Page last updated at 23:15 GMT, Thursday, 18 March 2010

City Diaries: "Laura"

Man looking at a falling graph

Laura (not her real name) works for a commercial bank in London. She is writing a diary on the mood in the financial industry as it goes through dramatic changes.

19th March: What should be in the next Budget?
petrol pump
"Many business will feel the effect of record fuel prices"

Q: When is a budget not a budget but a manifesto?
A: When it is delivered 14 days before a general election is announced.

It is therefore quite likely that much of the pain will be either hidden or non-existent as the chancellor - if it's the same guy after May 6th - will be able to have a second "emergency" budget after the election if he so chooses, rather than spooking the electorate now.

I don't expect much from the upcoming budget but am prepared to give the chancellor the benefit of the doubt as it seems he is much more inclined to give a more honest picture than the prime minister or party machine.

Volatility in the markets in recent weeks and the continued hammering of sterling do not bode well for the economy if the election is hung or if the budget fails to outline a credible plan to cut the deficit and wean the economy off state handouts relatively quickly. We are already paying a higher rate of interest on our public debt than other G7 nations, something which undermines our continued AAA credit rating and global position.


The public sector needs a reality check

One thing which is unlikely to be changed is the 3p increase in fuel duty earmarked for the 1st April after the last budget. Retail, manufacturing, tourism and discretionary spending will all suffer as a result of record fuel prices, particularly when coupled with electricity and heating bills which have not come down by anywhere near the amount wholesale energy prices have. After April 1st 74% of the price at the pump will be tax, which is a disgrace and hugely damaging for people who just want to go about their daily lives.

I would like to see not only some recognition that the public sector needs a reality check in line with that seen by the private sector, but also action on fuel poverty, and declining rates of private pensions and savings amongst younger people. A general simplification of the tax system for both businesses and individuals would go a long way to eliminate tax evasion and bureaucracy. It is probably too much to hope that the 1% increase in NI next year for employers and employees is scrapped but I believe this will prolong a slow recovery of the economy in the medium term.

Private sector pain

Conservative plans for a reduction in small business tax in their post election budget in June/July (if elected) are the right way to go to ensure private business can flourish in the years ahead and should prove cost neutral if not income generative for the Treasury.

Companies I have seen recently for bank lending have mostly implemented the job losses and restructure they have needed to stave off immediate threat to their balance sheet but many have yet to get to the low point in their sales downturns so more may need to be done. What is apparent is that the wage largesse seen pre the credit crunch is unlikely to return and employees should expect their pay freezes to continue into next year if not beyond.

It seems strange that unemployment claimants are going down but over 100,000 people have added themselves to the economically inactive column at the same time. Unless there is a structural shift in the UK economy it is difficult to see how many of the now 8 million people who are out of work (through choice, illness, training or other) are going to be brought back into economic productivity anytime soon.

11th Feb: Addressing the deficit

I have recently seen several companies who are now laying off staff at the end of the painful process of adjusting overheads to keep up with falling sales over the last 18 months. Many of these will not come into the unemployment statistics (assuming they claim Jobseekers Allowance) until March at the earliest so the slight improvement in unemployment figures look shaky at best.

Job centre
"Several companies are now laying off staff after falling sales"

One company in particular stood out - it had been trading for 30 years and although had seen downturns before it was not in a sector normally affected. The directors had been relatively relaxed about contingency planning as for years our economic growth ensured each year a profit was returned. Now they are down to 10% of the profit they had just over a year ago and have had a rude awakening as their current bank effectively told them to find another lender or else... all within a one month timescale. I won't say the turnover but needless to say it is not small and the company employs nearly 400 people who are blissfully unaware this is going on around them.

A fundamental flaw in our financial system is entirely reflective of the modern world where you can go online and buy something which then arrives the next day in the post. We have an immediate gratification culture which has spread to financial services with online sales of car finance, loans, insurance, savings and even mortgages. With the exception of the latter, all of these transactions can be completed without ever having to speak to anyone let alone meet them.

Many of the FSA regulations are unintentionally ironic and viewed as a simple tick box before lending - this is particularly pertinent to KYC or "Know Your Customer". If you are a British citizen this extends to not much more than taking a copy of your passport and verifying your home address with a utility bill. The purpose of this regulation was broadly supposed to ensure that a) customers are being treated fairly, b) products are appropriate and properly explained, c) you are who you say you are, and d) that the bank knows enough information about you to be able to spot incongruous or suspicious activity early.


A return to locally-based lending and relationship banking is needed

The rise of Northern Rock was a volume-driven growth and the quality level inevitably suffered. However many banks have the same model, particularly with consumer products such as credit cards, loans and mortgages. Volume growth means transactional lending with as little human interaction and staff levels as possible. You are a number not a person.

This strategy has lead to a disconnect between bank and borrower which is not only risky for the borrower but risky for the lender too. Many of the write offs we have all suffered have been on car loans for example, with vehicles just abandoned and the bank having no sight of customer's wider finances to see early warning signs to step in and help. Unaffordable loans have been granted for a variety of reasons on both sides which are now uncollectable and dragging borrowers down.

To adapt a Conservative Party phrase - "British banking in society is broken". A return to locally-based lending and relationship banking is needed. Large institutions can adopt this, as some already have, but the big four need to follow. Return can be increased through appropriate dialogue with customers about their needs and hopefully the lower write off levels that the increased sight and cooperative working between a bank and borrower can bring. As with all things, it should be less about the process and more about the people - something my colleagues and I would like to get back to.

Bonuses

Bonuses are not only being paid to the few investment bankers working in the profitable sections of RBS and Lloyds as they would like us to believe - I know that a local business manager has received £16,000 for last year's work. Yes that person was on target but the part of the bank they work for was not.

Many of my colleagues are not at all impressed that peers working for taxpayer-funded banks are getting larger bonuses than we are, when we managed to make a profit and have not had half our book underwritten by any special liquidity schemes. The suggestion that bonuses are only being paid in order to stop top staff going elsewhere cuts little ice given the number of unemployed bankers out there at the moment with little prospect of a job.

One thing that has been overlooked in the analysis of the 'improved' loss reported by these two banks is the amount of money they have saved on their wage bill by cutting (conservatively) 15,000 jobs in the last 18 months. Let's be generous and say that all those employees were earning £20,000 a year and that total cost of employing them when you take in NI and pensions was £40,000.

The total amount saved from the wage bill would therefore be around £600m. To still be making massive losses despite this enormous cut in overheads is an achievement. Total cost to the taxpayer from the bank bailout would also need to take into account the several hundred million social security bill for these staff now not earning, as well as the reduction in income tax receipts.

National Shop Stewards Network demonstrate outside the Bank of England in London
"I am yet to hear any union boss come out in support of members in financial services"

Structural changes in an industry can bring innovation and improved efficiency but in this instance it has been a case of fewer staff doing more work for the same reward - not withstanding below-inflation pay rises for most. If this was the public sector the unions would be howling and in the case of British Airways they would be on strike.

Perhaps 20% of bank staff are union members across the sector - although that number would fall in investment banking. I am yet to hear any union boss or lobby group come out in support of their members working in financial services, but that is I suppose what happens when your entire industry has become a social pariah.

Without wishing to sound like an angry kid, the European dictat that our nationalised banks need to be broken up to ensure fair play for the rest of us, is having zero impact in the short term, with the likes of RBS being given five years to complete their sale of Williams & Glynn.

What is happening on the ground is that by having access to cheap money, and the option of putting dodgy debt into ring fenced taxpayer entities, we are routinely being undercut on borrowing rates when pitching for new business. The offers on the table from the other side are at a level which any normal bank would not make money on, so if next year RBS and Lloyds are back to profit, at what price has that come to the rest of the industry?

26th January: US Banking Regulations

Barack Obama
"The fiendish simplicity of Obama's proposal made me laugh"

In a similar way to payment protection insurance on your credit card debt, the Americans are levying a "premium" on bank profits for the next few years to recoup the amount invested by US taxpayers into the industry. Individual banks that were bailed out have to repay both the money they borrowed and, if they are above a certain asset size, the levy on top.

What made me laugh about this proposal was the fiendish simplicity of it all. No messing about with a certain rate of tax paid by the employee here and a different tax paid by the employer there. Once again the Americans take a bit of time to work out what they want and deliver it in a simple package which no amount of non-domiciliation can avoid.

