which has many uses but in this area I am afraid that Men At Work were correct due to so many commodity prices being in US Dollars.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

A  much bigger mistake

The UK inflation establishment has pushed forwards a new inflation measure and when it was mooted back in 2012 it got a wide range of support. For example the committee which recommended and pushed it called CPAC included representatives from the BBC ( Stephanie Flanders although she left before the actual vote) and the Financial Times ( economics editor Chris Giles). But their main change has failed utterly unless you actually believe costs for those who own their own homes have done this over the past year.

The OOH component annual rate is 1.3%, down from 1.5% last month.

Does anyone actually believe that housing costs in the UK are a downwards drag on inflation? Even someone looking at us from as far away as Pluto could spot that one is very wrong. After all this morning also saw this released.

Average house prices in the UK have increased by 5.1% in the year to November 2017 (down from 5.4% in October 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Not exactly the same month but if we look at the trend we see that what buyers regard as 5% has somehow morphed into 1.3%! They might reasonably become rather angry when they learn it is because something which does not exist and is never paid called Imputed Rent that is used to lower the number. This also leads me to have to point out that this from the Office of National Statistics deserves the banner of Fake News

mainly from owner occupiers’ housing costs (OOH),
with prices increasing by less between November and December 2017 than they did a year
ago. OOH costs have changed little since September 2017,

This implies they have measured the costs when the major influence is imputed instead.

Comment

It is a sad thing to report but UK inflation measurement has been heading in the wrong direction since at least 2012 and maybe 2003 since CPI was introduced. Much of the problem comes from our housing market which CPI mostly ignores ( the owner occupied housing sector is given a Star Trek style cloaking device and disappears). It leads to this problem.

The all items CPI annual rate is 3.0%, down from 3.1% in November…….The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
4.2%, up from 4.0% last month.

Over time a gap like this is significant in many respects and has consequences. After all the inflation target was only moved by 0.5% so does the 1.2% gap highlight another possible cause of the credit crunch? Next whilst the gap is 1,1% to the headline RPI that means students pay more and reported GDP is higher. Of course GDP would be higher still if CPIH was used.

The all items CPIH annual rate is 2.7%, down from 2.8% in November

No wonder more and more people are losing faith. Let me end on a positive note which was my subject of the 19th of December which highlighted a better way.

 

 

Has UK inflation peaked?

Yesterday we heard from Bank of England Chief Economist Andy Haldane.

On 3 November, I visited Greater Manchester on the latest of my Townhall tours.

He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.

For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives.  The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate

The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.

Moving to today’s theme of inflation Andy did have some thoughts for us.

It is well-known that increases in the cost of living hit hardest those on lowest incomes.  Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.

I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?

 Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.

That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.

International Trends

This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.

Germany saw a smaller decline but a decline nonetheless.

Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.

Today’s data

This will be received in mixed fashion at the Bank of England.

The all items CPI annual rate is 3.0%, unchanged from last month.

The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The factors keeping inflation up were as shown below/

In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.

There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.

CPIH

The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.

Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.

This is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.

I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the  impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.

The OOH component annual rate is 1.6%, down from 1.9% last month.

This means that what our official statisticians call our “most comprehensive” measure tells us this.

The all items CPIH annual rate is 2.8%, unchanged from last month.

Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?

Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.

The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.

The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.

The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.

The trend

This mornings producer price dataset suggested that the inflation peak has passed.

The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.

So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.

Comment

We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.

However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!

I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.

CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.

 

 

 

 

 

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

 

 

 

Is there still something rotten in the UK banking system? I think so

One of the long-running themes of this blog is that there is something rotten in the state of British banking. This does not make it alone of course as plenty of other banking systems have similar issues. It was only yesterday I was discussing the latest details of the economic collapse in Greece which has seen her banks collapse and have to be rescued with ever more money. This gives us a clear idea of the modus operandi of the “too big to fail” strategy which is that the bankers always win. A central tenet of my argument against that philosophy is that it gives the banks no real incentive to change and so we rumble along with many of the same problems and issues which contributed to the credit crunch. My contention is that so far we have only dealt with the tip of the iceberg of the problems with our banking system.

The Payments Protection Insurance Scandal

I wish to use this as an example of how so little has changed. I would like readers to consider as I outline the scale of this issue who has been actually punished for their involvement in this? I am struggling to think of anyone at all.

For those unaware of the details this was where loan insurance (PPI or Payment Protection Insurance) was sold with a loan or overdraft by a bank. Nothing wrong with that it itself except that it was often sold to individuals who could never claim such as the self-employed and pensioners as you had to have employed income to qualify for a payout. Why did it happen? The banks received juicy commission payments for selling this insurance. To give you an idea of the scale I worked for the small business section of Lloyds TSB for a time in the early part of the last decade and was told that the commission for its overdraft protection plan could be 52% of the total premium. It made me wonder how it could ever pay out on any scale as more than half the premium was “lost” at the start. But you can also see the attraction of this for staff as the commission was a large part of how they could earn a bonus via sales targets. Also in another bad influence it led to a growth in the management structure as they placed themselves in the chain of command and took the credit and also bonuses for themselves for being responsible for such large juicy commission payments. Management saw its role as “kicking ass” so to speak if commission payments were not high enough and taking the credit when times were good. You may have spotted that this had nothing to do with a relationship with a banks customers as many were exploited and was often a shocking way of dealing with staff.

