Some Actual 'Prudential' Regulation Ahead?

The usual rule of thumb about articles ending in a question-mark is that the answer is 'no'.  (Nice Grauniad example today: "New generation wave energy: could it provide one third of Australia's electricity?")

But let's not be too cycnical.  So now the Bank of England has been conducting another round of stress tests.

The Bank subjected seven major lenders to a hypothetical scenario that involved a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test found that profits would fall more than than they had done during the 2008 banking crisis – by £100bn by the low point of the hypothetical scenario in 2016 - but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.

I have long-held reservations about these banking 'stress tests':  they are rarely stressful enough; and technically, stress-tests should involve a scenario that is a shock to the system, not an ongoing pressure like 'prolonged deflation'.  However, doing something like a stress test is better than doing nothing.

The BoE has reached some conclusions, the headline being rather complacent airy: "The stress-test results suggest that the banking system is capitalised to support the real economy in a severe global stress scenario, which adversely affects the United Kingdom".  Well let's hope they are right. 

But there is a line-item detail that may, just may, cause them to act; namely the easy terms on which buy-to-let mortgages are available (once again). 

While it did not take immediate action to cool this sector - where lending has risen 10% in the first nine months of the year - it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.” It will also be watching the impact of the extra 3% stamp duty announced last week by George Osborne in his autumn statement.

This might, then, be an actual British 'counter-cyclical prudential intervention'.   Correct me if I am wrong, but I think that would be a first -  the relatively new-fangled Prudential Regulation Authority hasn't really done anything at all along these lines as far as I know.

Of course, other countries act in this way from time to time as a matter of course, and were doing so before the crisis.  Our 'PRA' is a belated effort to catch up a bit.  Will they or won't they?

ND

A new source of funding from banks - a dangerous precedent?

As regular readers will know, there is not much love lost amongst the authors of this blog for the big oligopoly of Banks that Western countries find themselves lumbered with. They played a big role in pushing the leverage in 2003-2007 which has led to the depression which we are now only about half way through experiencing. More exasperating in the UK is the lack of punishment for the criminal behaviour of many of the former executives, as discussed ad nauseam.

However, Banks are businesses and like it or not they now lay at the dead centre of a capitalist economy, controlling the flow of money from savers to borrowers and, increasingly, from central governments. They have their own balance sheets, regulations and shareholders to report to.

Yet in fining UBS $1.6 billion, the Governments have found a new substantial source of revenue. After all in the US the money is going straight to the US Treasury and David Cameron has changed the game here to in order that the FSA does not become too rich. The money will go to the treasury, other banks too are going to settle soon, such as RBS - so there are more fines to come and collectively it could make a small dent in the deficit.

It's great politics too, bashing evil bankers and getting money back for ex-servicemen and schoolz'n'ospitals. There is not much incentive to stop the party, in fact they could beef up the regulatory powers and try and make this a regular thing.

In doing this, we further cripple an already busted market. banking is shrinking at a quick rate globally, volumes are low, transactions non-existent; RIF (Reduction in Force) is all the rage. In many ways this is good news, yea to smaller banks, but as an industry its a disaster and for Government to be extracting huge sums on top of new banking taxes already imposed, the push can be too much.

The economy can't recover if the transmission mechanism for money supply is broken. I doubt the Governments' can help themselves though when they see new sources of revenue with positive voter appreciation attached to it.

Chukka gets the Big Crunch?

Now some more frequent readers will be slightly aware of high level of disregard I hold for the labour Business shadow, Chuka Umunna. From is pathetic interviews, populist idiocies and frankly hide-behind-the-sofa dreadfulness whenever he appears on the Gogglebox he comes high up the list of "first against the wall when the revolution comes" ( I loved this phrase, how come lefties gave it up?).

However today in the Telegraph he has said something, unbelievably, that makes sense. That the leverage ratios that are potentially used in an acquisition of a company should trigger further investigation by regulators.

Where have I heard this before - oh yes, here, in one of my very first posts in 2006. Private Equity was in a real blitz then offering 10x leverage plus to acquire businesses. Even at the time this was blindingly obvious as a bad thing per say. Chukka is concerned about protecting his tax base to pay the for public sector worker and a benefits claimants - I am more worried about the destruction of viable companies and with it jobs and pension schemes.

It is still the law that you cannot buy a company with its own assets (i.e the seller can't help the buyer), but with leverage finance, in effect you can. Look at Man Utd and the Glazers takeover, filling the company with debt. Now you can argue that Man Utd has suffered little for this, the business is still growing and thriving. However, the Glazers simply took a huge bit of profit out right at the start and since then have denuded the club of investment - it has become a zombie.

The same is true across the economy, the leverage finance boom left many companies in PE hands, all with huge debts. In fact this has been a key factor in forcing low interest rates despite inflation by the Bank of England, in order to ensure the Zombie companies don't go under.

This has then also led to the Swaps mis-selling scandal, as companies that sought protection against high interest rates as their business model were so financially strained. Instead interests rates collapsed and now the same companies owe millions to the Banks who sold them the swaps. 

It is all messy and an important thing in life is to learn from mistakes. Somehow excessive leverage deals have to be prevented - at the moment with lack of credit, its not an issue, but the boom times will be back one day....