The irony here is that the American government is likely to extract a larger tax chunk from the UK banks big enough to qualify (including RBS), than the Treasury will with their political point scoring bonus tax. In addition, as no staff are directly affected (although lower retained profits may mean a lower overall bonus pot), few people if any are going to bother looking into relocation from New York to Zurich.

You do wonder what other horrors this will bring out of the woodwork

There are occasions where showing your hand first can be an advantage - you can hail yourself as the leader on an issue, and shape world policy and debate. On other occasions you are just giving your competition the chance to out manoeuvre you, or to improve upon flaws exposed by public scrutiny. I believe that this is one of those occasions where in our desperation to be "decisive", and to take the lead on being tough against bankers we have shot ourselves in the foot. I expect another derogatory comment from a French official about British economic policy in the next few days.

Gamble

Amusing as the above diversion was for the financial press, far more concerning is the ambiguity over regulatory capital requirements in the medium term. Adopting Basel II requirements early is proving to be an uncompetitive move as pricing on lending is being forced up, and return for savers forced down. You do wonder what other horrors this will bring out of the woodwork in those banks which are still trying to work out how to sell half their business and avoid becoming a basket case, let alone changing systems, credit procedures and pricing models that are needed under Basel II.

The Basel Committee have already revised their previous suggestions for liquidity of banks so there is a gamble being played out in financial services. Do you start seriously complying with Basel II requirements now or do you wait until the music stops and there is a definitive policy established? If you move now you could end up overcompensating and duplicating work, if you do nothing you could see an even sharper change required in a shorter amount of time.

In economic terms, it is the classic "Prisoner's Dilemma".

Several central bankers have warned that requirements under discussion are edging too far into the realms of a straight jacket on the global economy. We shall have to wait and see, but the bank bashers out there may want to be careful what they wish for.

13 January: Bonuses

Workers silhouetted in front of the Canary Wharf skyline, London
"Public anger at all bankers is both hurtful and frustrating"

I have been following the BA strike story with interest. The banking sector typically has under 20% union membership - not because we are all over paid so don't care but because there is a degree of entrepreneurial spirit inherent to those who work in sales or lending roles. We generally have faith that if we work hard, show ingenuity and help the team we will be fairly rewarded. That faith is waning.

The majority of people who work in banking are not investment bankers, they are people who handle your cash, ensure your internet banking doesn't go down, or put together lending packages for businesses or individuals to achieve more of what they want in life. Public anger at all bankers is both hurtful and frustrating. A whole industry of more than 100,000 people has been damned because of the actions of a few. It is as logical as the argument that a religion is bad because a few bad apples use the banner of that religion to further their own violent or hateful agenda.

Excessive pay?

In my contract of employment I have a recommended bonus level which is paid on income I bring to the bank over and above my annual target. However, there is a discretionary element to this which means this year I will receive less than 20% of what I would normally be paid. Regardless, the maximum amount I would have been paid would still be less than the recent bonus tax threshold.


I am lucky - most of my colleagues didn't get anything

I more than doubled my target this year bringing in an income to my employer worth several hundreds of thousands with no losses or loss provisions. This amount is several times higher than my total remuneration. Am I paid a lot in relation to the average wage? Yes. Am I paid excessive amounts for the work I do? No I don't think so.

This year I am going to buy a new boiler with my bonus as the current one is old and failing to cope even in my tiny two bedroom place. If there is any money left I will pay a bit off my credit card which was used to buy my annual holiday this year - not a great example to set I know but most bankers are rubbish with their own finances!

Scorn

I was lucky however - most of my colleagues didn't get anything at all this year as the entire year was spent trying to help customers cover their debt or reprice loans which were making us a loss due to the LIBOR issue. When you are in a sales environment that is turning inwards, not making new 'sales' is a disaster for your target. Managers often have not been sympathetic to the fact we are all in the same boat. I have lost many colleagues this year who have been laid off for not keeping pace despite their best efforts. Many more are on performance monitoring with draconian big brother weekly checks on activity and income.

Thankfully I have never relied on a bonus to pay my normal bills. There are moments where I love my job but like most people I ultimately work because I get paid and I need to be paid. I am angry with management for not protecting us from the rest of our industry going down as we had no sub-prime. I'm demotivated to do more than my target this year as profits have been paid to shareholders rather than split with staff this year. Mostly I'm tired of having my hard work for my customers belittled and scorned by people who don't even know me.

24 Dec: Pre-budget Report
National Insurance Numbercardf
National Insurance will be increased by 1% in 2011

Economists rarely agree on anything but one universal truth is that the balance between regressive (ie not scaleable with earnings) versus progressive (more you earn/spend more you pay) taxation can have notable impacts on an economy and on overall tax revenues and behaviour.

Governments have to be careful how they justify supporting or bailing out one industry or business when they allow another to fail.

Justifications given for not preventing Lehman Brothers going to the wall turned out to be flawed as ripples on a pond are sometimes difficult to predict and symbolic and psychological damage was not properly taken into account.

It is strange then that the government has seemingly put more value on the retail sector than other businesses by choosing to increase National Insurance by 1% in 2011 rather than increasing VAT, particularly given a VAT rise would have raised more revenue than the NI increase.


National Insurance rises may lead to job losses


Most people would think that £20,000 a year is not an excessive or 'middle class' or even 'fat cat' salary. So why did the government choose to increase all our taxes by 1% - a regressive income tax increase?

National Insurance rises may lead to job losses or at best a slower reduction in unemployment in the period when we would expect unemployment levels to be stabilising, if not falling.

It also affects profitability of businesses which could lead to them finding it more difficult to obtain bank funding. Moreover, prolonging potential uncertainty in business does have an impact on both lending and the wider economy.

A VAT increase would have had less impact on small and medium companies (which the majority of us are employed by) and would also not have harmed our export sector as much as the blanket NI rise.


Taxation madness

A rise in VAT is still likely as this pre-budget report has not shown how national debt will be repaid so we will potentially have a negative double bubble for consumer and business spending to come.

Governments should look to take as little tax as they can to provide the most fundamental and crucial services to the public, which otherwise would not be provided adequately.

Increasing taxation and then using it to spend more in the current climate is madness and shows a lack of honesty with both individuals and business about the future.

Bank notes and a credit card
"We continue to discuss ways in which we can be picky lenders"

In 'Bank World' this week we continue to discuss ways in which we can be picky lenders. We don't want to lend much more than we did last year while things are still uncertain and businesses are still failing, so we won't. The old "if you only have £10 and 10 people want it, would you give it to this person?" debate is increasingly used.

I'm naturally a positive person and will fight the corner of a business with credit more often than I don't (which means if I'm not in your corner it must be bad). Increasingly this is a wearing activity and I know several colleagues who just don't bother anymore.

They have an initial discussion with credit about a company who wants to borrow and are confronted with teeth sucking and "Well I think there are several hurdles here, are you sure you want to spend days of work on it?"

Please don't blame your bank manager when a loan/overdraft/asset based lend is turned down.

It's not that we don't like you and not that we haven't tried, it's normally that we have been shot down and been forced to move on, or that we have been rejected so many times we can't sustain the fight.


7 December: Bank charges
Withdrawing cash
"The bank charges issue is not over yet"

Despite the Supreme Court ruling last week on unauthorised overdraft charges it is reasonable to expect that this issue is not over yet.

Whilst I agree that charging someone £20 for going 54p overdrawn is particularly punitive, for every instance like this there are repeat offenders who go overdrawn by much more on a regular basis - which is a problem. Likewise, the charges you may rack up for having direct debits or cheques bounced would be notably more than £20 in most cases, so having your bank honour these payments I would think is preferable.

The principle of charging a punitive amount for late or non-payment is an established practice in sectors as diverse as DVD rentals to parking tickets. Consequently I don't really see why financial services are not allowed to charge a punitive fee for unauthorised borrowings. If you think you are going to go overdrawn, let your bank know and it is likely that the fee will be waived or reduced if it is reasonable.

Letters of credit

I have had a growing worry over international finance over the last few months. Since the crunch started, confidence in other banks has been knocked. The most obvious manifestation of this was LIBOR being thrown out of kilter. Whilst this has now settled it only shows the picture of banks operating in the UK. What can't be seen easily is the reduction or extinction of the willingness of banks to accept letters of credit from foreign banks which many customers who export or who have sister companies abroad need to trade round the world.

