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British banks received a fillip from parliament today, as the Treasury Select Committee called for “more detailed analysis” of the proposal to ring-fence banks’ retail units from the rest of their operations. Banks have criticised the proposal, made by the Independent Commission on Banking, as saddling them with unnecessary costs and restraining their capacity to lend. Signs of a rethink on the proposal sent British banks’ shares sharply higher.
The rally reversed steep declines following Friday’s EU stress test. Although all four of the British banks in the test passed, some of the details that emerged about the banks’ balance sheets spooked investors. In particular, funding costs soared in the test’s “adverse” scenario—which many analysts, including the EIU, think was not nearly adverse enough. The cost of funding for Barclays, for example, rose almost four-fold between 2010 and 2012 in the test, the largest jump in the 90-bank sample. The other British banks in the sample also saw above-average increases in costs, thanks in part to reliance on wholesale funding sources.
Exposure to fickle wholesale markets is one of the reasons cited in favour of erecting firewalls around universal banks’ retail activities. Any new analysis of the retail ring-fence idea should take the implications of banks’ enduring reliance on short-term interbank markets into account.
The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.
“Straightforward to characterise, but difficult to quantify”. The Independent Commission on Banking (ICB), a group assembled by the British government to make recommendations on regulatory reforms, delivered its interim report on April 11th. “Everyone agrees that we need a much more robust banking system than that of the past decade”, said Sir John Vickers, the ICB’s chairman.
A week after the report’s publication, markets continue to mull the implications of the report, as well as the prospects for British banking in general. Tellingly, the initial rally in many banks’ shares immediately following the release of the report quickly fizzled, with all of the major banks now trading below the levels seen on the eve of the report’s publication
It appears that the UK’s approach to restructuring its banking system will rely on higher capital requirements for retail units and an attempt to engineer a viable “challenger” to the biggest banks from the portfolio of Lloyds Banking Group. Other countries with significant financial centres, like Switzerland, have already gone further on capital requirements while others, like the US, have been stricter on limiting the market share of major players.
It may take years to judge whether regulators can promote a more stable and competitive banking market in the UK. In the meantime, markets have shorter-term concerns.
Read more at Financial Services Briefing: “For better or worse” (April 20th)
The Bank of England’s latest “Trends in lending” report paints a subdued picture of credit conditions in the UK. The overall stock of lending continues to fall, particularly for small and medium-sized businesses.
A section of the report on banks’ liabilities, meanwhile, gains extra significance in light of the stubbornly high inflation data released last week. Savers, desperate to keep up with inflation, much less earn real returns, are increasingly squirreling away their money in higher-yielding time deposits with longer maturities. (Guaranteed inflation-beating national savings certificates were recently withdrawn, which makes Buttonwood’s blood boil.)
The share of fixed-rate retail deposits of one year or more has doubled over the past two years. The Economist Intelligence Unit does not expect the Bank of England to raise its policy rate from the all-time low of 0.5% until late this year, prolonging savers’ desperate search for yield for some time to come.
“There is opacity around what fees are actually paid, to whom and for what.” This is one of the conclusions of a new report about rights issues in the UK by a group of institutional investors. The group, known as the Institutional Investor Council, bemoans the fees paid by companies to raise equity capital.
Underwriting fees should be expected to rise during times of stress, given the greater risk that underwriters expose themselves to when managing issues in choppy markets. However, the investor council claims that the average gross underwriting fee since 2007, 3.4%, is unjustifiably higher than the 2.0% average recorded throughout the 1990s. It cites a lack of transparency and limited competition as key factors contributing to the situation. It also notes the common perception among clients of banks and other professional advisors that low fees are a sign of low quality. It then provides this unflattering anecdote:
We were told that extreme pressure could be brought on issuers to pay additional costs, the need for which appeared to come to light only once the process had started. Indeed, one sought to protect itself at the outset from these risks by paying an additional fee dependent on ‘not being held to ransom’ after the process had started.