This bubble eventually burst and we now see the scale of the cost. Which magazine has estimated this week that £12.3 billion had been put aside for provisioning against the claims. As Royal Bank of Scotland or RBS have added £400 million only this morning we can make that £12.7 billion and rising. I pointed out earlier that there had been a lack of punishment for this -as after all bank management had taken the credit and bonuses in the “good times”- but actually the situation is even worse as Which points out.

At the same time, senior Lloyds executives who presided over PPI are still due to get bonuses worth hundreds of thousands of pounds early next year.

As I said at the beginning of this article there remains something rotten in the state of British banking. Even worse the large amount of provisions is unlikely to be enough as Which has calculated that even with the extra £1 billion that it has announced Lloyds provisions will run out in March at the current rate of claims. So we see another theme of this blog which is that big mistakes are admitted piecemeal which we saw for example as the Irish banking crisis unfolded. As some must know the truth there needs to be an investigation as to why it is not revealed. Otherwise we will go on with a drip drip feed of more claims at each announcement of the latest bank figures.

If we review this section we may have a brief sigh of relief and think at least that is in the past. Unfortunately I do not believe that there has been any fundamental change in the sales cultures of our banks. Staff will be put under pressure to hit sales targets which on the upside bring bonuses and on the downside help avoid the sack. This pressure is one of the main drivers of miss-selling. I do not know what the next scandal will be but with the same culture it will be along. For those who cry that better regulation will help us I would point out that the track record of the 4,500 employed by the Financial Services Authority of FSA is that they do not know either, or perhaps more worryingly that they have been willing to overlook it.

Royal Bank of Scotland

Today’s figures have confirmed again my argument that our banks are in trouble and need fundamental reform. Please remember as you read the quote from the BBC website that out banks are supposed to be in a recovery period and improving.

RBS reported a pre-tax loss of £1.26bn for the three months to 30 September, against a £2bn profit a year earlier.

According to Chief Executive Stephen Hester this is called “making progress”. Has anybody checked if he walks backwards? Mind you the BBC seems to have accepted that line.

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

Apparently all losses,charges and mistakes are temporary and profits are permanent and will exist to the end of time. I have updated my financial lexicon accordingly.

Also there are serious issues with the standard of and reporting of profits and losses. if you would be kind enough to glance up and remind yourselves of what the BBC reported now see the Daily Telegraph.

Royal Bank of Scotland has reported a £1.38bn third-quarter loss

I am glad that this is clear! Also we have the issue of this below which to my mind is a clear accountancy scandal but gets little attention because it is not understood. From the RBS report.

after £1,455 million pre-tax accounting charge for improved own credit

Yes that is correct if you do better you end up with a charge and if you do worse you end up with a profit. Regular readers may recall I have discussed this form of profit manipulation before.

If  we take a step back and look at the situation I am left wondering how much actual banking RBS wants to do. The journalist Ian Fraser who follows it closely has recorded various instances of it withdrawing credit from small and medium-sized businesses. Also in echoes of what happened in Japan when lending targets were set some are seeing the company lending them money change. No doubt stale or reduced loans will not be in the numbers in the entity presented to the Bank of England’s Funding for Lending scheme. You may have spotted that the Bank of England has adopted the flawed target culture here too.

If all this has made you uncomfortable there is always in Matrix terms the blue pill and this from RBS Chief Executive Stephen Hester.

The RBS restructuring programme continues to make excellent progress as we take the action needed to make the bank safer and stronger

I wonder how many of the dreadful commercial property loans RBS made have been fully accounted for.

Libor and energy market manipulation

We now know some of what went on. The London Interbank Offered Rate or LIBOR manipulation enquiries will gather pace over time. Whilst Barclays took the initial flak it was not possible for one bank to manipulate such a market on its own there had to be others. Now we see Barclays -not its year is it?- threatened with a US $470 million fine for manipulating the energy market in California.

Santander

Due to its problems in its home country of Spain and according to its latest report bad debts in Brazil too Santander is no longer expanding its lending in the UK. Will it retrench more? We have to face that possibility that a (likely) deepening of the economic crisis in Spain where there were further poor numbers today will led to Santander being less willing to lend in the UK. I have argued many times that whilst it was politically convenient at the time we let her buy too much of our banking sector. Please do not misunderstand me Spain is a friendly nation and I have no issue with a Spanish bank buying a UK one, my issue is the scale of what happened, and it made us vulnerable.

Comment

I have managed to get to this point without revealing that due to the commercial property losses not fully revealed on our banks and likely derivatives losses that I think that they could easily be insolvent. Adding this to the list of problems above shows the scale of the problem that we face I think especially as there is little or no sign of a genuine change of culture. I gave my views as to what we should do just over a year ago in the article linked too below.

http://www.mindfulmoney.co.uk/wp/shaun-richards/a-plan-for-reforming-the-uk-economy-start-with-the-banks-right-now/

But as 2012 has developed let me give you a signal I have seen which has confirmed me in my view and hurt many of you in your pockets.

Co-operative Bank, Halifax and Clydesdale and Yorkshire Banks and Santander and Bank of Ireland and Royal Bank of Scotland

They have all raised standard variable mortgage rates this year on what are essentially captive customers. Interesting in a period where we keep being told interest-rates are low and in fact the official description of the ZIRP strategy is Zero Interest Rate Policy. How do you get to zero by raising them?