There are some countries now which have no banks which UK organisations are happy to accept a letter of credit from. Letters of credit are, in simplistic terms, one bank saying our customer is good for the money. This letter says we guarantee that so please let them have the goods and pay after delivery. If your customer then doesn't pay you, their bank has to honour the letter of credit they approved. If your bank doesn't have faith that they would honour that then the whole system falls down. Which it virtually has.

This situation hasn't notably improved for some countries and I think this is a real threat to economic growth to UK Plc next year, as low exchange rates should mean good times for exporters. If they can't get funding, however they won't be able to capitalise on this.

Yet more regulation?

Michel Barnier - new EU Internal Market Commissioner
Mr Barnier's new job will include supervision of the City of London

I was completely incensed over President Sarkozy's comments about his brilliant French colleague Michel Barnier being appointed to the new European Cabinet to sort out the EU's banking sector and the City in particular. I wasn't aware this was their remit and neither was the Chancellor apparently, which is depressing as his government was the one who shoved through the treaty without reference to the public.

The FSA has over the last year been reaching into all levels of banks in the UK with varying degrees of success or cohesion - including the structure and number of middle managers. If we already have sometimes competing requirements from the Treasury, the FSA, the Bank of England and now the European Commission exactly how is our industry a) meant to square the circle, b) know which master we are answerable to, and c) stop navel gazing and start lending?

5 November: RBS sell-off

RBS headquarters in London
"The emasculation of RBS is staggering"

If a week is a long time in politics the same can definitely be said for banking. The expected scale of the Royal Bank of Scotland emasculation is staggering. There are seven relatively recognisable brands under RBS ownership - RBS, Natwest, Direct Line, Churchill Insurance, Lombard, Coutts and Green Flag. Of these, RBS will disappear in England, and Churchill, Greenflag and Direct Line will be sold.

Asset finance has been cut back across the financial sector as the return on lending is often low and the rate of default over the last 18 months is high. So that leaves just Natwest, Coutts and a reduced Lombard standing - not counting the other RBS brands, which few consumers have ever heard of.

Commercial business lending is quite active in part as customers of RBS and Lloyds have been running for the hills (ie other banks) due to uncertainty over their long-term funding. The announcements from the EU on their break up will inevitably spook business owners even more and this doesn't bode well for their eventual sale price.

A few weeks ago an RBS bank manager commented to me that all of a sudden no business lending deals were being approved for more than a five year term - whether it be a secured loan or interest rate hedge. The reason given to staff was that it was something to do with their balance sheet. As usual, the staff had been told complete rubbish and had to give patsy answers to deflect any questions from customers. But now all becomes clear: the bank knew that it would be given five years by the EU to 'dispose' of RBS business banking in England following the announcement this week, and it was trying to tie up potential loose ends early.

Sickening


Yet again the drivers of the bank's misfortune get away virtually scot-free

I love my job most of the time. I get to meet interesting businesses and help them fund growth and create new ideas and employment. However, what makes me sick is the complete lack of honesty by the powers that be in RBS and two other banks in particular who shall remain nameless. The 3,700 staff losing their jobs in the latest cull by RBS had nothing to do with their paymasters' mistakes and yet again we see the drivers of the bank's misfortune getting away virtually scot-free.

It doesn't make you feel good when the black sheep of the family have taken over the asylum.

Arrogance

Whilst I'm in a feisty mood - HBOS in 2007-08 tried to grow their market share by launching the now laughably named 'Hero' product. This effectively offered over the odds business funding for one year fee-free at a level that other banks refused to compete with, all with the aim of buying business. The fact that someone in management didn't work out that lending more money than you could probably get back for no fees and minimal interest rates was a rubbish idea is testament to the monolithic arrogance which unfortunately still pervades so many of our high street names.

There is also a poignant circle of life lesson to the break up of RBS. In marketing they used to refer to the RBS v Virgin method of branding; RBS being a company which had many distinct brands while Virgin had all of their companies strongly marked with the same brand. Virgin may soon own large chunks of RBS and potentially win the marketing strategy debate with it.

15 October: Bonus crack-down

A salary slip
Employers will find it difficult to renege on pay agreements

If a private company wants to pay someone a large amount of money in return for that person earning the company an even larger amount of money or a massive loss, what business is it of the state or any other person if all parties are working within the law?

Bonuses have become part of many remuneration packages. If a PLC business wants to pay someone a very large amount of money the shareholders have the right to question and change that pay package up to a certain point. If someone has been given a contract of employment setting out an incentive scheme that is then reneged on (and assuming no 'get out' clause was included) it's possible the company will find itself in court.

In the public sector, the case of Sharon Shoesmith (Baby P) shows that even here you are getting into potential legal hot water if you start changing previously agreed rules over pay. If the government loses then it could potentially have to pay not only the original amount that was withheld but damages and legal costs too - all great news for the taxpayer.

So what makes regulating bankers' pay any different from the normal constraints of law? Nothing.

Believe me, I'm fed up with the Goldman Sachs announcement that the average bonus this quarter will be $172,581 per employee; just as I was disgusted that the government guaranteed bonuses for Northern Rock staff in return for being slightly less in the red to the taxpayer.

RBS and Lloyds are still paying bonuses and if the government wants to do something about this then it will have to pull out the only stick it can and get down to the next shareholder meeting.


I'm not getting a bonus this year despite being almost 100% over target

I'm not getting a bonus this year despite being almost 100% over target as my employer says that at the moment we should be keeping our shareholders happy and showing restraint in front of our customers - and we aren't even state owned.

This goes against my contract of employment but I like my job and my employer so I will keep this one back and remind the powers that be at the appropriate time in the future that my goodwill is something they need to maintain if they want me to keep earning them money.

Seething fury

Some of you will think it serves me right for being a banker in the first place, while others will think that I am looking for praise for this act of restraint. In reality the gnashing of teeth at Westminster over repaying cleaning expenses is as nothing to the seething fury of some of my colleagues over the change of the goalposts in pay.

We all earn far less than an MP or BBC presenter and many of us have spouses who have lost their jobs and therefore aren't flush with cash but c'est la vie.

The reason nothing has happened so far and is fairly unlikely to happen in the future, is that in order to change the way bonuses are paid the government and the banks would need to change the contracts of employment for most of their staff.

If either party tries to skip this step then they will be sitting in employment tribunals and the European Court for the next decade.

24 September: G20

Sign on hotel in Pittsburgh
Will the G20 just generate snappy soundbites?

Allegedly our telecoms, energy and water supplies are overseen by state regulatory bodies to ensure that the consumer is not being ripped off and that necessary industry investment takes place. Would this be something that could be extended to financial services? The basic answer is that it is already. We have the financial ombudsmen for complaints, the FSA and international organisations regulating how we communicate information, the structure of our charges and the amount of money we hold in reserve to support our lending.

So what else could be done? The upcoming G20 will look to make grand gestures and snappy sound bites about bank profits and rewards for staff and shareholders. Most likely these will be predominantly recycled and repackaged existing initiatives with the bulk of the statements agreed before any of the national representatives pull up to the opening dinner.

The primary purpose of government is to protect the citizen and provide those services which would otherwise not be provided by the market or those which are considered universally 'good' such as healthcare, education, police and the military.

Even at its worst the open market is the best 'incentivisor' for innovation and good customer service in financial services. It is not possible to nationalise money as money is an international and intangible entity. Projects such as the massively over budget, unfinished and underperforming NHS computer system should provide clear warning against government trying to do something which the private sector is already doing better. Even National Savings and Investments isn't truly state run as the products and services are predominantly rebranded Bank of Ireland facilities.


In banking it's the front line and not the puppet masters which has suffered.

If we run ourselves so badly that our customers move to another bank then we won't make a profit and will ultimately stare a performance review or a P45 in the face. So many in our industry have experienced this over the last 18 months and predominantly it's the front line, not the puppet masters which has suffered.

The vast majority of the civil service is unaccountable to their end users - note the periodic shambles at the Passport Office and the underwhelming lack of response you get to your growing frustrations. If the state was our source of loans, direct debit set-ups and mortgage one can only imagine the nightmare when the unions decide to down tools for days over public sector pay settlements or attempts at change - yes Post Office this means you too.

