Thursday 28 April 2016 The one stop source for free breaking news, expert analysis, and videos on AIM and LSE listed shares
By Charlotte Argyle | Friday 28 March 2014
I like Bankers..... There you go I said it. My guilty little secret is out. What I don’t like though, is the concept of an organisation being too big to fail.
This contagious culture of pernicious corporatism, magnified since 2008, has provided a safety blanket to some of the most inefficient organisations, and I am not just talking banking with the likes of the Northern Rock, Co-Op, Lloyds and RBS, I am also talking about state subsidised entities like the dripping wet Beeb and the super litigious RSPCA, both of which act as a vehicle for propaganda and frankly impact my freedom when it comes to choice.......but more of that later.
The point is this, keeping something running at all costs, rather than letting the power of the free-market prevail is the only real crime at hand here. Rather than the actions of our pinstriped, suited and booted banking friends we should look at the actions of government and the parameters which were put in place, or not as the case may be, to prohibit the activities of a few individuals.
This is not some kind of mass conspiracy on the scale of the Moon landing (let’s put aside Forex rigging for now) for the most part the remaining masses – 1.1m people (3.8% of the UK workforce- 31 March 2013 and 31 March 2012) have worked tirelessly to sustain London’s position as a global hub (New York – we are coming to regain our crown, watch this space).
When I think of the traditional characteristics of this centuries old industry, I think back to the first Goldsmith of banking and some of the traditional characteristics evoked are those of precision, integrity, methodical decision making, discipline, strong judgement and safety. A stark contrast to the 7 deadly sins of which Bankers have recently been vilified. ‘Banker ‘Bashing is starting at an increasingly young age.
We need look no further than the 1964 children’s fable - Mary Poppins for evidence - Mary takes the children to the bank where the Father George Bank is employed, Mr. Dawes Jr. and Mr. Dawes Sr. — George's Bank’s employers — aggressively try to persuade Michael to invest his pocket money in the bank to the point of actually snatching it out of his hand without waiting for his permission.
When Michael protests, the other customers misunderstand his cries and start a run on the bank that forces the bank to suspend business. Is it any wonder that bankers are now painted as being the 21st century personification of Satan. By taking these analogies as unquestionable truths we also become tacticly complicit when it comes to the belief that people are somehow incapable of making their own choices when it comes to their money.
As unacceptable as were the actions of a few senior bankers, I question why no one is pointing the finger at the consumers who took the unwise lending decisions around over-leveraged spending, those who have consistently lived outside of their means and those who didn’t read the small print when it came to PPI. In these cases I would ask who was really exhibiting the 3rd Deadly sin of greed – And so I came back to choice.
So let’s try and move aside from the image of Bankers being like ‘Pigs at a trough’ trying to get a piece of the action, whilst I am sure this did go on, but for many it is about long hours and intensive risk management. For the most part, banking has provided a buoyant platform for employment within the UK. Its beneficial effects have rippled out to around 34,000 businesses who provide financial services and more than 37,000 businesses providing accountancy services.
As of March 2013 - 73.3% of the total tax contribution in the UK was attributable to banks. This was in the region of £65.0bn, or 11.7% of total UK government tax receipts. When you consider that burden of £1.6bn of bank levy was shouldered by the FS sector as a whole, I cannot help think that we are biting the hand that feeds us when I look at it like that.
Whilst the contributions to the UK economy are evident, this orthodox fallacy of bailout at all cost (An indication of Number 7 - Pride one might say) is an ineffective as a gambler repeatedly backing the same horse which has been declared as lame or a shop repeatedly selling the same goods at a loss, It doesn’t work and it never will. It also doesn’t tackle the real crux of the issue. The most important indicator of how people will behave and how they are targeted to behave is culture when this is combined with a lack of personal accountability it proves for a toxic mix.