Ego unbounded and unbent- Peter Cummings

It is very lucky today that I am going to work early enough to avoid breakfast; otherwise on reading the paper I may have choked this from the Telegraph:

"In a statement Mr Cummings said he rejected the FSA's findings but would not be appealing the fine.
He said: "Many people must bear collective responsibility for what happened, including governments and regulators as well as the boards of the banks themselves. But the fact that I am the only individual from HBOS to face investigation defies comprehension.
"The decision to single me out for investigation is even more grotesque given that even the FSA has to admit in its notice that other senior people were involved in the critical decisions for which I am taken to task. This is tokenism at its most sinister, and has made it feel throughout like institutional oppression."


Poor Mr Cummings, responsible in the main for signing off dodgy loans with markers like 'approved for business development purposes' when the Credit teams at HBOS had come back saying not to make the loans as they were too risky. Mr Cummings, who indulged in the ultimate 'pig and pork' banking whereby you lend equity and debt (senior and mezzanine) to a client who if they go belly up you will be guaranteed to be over-exposed and take a massive loss. Real banking 101 stuff. Lo and behold, HBOS lost so much money in 2008 a Government rescue via Lloyds was the only way out. Lloyds has not recovered, still writing off billions in losses on real estate loans, of which almost the whole book came from HBOS Corporate Banking wherein Mr Cummings was the boss.   Of course, he wants to blame regulators (who could have sacked him) or Politicians (who could have given backbone to the regulator) - but no one made him sign-off on these loans.   By my guesstimation he has ended up costing taxpayers a bailout of around £20 billion. A ban from working in the City and a fine is getting of lightly - in the US he would be looking at a long stretch, in China possibly the death penalty.   I generally am happy with the Government proposed reforms to the banking system, they will make it safer - but Mr Cummings did not do anything criminal under current or proposed laws. This should change, if it were me he would be done for treason.

Politicised FSA to 'fix' bond markets for Brown.

It seems clear from recent speeches by Adair Turner, about socially useless banks and the curse of bank bonus' that we have someone of the Left in charge of the FSA. And why not, it has been Labour principle to fill the country with Quangocrat placemen to ensure the policy of the Labour party is enforced everywhere and at every level.

The news today is not unexpected, but shows in its true light both the desperation of the Government, the failure of regulation previously and the guarantee of a double dip recession.

This is all quite good for one small announcement. That the FSA will require Banks to hold only Government bonds at tier one capital, no other instruments. Let's ask a rhetorical question, would you rather have bonds invested in UK Gilts or say, Vodafone or BP in the current and future expected climate. Quite.

Instead, banks will be forced to hold UK Gilts, which gets the treasury out of its QE hole by screwing the banks returns. This may sound like a good plan for avoiding bankruptcy but is really just fixing the markets. It also shows how in the past the FSA had little graps on what was and was not tier one capital, now they are going further than necessary to make up for past laxness.

Finally, this imposition on the banks will reduce greatly their returns say by up to 200 basis points being conservative. This is £12 billion of profits not earned to help fix their balance sheets, so enforcing a slower return to the private sector for the banks. Of course to make up this loss they will increase their borrowing rates and this is how we get to a double dip recession. The banks care about trying to stay solvent, if it screws their customers then so be it - it is their duty to their shareholders (which for 2 of them in the UK, means us as taxpayers).

So the result of the change is that the cost of banking to you and I is increased, whilst the cost to the Government is lowered. That is the proposed market fix. Sounds great does it not?

Why G20 banking regs won't work

the papers that i have read today and this blog piece by Robert Peston all agree that the G20 has been something of a triumph for global co-ordination. Yes, the bankers bonus' make the line in the news, but commentators seem happy with the new proposed rule on capital regulation.

This is the idea that banks have to hold more capital to cover potential risk losses and that they must have lower leverage as a result. This should make banking boring.

The downside to this analysis is what I would expect from Financial analysts; in that they miss the politics. Why will France and Germany ruin their banks and ecnomies now when they see the problem as Anglo-Saxon capitalism. France and Germany already have higher public debt ratios than the UK and US.

There is not a chance this will be agreed to in its current form, whatever proclamations are made by G20 finance ministers. Global regulation will have to wait and in the meantime national governments are going to make up their own rules on banking.

Darling, to the City; Que Paso?

As usual, the mansion house speech by the Chancellor is being leaked to friends this morning. So after dinner this evening it will be an even more riveting listen for the audience. Hearing Darling say something you have already heard about, in that wonderful voice of his.....I hope they are serving black coffee!

Worse, the UK Government proposes to do nothing of any import, as posted here Monday. The FSA is fine, the Bank of England is fine and so on. Minor changes needed, biff those nasty hedgies etc.

No mention that the Labour Government might cave into Europe and see the City (and thereby the Country it supports, like it or not) ruined. No mention that Obama and the Tories think radical change is needed.

No mention that the Banks themselves are in favour of an overhaul to Basle 2 regulations and the imposition of rules for pro-cycliality (that is, fixing the roof while the sun is shining in bank lending terms).

Nope, we have finger in the ears government today. After all none of this is our fault, it all started in America.