The government needs to realise that they are doomed to fail in their quest to turn financial services into a sackcloth and ashes wearing charitable concern. What would be the point in lending money to a start-up business if you couldn't make a return while carrying all of the risk of default by your customer? As with most things government related - do the minimum you need to protect the public and beyond that leave it alone.

Special mention this week goes to the Liberal Democrats for their poll tax throwback million pound property tax - Vince Cable has undone a lot of the goodwill from business he had accrued by coming up with a pernicious and spiteful tax on aspiration and that is a shame.


9 September: Aftershock

Lord Turner, FSA chairman
Has Lord Turner of the FSA been using diversionary tactics?

I am so very tired this week. We are currently going through initial strategy meetings for next year and the whole thing is so depressing it saps the life out of you. Whilst we are looking to increase our net lending, it will only be to those companies who have a better credit rating than we do - which means only the top businesses, posting good results and having recovered or stayed immune from the crunch, rather than small and medium sized businesses.

Although it has been two years since the financial world went into freefall, the impact on us and the majority of the population have been for less time than this. When newspapers start talking about the perfect storm unfolding with trillions of dollars of collateralised debt obligations or CDOs, the average person felt like a distant observer to a car spinning out of control. It was so far away, no one knew what it would hit or where it would end up, but you had sudden distinct terror that it would be bad.

What has proved to be bad is not the potential failure of a lender, but the hundreds of thousands of unemployed people, the stifling of innovation and investment, and the massive tax liability for generations to come.

A little reported item last week confirmed that the government's plan on debtor insurance has been an epic failure - the problems in this industry were billed as a catastrophe for business and needed a £5 billion government intervention to fix. So far a total of 52 companies have made use of this scheme since April and a frankly pathetic £7m has been utilised - I lend more than that in an average month.


Wealthy investment banks have become even wealthier with minimal incentive to reform

Lord Turner's efforts at a classic diversion trick last week with his Tobin tax mutterings are symptomatic of the institutional response to the crunch. We're told what we should worry about, we are told some grand plan to solve it and we are told that we're uniquely placed to deal with it. The reality is that we have had two years of predominantly useless noise and an impression that things are being done. We are still no further forward than what should have been blatantly obvious before we got into this mess.

With some notable exceptions, the herd mentality which causes asset bubbles and the corresponding crashes, is evident in our financial journalists given the lack of divergent commentary. Some June figures could be seen as positive or slightly less negative - hooray the recession is over! What a shock that July's figures completely disprove that tertiary analysis and suddenly the same people have reversed their position without a reference to their previous article.


I am a strong believer in the potential of creative destruction

A crash in an industry which was previously considered impervious and monolithic you would hope would result in profound change and enlightenment - core principles ripped up and rebuilt. I am a strong believer in the potential of creative destruction but there is a void-like gap in financial and regulatory innovation or debate. Wealthy investment banks have become even wealthier - with minimal incentive to reform as they now have even fewer competitors.

The government has jettisoned moral hazard by bailing out terrible lenders with universal quantitative easing. Business failure, the ultimate sanction of the free market, has been removed. Perhaps this is an inevitable conclusion of the rights-rich, responsibility-free society as collective blame avoidance makes the leap into the corporate world.

With weary resignation my colleagues and I look ahead to the coming year as anger has subsided into disappointment and ennui. We have learnt nothing but that which we should have already known - as yet I have not seen what will be done with this knowledge."


21 August: Are we near the end yet?

Shoppers in Printemps department store
Consumer spending has risen in France and Germany - will it help the UK?

Whether we are technically in recession or not is somewhat irrelevant to the real world at this point. People will continue to be laid off or enter into an individual voluntary arrangements even if we are back to economic 'growth' of tiny proportions.

It's also not worth worrying that much about Japan, Germany and France now being back into miniscule growth. France has much higher unemployment than us even when it is doing well economically. Consequently the secondary impacts of the crunch, which we and others like Germany face as a result of rising unemployment, do not affect the French economy in the same way.


It's not worth worrying that much about Japan, Germany and France being back into miniscule growth

Some financial commentators have extrapolated from the Bank of England's figures that we will be back to growth this quarter - whoopee doo! This is a macro indicator and the economy, banking sector and people's lives represent a series of micro transactions which feed into the whole. If the company based in the business unit next to yours managed to get an overdraft from a bank last week that is of no positive benefit to you if you still can't get one. The return of profitability and therefore bonuses at some banks is of absolutely no comfort or help to the thousands of staff laid off by the exact same banks over the last 18 months.

A container being unloaded in Hamburg
Germany is the world's biggest exporter

It is notable that the tax receipts for July were negative v expenditure for the first time in donkey's years.

Reduced tax means either:

1) Less income tax = people earning less = people with less money to spend in retailers + less ability to repay debt;

and/or

2) Less business tax = companies making less profit = fewer jobs being created / more redundancies + less ability to repay bank loans = more bank write offs and less money being lent + more of 1.

The number of people of working age being provided for by the state has now reached six million. This is not an easy number of people to shift back to work, leaving a longer term financial burden on the rest of us and a definite dampener to our ability to restructure the economy long term.


We really have to get back to making things that people across the world want.

Larry, London, England

The tougher international banking regulations, known as Basel 2, are turning into an excellent new way to distract yourself from lending money or putting credit back in their box. Over the coming months we will all be spending countless hours re-rating our lending portfolio, reviewing risk, changing how we monitor accounts and how we make provisions. Even how we price for risk and reflect capital held. If you think this sounds terribly dull, you are right - it is.

I would say most business bankers will be spending significant time on this until June next year, which coincidentally should also be when we see a levelling out of unemployment figures and everything else.

This is then the perfect time to start lending again, as we can always blame the lack of activity in the meantime on us complying with the shifting regulatory requirements of the government, the EU, the FSA and Bank of England etc.

Oh, and conveniently we will have a new government in place so we can have more certainty over tax and spending levels. Let's face it - the tax increases required to pay back the giant debt left by the current lot are going to be enormous.

7 August: Bank results

Mourners gather at Kensington Palace to mark the passing of Diana Princess of Wales
Britain has gone through a series of 'Diana' moments, Laura says

With all the noise about Northern Rock and Lloyds (the 'nationalised' banks) faring so much worse than the non-nationalised HSBC and Barclays, people have failed to notice something important.

It's the banks' investment divisions that have made much of this profit.

Some of the big profits have resulted from 'taxpayer' money, or the cash being used to bail out institutions by shareholders and pension funds.

Also, the fact that some banks have disappeared or been taken over means there is less competition, leaving the remaining banks to pick up even bigger slices of the profit pie.

When the economy does correct itself these investment arms will have fewer large capital raising schemes to underwrite and make profits from, so it may be that their profits fall back from their current position slightly.

To get a truer reflection of the UK economy, it is more important to look at the retail and commercial banking results - where the picture is not so rosy.

Behind every £1 of commercial debt that is written off is a failed employer and that means lost jobs.

Most of the money that has been written off has yet to be fully realised. These are the debts which the banks are going through the motions of trying to collect, but all parties involved know that the process is ultimately futile. The real loss of livelihoods and jobs is often therefore yet to materialise.

Nick Griffin


Small commercial business owners are still holding out for rates of 2%, and then wondering why banks aren't falling over themselves to lend

In the same way, behind every £1 of retail or personal debt that has been written off, is an individual or family that is potentially being made bankrupt, perhaps losing their home.

The cycle, which has yet to play out in UK Plc, sees commercial write offs self perpetuate into another personal debt that has to be written off as that person loses their job. This then dumps another under-priced home onto the market, undermining housing market recovery next year.

This is exactly why several people, many of my colleagues included, expect a W-shaped recovery. In other words we are currently experiencing the "dead cat bounce" phase, exacerbated by the summer silly season in the news.

Many of us are still scratching our heads as to when the end will be.

We have money to lend, but getting credit approval is virtually impossible.

As with any business, the only way to cover losses is to make more profit - and that means trading your way through a downturn.

In our case though, trading through means lending to new customers who we have no track record with - something that requires credit confidence.

Food for thought: the largest companies are happily paying 5% over base rate for their new loans as they realise they are lucky to get big chunks of cash from a bank at the moment.

Small commercial business owners are still holding out for rates of 2%, and then wondering why banks aren't falling over themselves to lend.