However, who can blame them when the bailout gravy train keeps stopping by. It is also clear that correlations can be drawn between internal culture and the modelling of financial products and services and approach to risk. The parameters by which success within banking is gauged can often be unclear, what is clear however, is the impact a ‘negative’ culture has on cannibalising the core purpose of a bank - to act as a safe instrument to match clients to appropriate risk and keep deposits safe.
When it comes to culture though, help is at hand. The banking and financial services sector is undergoing the biggest systematic regulatory change in a generation. The premise is to prohibit over-leveraged lending, stabilise and shore up capital reserves, protect and ring-fence consumer funds and mitigate further risks from future bailouts and government recapitalisations.
Let’s touch about one of the most destructive measures to give these Banker Boys & Girls a tap on the nose though - Banking Levies. These have been in existence since 2011 and the current figure of 0.088% applies to the value of all UK Debts (Including money deposited with banks!!!) Let’s be honest – The Government is salivating at the estimated £2.5bn in revenues which will be from this. Just for the record that’s about 19% of reported profits of the ‘Big Five’.
Watch this space, this will mark the end of ‘Free’ banking as we know it. This imposition creates further penalties, encourages the banks to pass on some of the tax to savers and via lower deposit rates, erodes the ability for banks to spread the risks, risks they make with OUR money (even though retail deposits are exempt – don’t be naive, as it all boils in the same pot and an unsafe bank is an unsafe bank). This levy also prompts them to look for riskier ways to raise the money which they now have to find to feed the stomachs of our government.
I shan’t bore you with the over-zealous macro-prudential directives coming out from the EU or ESMA, but if you are feeling inquisitive review some of the below:
Volcker Rules on proprietary trading
ESMA proposing the location of clearing houses (within the EU)
Prohibition of short selling within Hedge Funds
Increased LTIP’S (long term incentive plans) and Board sanctioned caps of up to 200 % on bankers bonuses
Ring-fencing of wholesale and retail banking operations
Deferring of Bankers bonuses for up to 10/16 years
Discussions around the merits of fully reserved banks
Basel 11 requirements relating to Capital and Basel 111 to include Capital, Liquidity and Leverage
The Liquidity Coverage Ratio (LCR) which defines the amount of unencumbered, low risk assets (such as cash or gilts) that banks must hold to offset forecast cash outflows during a 30-day crisis
Leverage Ratio targets
Capital Requirements Regulation for banks to increase from a minimum of 7% -13% of risk weighted assets (RWAs)
What is evident from the FCA’s ‘Cultural Audit’ is that changes are afoot. Banks will quickly have to understand how to balance the pressures coming from regulatory authorities, with the internal desire to retain talent and diminish natural churn which will inevitably result from the practicalities of implementing codes of practice which have a deferred or detrimental effect on employee financial gratification.
Measures which should serve as a way of enforcing clear disciplines to the industry simply serve as a way of reducing UK Banking competitiveness and in most cases act as a smack on the derriere for those who did have not had any real involvement, authority or influence over the mistakes made by the few. Being realistic though, culture is about people, not what is written down on piece of paper. By nature people are unpredictable, idiosyncratic and often make mistakes. A business is nothing without its people and the dedication and high levels of service within Financial Services organisations needs to be applauded. On the most part the savings and mortgages of the British public are safer in the U.K than anywhere in the world.
Rather than prohibiting the ability of banks to operate we should be opening up the sector in a way which only the free-market can. Metro Bank has done a great job at this but we need to see many more challenger banks. This is after all, the only way to ever give the British public any real choice. It seems though that ‘Banker Bashing’ is all too popular right now from those with little or no professional experience within the sector of real understandings of the complexities.
The politics of envy is at work and by coincidence envy is the 6th deadly sin.
Charlotte Argle is known as "Tom Winnifrith's fave Tory blogger". This "daughter of Thatcher" will be one of 16 bloggers sitting at the blogger's cafe at UK Investor Show on April 5. To meet Charlotte and the other bloggers register here NOW (less than 50 tickets left)
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