At the recent UK Financial Services Summit, a panel discussion touched on the need to improve the financial education of consumers, particularly when it comes to saving for retirement. Too many people underestimate the scale of saving that is required to fund the standard of living they expect upon retirement. To be fair, the panelists also noted that traditional investment products largely fall short when it comes to addressing longevity, inflation and a host of other factors that can erode long-term returns.
The Consumer Financial Education Body (CFEB), a group created by the British government earlier this year, published a report yesterday on the link between financial capability and the propensity to save. The measures of capability and saving correspond, roughly, to a basic grasp of personal finance and regularly setting aside money aside in a “rainy day” fund. Using these fairly simple measures—no talk of annuities or target-date mutual funds—a 15-year panel of data on British households found a strong link between education and savings, subject to some variation based on gender, age, income and other demographic factors.
Vyv Bronk of the CFEB, a panelist at the summit, noted that her group aims to raise the level of financial capability in Britain by offering free advice and information on subjects like saving for retirement. Anecdotally, she mentioned another method to get people to “envision” their future financial needs: showing them computer-generated photos of what they will look like when they retire often encourages them to save more. Simple but effective.
The latest survey of financial industry executives by PricewaterhouseCoopers and the Confederation of British Industry is encouraging, with reported business volumes up for the fifth consecutive quarter. But the results are also tinged with disappointment, as survey respondents’ forward-looking expectations have been far too optimistic in recent months.
Last quarter, a balance of 63% of respondents expected volumes to improve over the next three months; in the end, “only” 28% actually reported higher volumes for the quarter. In the latest survey, which closed on September 1st, a net 24% of respondents expect higher business volumes over the next three months. This can either be seen as a warranted moderation in forecast volumes or, given financiers’ recent tendency to overshoot, sign of a significant slowdown ahead.
The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.
The credit crunch was not kind to British banks. Many of the country’s lenders grew dangerously exposed to overheated property markets, exotic derivatives and flighty wholesale funding sources. When the financial crisis struck, these exposures pushed several banks to the brink (and beyond).
Against this dire background, the latest half-year results from the UK’s largest lenders represent a relatively swift return to health. The country’s biggest banks all reported profits for the first six months of this year. For part-nationalised RBS and Lloyds Banking Group, the profits marked a welcome break from a recent string of losses. For the other large domestic banks—HSBC and Barclays—robust increases in first-half results met or beat analysts’ expectations. The results reinforce the conclusions of the EU’s July stress test, which the British quartet passed comfortably.
Read more at Financial Services Briefing: “Recovery mode” (August 6th)
The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.
First came the Swedes. Then the Brits. The Americans also seem keen, as do the French and Germans. When it comes to imposing a special tax on banks, a cursory glance at the countries that favour the levies suggests that the world is united. However, there are some noteworthy dissenters and even among those who agree on the principle of bank taxes there are disagreements over details.
Read more at Financial Services Briefing: “Entente fiscale” (June 24th)
The financial industry in London is finding its feet. In May, the number of new job vacancies in the city’s once-thriving financial services sector was up by more than 80% versus the previous year, according to a new report from recruiter Morgan McKinley. The number of new job candidates, meanwhile, rose by half as much over the same period. The absolute number of candidates, however, continues to outstrip the number of vacancies, suggesting that landing a finance job in the Square Mile remains as tough as ever.
The new, independent Office for Budget Responsibility (OBR), created by Britain’s recently installed coalition government, published its first forecasts on Monday. The group’s GDP forecasts were less optimistic than the ones published in March by the treasury under the previous government. The OBR expects the UK to grow by 1.3% this year and between 2.6% and 2.8% in 2011-14. (The EIU expects significantly slower growth, with a rise of 0.8% this year and between 1.1% and 1.6% over the following four years.)
Despite these more downbeat economic expectations, sterling rallied in response to another aspect of the OBR’s report; a lower-than-expected deficit. Thanks to higher-than-expected tax receipts, the UK’s deficit is forecast to reach 10.5% of GDP this year, down from a previous forecast for 11.1%. Although more manageable, this remains a daunting figure. The measures taken to address it, to be announced in an emergency budget on June 22nd, will be closely scrutinised.
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