22 July: Banking is about risk

Wall Street sign
Are we seriously saying that it is OK to suddenly pick on one profession? Eventually bankers may get protected status along the lines of gypsies

"I'm sorry Mr Branson we've decided that as we don't like entrepreneurs anymore you are going to have a super tax on anything you earn over £1 as your wages are morally wrong in the eyes of the law. I'm sorry Mrs Smith, that goes for you too as we don't like cleaners either."

The fact that there has not been more of an outcry about the utter rubbish being bandied about by the Treasury and various think tanks is more worrying than Goldman Sachs paying out lots of bonuses. Are we seriously saying that it is OK to suddenly pick on one entirely legal profession and discriminate against them in the tax system because of what they do? Eventually bankers may get EU protected status along the lines of gypsies and travellers - whole towns like Weybridge will get protected status for their cultural diversity.

On the matter of risk and reward, existing in a world where people only played a very long game would do none of us any good. Our standard of living would decrease as returns were measured over, say, a generation rather than five years or even six months.

In every aspect of life, we choose short and longer term goals. Some work out, some don't. Buying a lottery ticket is a short term risk with a potential for long term reward and many of the decisions you make in investment banking are similar. In business banking you look at a company and decide if you want to lend and over what term. Sometimes you will lose a deal for being too cautious in the face of competition but that is also risk. That company may then turn into the next Google in which case you think, "If only I'd gone in £5k cheaper," or they may end up with an insolvency practitioner - in which case you sit smugly saying you were right not to try too hard for it.

Banking isn't only about money, it's about risk. The best banks are not the ones who just make the most money - if they are also the ones who are then having the highest bad debts.

You cannot inextricably link risk and reward on an individual level in banking because £1 of risk is not the responsibility of any one person. In fact, the person who chooses to lend £1 is likely not to be the person who collects it if it goes wrong. This is not that stupid when you consider the extremely large number of people working for banks and the wide variety of jobs they do. Balancing risk and reward must therefore be the job of the institution as much as it is the individual staff member and attacking people's pay is not the way to do this.

16 July: Green shoots or yellow weeds?

Knock knock. Who's there? Green shoots! Green shoots who? Erm, never mind.

For sale sign
No matter how bad the housing slump gets, we will come out of it eventually because people will always need to move for life events

The great thing about economists is that you can give them one set of figures and they will come up with numerous ways in which that data categorically proves wildly different theories. This isn't a bad thing and is not to say that they are wrong, but everything comes down to perspective.

No matter how bad the recession and housing slump get, we will come out of them eventually because people will always need to move for life events like births, deaths and marriages. Some companies will always do well as they take over other less profitable companies, or find a new way to appeal to consumers.

A lot of people are saying that bank lending is the key to the recovery. I'm afraid we are not going to return to early 2007 lending this year. I have touched on the reasons for this in previous diaries - such as the continuing business insolvencies and redundancies. Also, restraints on capital and low interest rates mean that savers are not putting money into banks. And the banks, once they have the money, are not lending at the same levels as before. But consumer spending will increase eventually - if not before then when we reach the 'damn it' moment - when people get fed up with self-restraint and simply splash out. The key then is if this sustains itself.

At the moment there is a sense of national gloom - but that will change. Looking at our sector's hit list, if you are not in property or the automotive industry you will find a bank to lend to you. Business people are more attuned to the reality of lending than earlier in the 'Crunch'. There is now a realisation that accepting a fair price for your borrowing rather than expecting (and getting) a ridiculously cheap rate is the new status quo.

What I don't think we have got to yet is individual responsibility for their own personal financial circumstances and accountability of that.

If you borrowed more than you can now afford to repay that was no one's fault but your own. People have become increasingly infantilised over the last decade, partly down to the nanny state approach to so many aspects of our lives. This personal responsibility about borrowing inevitably comes more into focus in times of economic hardship. My one hope is that when the dust has settled people will consider their own actions much more carefully than they did before.

8 July: Bankers and fairness

Stop Press! The RBS is getting close to telling their staff what their targets are for this year - which is excellent news given we are now in the seventh month of their financial year. The only reason I mention this is that I think it highlights what a state much of the banking sector is still in. Expected write-offs, write-downs, capital constraints and the like are such uncertain targets it renders setting all other targets impossible.



What makes an entrepreneur, company director or business great is when they are structured in such a way that their risk from outside sources like currency, customer strength and interest rates is well managed

If you had a business which had been operating without a plan for your sales team for that long how would you know where you are? Are you on track, or are you just setting your plan late in the day so you will know you will hit it and can say to the world "taa-daa! we are on budget"?

There has been much talk of fairness over the last week with "bankers" getting another blasting from union leaders determined to shield our massively bloated public sector from pay freezes. Apparently it isn't fair to penalise public sector workers for the mistakes of regulators and bankers - it has obviously escaped them that regulators are staffed by public sector workers and that some of our banks are now owned to such a degree by the state that they too may become state employees sooner rather than later.

Unless you live in a bubble every single person is affected by recession, regardless of cause - sometimes in a positive way, mostly negative. If you are a homeowner your house is worth less, while renters have more choice and potentially lower rates. If you are a shareholder of airline stocks you will have lost out, if you are invested in tobacco you will be doing ok.

Is it fair that we are now only lending to companies with better financial strength than a year ago while restricting money to others? It depends on how you look at it. You could argue that we are 'rewarding' people who have managed themselves well during the downturn and made the most of the opportunities in their sector with access to cash and decent rates. On the other hand, you could say that we are penalising people who were "unlucky" to be in the wrong sector when the market turned or had been "victims of circumstance" when they over-borrowed before the recession.

What makes an entrepreneur, company director or business great is when they are structured in such a way that their risk from outside sources like currency, customer strength and interest rates is well managed. They are flexible enough to be able to adapt. Darwin's often repeated "survival of the fittest" actually referred to the animal or person most able to adapt to the changing environment, not just brute force. Two of our high street banks may have had a lot of brute force but in the evolution and revolution of the markets they were proved to be unfit.

All this leads us back to the question of fairness. In my opinion, what is fair in bank lending as well as in pay awards is that those who have shown themselves to be deserving get the lion's share of diminished resources - the days where everyone could expect to be lifted up by the wave are over.

'Known unknowns' and 'unknown unknowns'


We know that economic growth when it happens will be delicate and easily thrown off course. We don't know what regulation or public spending will be in place after the next elections

With the increasingly bold statements being made by Mervyn King it is ever more apparent that it is not just the electorate that is waiting for a general election, it is the financial markets and authorities also.

From listening to Gordon Brown waffling on about his lack of cuts (I guess he didn't get the memo that we were massively in debt) it's not surprising that our Lady of Threadneedle Street is worried. Obviously nothing earth shattering is going to happen before May next year, indeed the government has now scrapped the spending review which would have given us a better picture of where we are headed. The net result is that we are opening ourselves up to being pushed about by outside forces such as the EU, the US and of course the IMF - reactive and not proactive.

In the last week several people have asked me what I think will happen to interest rates - and at the moment this is a giant wet finger in the wind calculation. If government spending is scaled back then this may help to reduce the likely inflationary forces which are going to come into view as soon as the recession is over. If the government keeps ploughing on with its fingers in its ears then potentially interest rates are going to be ratcheted up severely to cope with sharp upswings in inflation.

What does this matter? Well for a start how do you expect banks to work on stabilising their pricing models, maintain their returns or look at appropriate rates to keep deposits, if potentially over the next 12 months we have massive swings in the difference between the interest rate charged by the Bank of England and the Libor rate that commercial banks charge each other? Government spending has a key influence on private business if it results in the base rate rising by say 4% within 12 months. After all, that is a notable increase in your banking costs and a chunk out of your profits (assuming you have them).

The brilliant revelation that "there are known knowns, known unknowns and unknown unknowns" isn't as stupid a statement as you first think. We know that economic growth when it happens will be delicate and easily thrown off course. We don't know what regulation or public spending will be in place after the next election.

Most worryingly of all, we don't know what the regulators and the government think will be thrown at us by other nations who are more fleet of foot while we are counting the days to the general election. In sympathy with this week's weather, the air over the City is stagnating.

Looking for a messiah

A wise man once said that there is nothing new in the world - a modern version of this is same rubbish different time. We may be a year into the financial disaster but nothing really seems to have changed.

Coins


It would be great if we could have some sort of financial messiah to pick us up and renew our passion for our profession but none seems to be on the horizon

Unfortunately, we have lost several colleagues along the way and trying to be in new business has been more akin to smacking your head against a wall but the revolution has never arrived.

Friends in private equity and law who have also gone through a bloodbath are also at an all time low. In times of crisis your fight mechanism keeps you going and keeps you together but now the adrenalin has subsided - mass depression is sinking in.

It would be great if we could have some sort of financial messiah to pick us up and renew our passion for our profession but none seems to be on the horizon.

What is the point of our jobs? What are we trying to do? Do we actually care anymore?

A midlife crisis normally occurs when you realise you are past middle age, and have suddenly aged - reflecting on all those things you could have done and normal involve a red sports car.

Currently there are several colleagues - and myself to a degree - going through a mid-Crunch crisis. What is holding us back from starting a commune or becoming a teacher?  The mortgage.

Looking into next year, the uncertainty over the regulatory and capital requirement future of the banking sector means that I don't think there will be much change in lending rates anytime soon.

We seem to be in a vicious holding pattern over our approach to the market and partly that's down to the regulators, partly down to the EU, and partly down to shareholder demands.

Double digit growth is not going to be returning soon.

Happy days

The sudden arrival of summer seems to have coincided with a return to the market for some business lending teams at various banks, with slightly concerning results.

Handing over cash
Remember when you could get a nice bit of business lending for about 1.5% over the base rate? Well, 'happy days' those deals are back

Remember the heady days of Spring 2007 when you could get a nice bit of business lending for about 1.5% over the base rate?  Well, 'happy days' everyone those kind of deals are back out there, though you do have to be lucky to find the few bank managers with the cahones to price it.

There is nothing like coming up to your half year financial report to focus the mind and remind you that your business is that of lending money.

In the past week alone I have seen a borrowing rate as low as 1.7% offered by a competitor which is getting into dangerous territory again.

I would like to say that the City has learnt from its mistakes and would never go down the buying business route at stupid rates to improve market share... but over the last couple of weeks it is painfully apparent that many are only able to operate on one setting.

And where is the regulator during all this? Pathetically no major reform has happened since the crunch, so in terms of how we lend and the charges we make it is exactly the same as pre-crunch.

Nick Griffin

Realistically two BNP MEPs are going to have zero impact on our daily lives - but the failure of our government in the European arena is already having an impact

MPs' expenses may still be trundling on but do staff at the FSA really deserve a bigger bonus than last year for not completing their job to reform the system and still not understanding what some of the big banks are up to? You would think this is an obvious no, but in the almost parallel universe which is Britain 2009, they've already received them.

The failure of the UK Government to block the European Union having ultimate control over financial regulation this week has been drowned out by the catastrophic Euro elections.  Realistically two BNP MEPs are going to have zero impact on our daily lives - but the continued failure of our national government in the European arena is already having an impact.

We do not have the same economy as the rest of Europe, hence the single currency doesn't suit us, our economic cycle is not generally in sync, the market principles and ethos are also different. With this background, if the FSA cannot even work out how best to regulate the City, how does an unaccountable European quango expect to come up with a coherent and universal policy to cover all the different financial markets of member states? A better place to start would be to make a universal bank deposit guarantee scheme so savers deposits are never at risk again, as they were with the Icelandic banking collapse.

The authorities are too ready to take the word of the people running our financial services sector - and we the staff are getting fed up with it.  If a bunch of middle managers can spot the bleeding obvious how is it still routinely missed by the regulators?

A few weeks ago I noted that the collective brain power of the City on a good day was more than a match for anything the regulators chucked at us - at this point it doesn't look like we even need to turn up.

The fury at bankers

Mourners gather at Kensington Palace to mark the passing of Diana Princess of Wales
Britain has gone through a series of 'Diana' moments, Laura says
Our country seems to have gone through a series of 'Diana' moments of mass spasmodic emotion over the last six months. I don't think it can be doing anyone's health any good. Just as the fury at Every Single Person who works in a bank (yes Mr Grounds Maintenance Man, that includes you) went on for far too long, so to is the MPs' expenses outrage.



Don't get me wrong - some of the claims under the Common's allowance system (note these are not technically expense claims) are more than dubious with some verging on fraud, but in what 'tolerant' society is it OK to lambast someone for claiming for mortgage interest money on a second home that we require them to have? Claiming for expensive furniture however may be a different matter.

You might think that recent events would discount any comments politicians might make about pay in the banking sector in our eyes but you would mostly be wrong. If you are trying to tie salary to economic worth you are doomed to fail.


With the attention being off the City we have enjoyed the opportunity to get on with our jobs
The footballer on £125k a week generates probably £20million in economic value to his industry. A banker who lends money to small businesses totalling £150million turnover will probably be on £70k a year. The Minister for Health, on a salary of circa £120k, is in charge of a budget of over £1billion a week and a department employing one million people. It's amazing how little time the British people spend spewing rage towards footballers salaries who earn more in a week than either a decent level business banker or cabinet member earn in a year.


With the attention being off the City we have enjoyed the opportunity to get on with our jobs - and guess what, business is doing pretty well as a result.

This week RBS has been preparing for another kicking by announcing staff bonuses. My hope is that people calm down and take a deep breath before once again threatening staff and ranting on talk radio, because I for one believe that for a bank to pay money to staff rather than its shareholders in the current climate suggests they actually deserve the money. Market favour is key, but remaining a viable business by keeping decent staff is even more important.

If the government comes out against the move I for one would like to remind them that they sanctioned bonus payments to all Northern Rock staff last Christmas. Now where is a court of public opinion when you need one?


Bankers, bonuses and Peter & Jordan
Peter Andre and Katie Price
Peter and Katie's split was something different to worry about
As if by magic, another topic has come along to keep banking and the economy out the headlines for another week - Peter & Jordan's split. The feeling in the office is that although people are still angry about Fred Goodwin and City fat cats, they have come to realise that having no bankers would be a lot worse than having no MPs (you didn't really expect me not to mention expenses?)

The last 12 months have been akin to a child learning that the tooth fairy, Santa and Care Bears aren't real one after another. Who would have thought that many high street banks were effectively betting our money on things which were nothing more than pillars of sand? Or that some MPs didn't have the gumption to ask for a decent salary and decided to push the boundaries of what allowances they could claim instead?

Public anger

It wasn't the £21 billion RBS/Natwest loss that got Fred into trouble, but the relatively trivial amount of a £17million pension pot that truly got the populace in a lather. In the same way, it isn't the squandering of our future financial health by the Government debt, but the relatively trivial £24,000 a year second home allowances that finally made us turn on the Government. Some may argue therefore that it is 'irrelevant' to note that all second home claims together don't even add up to the pension pot.

Mortgages for one legged stilt walkers are no longer a viable proposition
With everything stacked against the banking system at the moment in terms of clients going bust, the tail end of the LIBOR/Base rate nightmare and a recession, there are still some people doing well and doing more than they have been asked to do. These are not colleagues who are out betting your granny on a mortgage to a one legged stilt walker, these are people who are searching out good lending propositions in this country despite of the current situation. They will not be getting bonuses this year despite helping to prop up their businesses. It is perfectly possible that the financial results of companies that employ thousands will be in a large part down to a few hundred people.


You get what you pay for

I'm sorry to mention bonuses again but this is the one issue that has not been properly resolved, and I think that it is quite fitting with the current furore over the pay of our elected representatives. Are people honestly saying that we shouldn't pay for a job well done anymore? A good old British saying is that "you get what you pay for". If you don't motivate or reward the good staff in our banks will they sink back down to the average because they feel dejected? If you don't pay our politicians the same as say a BBC newsreader, a GP or even a mildly senior civil servant you can't really expect our best people to be sadistic or altruistic enough to stand.


Foreign ownership in the City
Tamiflu capsules
With the cynically convenient onset of swine fever in the headlines (well, we did have to find some use for the stockpiles of Tamiflu...) the economy has had a somewhat welcome reprieve from the press this week. In team meetings and office huddles we have already moved on now that we are more certain we will not a) being going bust, b) get nationalised, and c) (for the moment) are not going to be made redundant.


All banks, big or small, are like giant boats with a massive propeller on one side (growth) and a little tiny dinghy sized one on the other (not growth). It is with this imbalance that we have been trying to turn ourselves back to a net neutral course in the (last metaphor I promise) stormy waters of the economy. There will be some for which this exercise has damaged their main propeller for a long time, potentially indefinitely. The spectre on the horizon is notable consolidation in the banking sector, with various 'non-core' chunks of business being snapped up by foreign owned banks.


The ramifications for a whole generation of bankers doesn't bear thinking about
Pity the poor souls at Lloyds HBOS who are going through a brutal restructure at the moment akin to a round peg being forcibly driven through a square hole. The process has not reached its crescendo yet as staff are still needed to sift through every client with a fine tooth comb to both identify losses and to manage away clients they don't want anymore. The ramifications for a whole generation of bankers, as is happening with lawyers, doesn't bear thinking about as so many of them will be out of work by this time next year. Our competitive skills base is being undermined as many of these people will never come back to the professions they previously excelled in, preferring to change career or change country.


I have been ruminating for a while on the transfer of ownership that has taken place not on a national level with the Chinese provision of Government borrowing, but on an industry level.

Foreign ownership of banking sector


What exactly will the consequences be of most of our banking sector being foreign owned?
It is often bemoaned that our energy security is weaker and bills higher than they should be as a result of nearly the entire UK energy sector being foreign owned. What exactly will the consequences be of most of our banking sector being foreign owned?

Santander now controls enough UK banks and building societies to fill a page, and Barclays has a giant chunk handed over to the Gulf. HSBC, although a 'British' bank makes most of its money abroad, with the still lending mid-size commercial banks also foreign owned. If the UK needs its financial sector in the future it may find that just as utilities are now run for the benefit of other countries and shareholders, the banks are too.

Gimmicks cost more money

With the news that the government is going to increase our debt by another £606bn I thought I would turn to a favourite bankers training method (the role-play) to give our response:

Customer: "I would like to have a loan of £30,000 for each member of my family please."

Manager: "Hmm, sir I see you are in a lot of debt already, how are you going to pay this back - are your finances improving over the next 12 months?"

Customer: "Well no, but my current outgoings are only going to increase by 1.6% next year, although I do have some other expenditure I've just agreed."

Manager: "So you have no money, you are already borrowing beyond what you can repay and you want another £30,000 each? Sir, I'm afraid you have a debt addiction problem. I recommend Citizens Advice as being a good place to start getting counselling. Bankruptcy is a possibility although it will impact your credit rating for some time."

In business banking, if someone presents you with a business plan and you find out that their previous one was way off, you don't generally take a positive view on the figures.

Looking at so many of our customers books recently, it is apparent the previous gimmick to help business (the VAT cut) has ended up costing most of them money, and there were no savings for companies that sell to other companies.

Ordinary people know that if you don't pay your debts someone might just turn up and take your house

Add to that burden a 0.5% increase in national insurance next year, higher transport costs for getting your goods and supplies about with the fuel tax hike, and it is difficult to see what help has been given to the sector of our private economy which employs the most people.

The financial sector has been criticised for not coming clean on their debts sooner but it seems this is perfectly fine for the chancellor to act in this way. Newsround on Children's BBC gave an unintentionally good summary of the Budget on Wednesday by highlighting all sorts of 'new' 'investments' which are made possible by borrowing more - and yet no mention was made of the consequences or of having to pay this back.

Perhaps Labour believes that the average citizen has a similar intellectual capacity and will think that everything is great because we'll just take out a new loan. Ordinary people know that if you don't pay your debts someone might just turn up and take your house.


Will banks start lending again?

Are you sitting down? This may come as a shock... the powers that be have realised that banks make money by lending and that it might be an idea to start doing it again.


We probably have about four months before RBS start to get their big guns out again and start pursuing new lending like a thing possessed
Honestly the genius abounding in the financial sector knows no bounds. Please don't think that this spiritual awakening has anything to do with the government either, the collective brain power of the City on a good day is enough to bulldoze round any blocks the regulators try and throw our way and we are hardly going to take business advice from a Cabinet with no financial or business experience.


To be fair, it wouldn't be entirely accurate to say that we haven't been lending for the last six months or so but trying to get something through credit which isn't backed up by iron-clad gold bullion and a lifetime of history with the bank has been hellish.

There is a natural equilibrium between 'sales' and 'credit' in any bank - and the danger zone is when either of these is too prominent. In the BC years (Before Crunch) sales was where it was at - your target was to grow your lending book and your income by double digits year on year, every year.

Since ground zero we have been in the pits of despair with credit refusing to get their stamp out, all the while 'tsking' at you for ever having lent in the first place. You may think that prudence is no bad thing but banks are realising that if no profit is forthcoming in the 2009 results it will be hard to explain it away as bad debt write offs rather than the reality - we aren't getting new income in.

The non-nationalised among us have realised that we probably have about four months before RBS start to get their big guns out again and start pursuing new lending like a thing possessed, and perhaps a month or so before that Lloyds HBOS will also be in the game.

Regular City Diary readers may remember me bemoaning the navel gazing that was going on back in January and worryingly these people are now waking up and blinking at a countdown to seize the initiative and steal a march on our rivals.

Hang on to your hats!"


Protests and the G20 summit

Well, the G20 show has finished and left town and alongside the mess left by the protesters, we have some nice shiny statements which are going to apparently change the world. For financial services, there is the "threat" of a new regulatory regime to keep the genie in the bottle.

It will take decades worth of employee involvement in charity and voluntary work to even start to atone for the damage our industry has done

Keeping investment and retail banking ring-fenced would not be a bad start. This will increase protection to normal depositors and would push investing in riskier financial products and assets into the already regulated sphere of investment management - where, in theory, you can choose the level of risk you want to be exposed to through a fund.

However, as many of us have found out recently, putting your pension investment in the "low risk" pot isn't any guarantee that it won't tank along with everything else.

We bankers each spend a good few hours a month filling out compliance checks, watching boring videos on money laundering, and learning and relearning about a whole manner of regulatory rubbish.

The process has overtaken the purpose and this is the real reason that corporate governance has been found wanting in the crisis. It may not be a new regime that will fix the problem - rather, the regulators actually allowing common sense to enter the system and a change in focus. If a bank has to fill out 20 forms a week to meet basic requirements, their completion becomes the focus, rather than actually bothering to read the things.

Large companies are obsessed with meeting tick-box requirements for their annual reports, and on portraying themselves as progressive in their approach to corporate social responsibility.

For the banks, this is an even bigger joke - it will take decades worth of employee involvement in charity and voluntary work to even start to atone for the damage our industry has done to the countries we operate in.

The danger of depersonalisation

Change for change's sake is never a positive step and at the moment it would be nice to have a chance to take stock and be allowed to do our jobs. Ironically the institution to give us that break may be the highest bank in the land - with Mervyn King's statement last week.

The spectre of the great unwashed threatening physical violence against bank staff during the G20 summit is proving to be a galvanising force in our industry

The spectre of the great unwashed threatening physical violence against bank staff during the G20 summit is proving to be a galvanising force in our industry. The phrase "you bankers are all the same" is just the latest in a long list of people who have become depersonalised by the public along with 'you council people' and 'you politicians'. You may point out that there are some individuals in banking who have remained individuals but Fred Goodwin is just as much a bogey man for the rest of us.

The danger of depersonalisation means that the cashier on less than average wage is as likely a target as the handful of people on over £1m a year and really where does it stop? The protestors will most likely smash windows of the local NatWest branch or McDonalds but all that achieves is the terrorisation of private individuals who are as much victims in this whole debacle as taxpayers.

If you are angry at bank profits in years past then pause for a moment to work out where much of your private pension is invested - in bank shares. What sector accounts for much of the 10% decline in corporate tax revenues that funds your child's school or your local GP - banking.

Unjust persecution of an entire industry will provoke a defence mechanism which may just see your nose cut off to spite your face. Next time you come in looking for a mortgage slightly above what you can really afford don't be surprised if it's not forthcoming.


Colleagues are considering a career change

Economics is great as a theoretical tool but as with communism, its principles fall down when people are added to the equation - a variable which no one can account for. What level of chance would you take with £10 of your own money when lending it to someone else if there was an increasing chance they couldn't pay it back? What if that figure was £10 million for an unsecured overdraft to a company with declining sales and profit due to the recession?
Non-traditional lenders have been dipping their toe into commercial lending
The paradox of thrift can be applied to our banking market in the current climate even if consumers are taking a while longer to follow suit.

There has been a growing trend for non-traditional lenders dipping their toe into commercial lending in recent months - whether they be niche lenders or investors. While this is not at a high enough level to pick up the slack it may be just what the doctor ordered to bring competition back into the lending market in the medium term.

Many of the colleagues who have been pushed out from their jobs in recent weeks are looking in a completely new direction for their careers. The all encompassing culture of banking has finished and they have exited blinking into the sunlight, and are spending much more time with their kids as a result. However, I worry that we are storing up mass post-traumatic stress for the future as the ostrich mentality in the office is (for now) continuing.


We are standing on the edge of the abyss

We are standing on the edge of the abyss - on one side is a quick decline into becoming managers of a declining portfolio and a winding down of the business and, on the other, the will to take risk by rejoining the land of the living and a sustainable future as a Bank.

Senior management have become so cowed by recent events that the easiest decision to make at the moment is to not make decisions at all. Are we really lending any new money? No. Does anyone want to make a leap of faith and break the Banks' perpetual self-flagellation over mistakes made? No. Can we continue as we are? No. Will anyone stick their neck out and personally make a decision to either give up or get on with business? Not likely...

If we can achieve the best capitalisation ratio by hardly lending will that stop our business being torn to shreds? If anything markets have proved to be more fickle than anyone suspected, so it won't be long before they return to wanting to make a decent return on their money which means growth. The movement of depositor money to nationalised banks is sucking the life out of the rest of us, and so a race to appease the rating agency gods continues in the vague hope that it will bring depositors back. We are being perversely punished for not being bailed out.

What is apparent to us 'cannon fodder' at the bottom is that this paralysis has to stop, but we are facing the classic prisoner's dilemma - he who jumps first may take the pain despite getting the long-term moral victory. Most managers are oblivious to reality due to being in a state of shell shock, but eventually the true horror of deferred leadership will dawn. I just hope it isn't too late.


The ratings agencies are getting twitchy

The ratings agencies are getting (understandably) twitchy about the amount of commercial property lending on banks' portfolios.

The Irish banks were some of the biggest commercial property lenders in the UK and of course they are suffering even worse horrors right now. So why did the Irish and banks like HBOS like property so much?

Banks have worked out how much 'new' lending they can get away with
One of the less obvious answers is that it is an easy way to increase market share - a property transaction starts and completes often within a few weeks and is an 'easy win' to get lending out of the door without having to spend time building a relationship with someone.

On the consumer side: banks have worked out how much 'new' lending they can get away with to avoid a bashing from the Government. Once this 'quota' has been reached some of the recent mortgage deals might disappear from the market.


The whole ethos of the banks was wrong

In early 2007 one of the partly-nationalised banks had a spate of fraud losses on specialist business lending over a period of 10 days. These were not the figures that would generate a headline, but enough money to generate a knee jerk credit reaction to almost shut the unit down, until the quality of the lending book had been reviewed.

The root causes of these losses (apart from borrowers deciding to defraud the bank) were as follows: 1) relaxing of lending criteria in the pursuit of market share and sales targets; 2) a perceived requirement to achieve double digit returns each year for shareholders; and 3) rampant cost squeezing on the client management and risk side, with staffing levels not keeping pace with customer numbers. The net result was not exactly a shocker to most of us - if you keep setting unrealistic sales targets then the quality of lending will deteriorate over time.

This incident was in just one sector of the bank, and took place two years ago. In reality what the bonus furore and qualified apologies we have seen this week show is that they, and others, have learnt nothing. Believe me when I say that the staff were pointing out the bleeding obvious two years ago, but were either paid lip service by their line managers as they were never going to challenge the bank's top brass, or pushed out when they finally admitted defeat and questioned the impossible targets they had been set.

When the 2006 RBS results were presented internally Sir Fred Goodwin said that the market was getting concerned that RBS could only grow by acquisition and that the business hadn't shown they could grow organically. The 'vision' therefore was that in 2007 RBS would show the market they could achieve double digit growth without any acquisitions being made - to you and me that means even more ridiculous sales targets and even less investment in credit and client management to bolster margins. There was therefore a degree of scepticism from staff that all was well with the RBS business model when suddenly we were abandoning the organic growth project and buying ABN Amro.

The Treasury Select Committee failed to get at the root cause of decisions like these which have led to our current position. The bailed out banks did not just make a series of bad decisions their whole ethos was wrong. The finger of blame should also be pointed at the institutional investors who have 'managed' our pension funds into a slump in the last year. They were the biggest bank shareholders and they were the ones pushing for double digit growth from their investments. The Government's 'hands-off' management of the banks is just replicating the exact same approach as the last shareholders - i.e. make us money and we don't care how you do it.

The markets are now asking for the 'best' capitalisation/funding ratios rather than the 'best' growth figures. There is no incentive to a bank to lend money, rather only to get more deposits, in the pursuit of market approval. Institutional investors (public and private) are yet again driving the industry, although this time it is the would-be borrowers and 'cash cow' savers who are suffering.

Denying low and mid-level bank staff their couple of thousand pound bonuses is like punishing the children for the sins of their fathers. If you are employed to do a job and you do it then you should get the pay you were told you would get for doing so. The Government may be up in arms over RBS, Lloyds and HBOS but they were the ones that set a contract for Northern Rock staff that led to their bonuses this year - what is the difference? The staff at the Treasury and the FSA who have been working on the crisis are also getting a bonus, despite being asleep at the wheel regulating our financial services. Not a peep from the Government on that either.


Is taxpayer bailout encouraging bad lending?

I'm getting increasingly angry with some of the banks (including those which are partly nationalised) still trying to buy in business at loss-making borrowing rates. Still charging 1.25% over base when LIBOR is 0.8% over base for business lending is what Mr Brown should be ranting about - it almost seems that this taxpayer money is encouraging stupid lending. All they are doing is putting the whole industry more at risk - and it's not like it can get much worse.

The new loan guarantee scheme has prompted a sum total of one enquiry from our customers so far. We are sceptical that the government would ever pay out under their guarantee as there is a conveniently hidden declaration banks have to sign, effectively saying that they would have lent money to a business happily and on the same terms, even if there was no guarantee available. How can you prove that beyond doubt? No confidence boost to lending there then.

Colleagues have been staring at the news websites for hours this week watching falling bank stocks, unable to breathe for fear that we will be next. The name of the game is staying low profile - don't promise anything too big, add caveats to everything you say and above all don't stick your neck out for a customer who may lose the bank money. Performance management is the new stick with which to beat us - unbelievably the current crisis is not a reason to underperform on your growth target. Many feel that it is just a way to ultimately lay people off without having to mention the "R" word. By March we should find out.


Why can't bank leaders admit their mistakes?

I heard about a teleconference at one of the part-nationalised banks last week in which the head of commercial lending was challenged about the complete loss of an employee's 30 years of investment through the staff share save scheme.

His response was that maybe she had simply made the wrong choice in investing part of her salary every year in the bank's shares (encouraged by the bank and given a tax incentive). Would it have been so hard just to say "sorry, we are all disappointed and all in this together - believe me when I say we are doing everything we can to get things fixed"?

There is a growing sense of mutiny among the ranks. Some of the 'top brass' in banks still just don't seem to understand the level of balls-up they have made. As a staff member on the front line with customers you try and do the best you can for both the customer and your employer. You have faith in what you are told because you don't imagine that your bosses would lie to you - the importance of being a team player apparently only works one way.

Bank staff are feeling emotionally wounded by this current crisis - our faith in our industry and our employers has been undermined. Now is not the time to be looking for new employment but people will have long memories. Some will be biding their time wilfully wasting stationery and expenses until they can give a final "get stuffed" as they walk out of the door to a new beginning.


One of our clients has gone bust

First week back after Christmas, deep joy round the office with the realisation that we can no longer refer to 'next year' as being the really bad one as we are now in it.

Re-pricing to stop the losses on our balance sheet remains the order of the day, with people increasingly wondering when we are ever going to want to lend again. The lunatics (credit) are now definitely running the asylum. Colleagues are bemoaning the fact their portfolios are shrinking for the first time in years as customers (who are able to) have got their facilities moved to another bank in protest.

It is with no sense of pride that we have to go to our customers and ask them to help us out by paying a higher rate - but the alternative is they are making us a loss. If I were them I would say get stuffed but then they risk just getting their facilities removed.

One of our clients has gone bust - realistically the first of many - and so a colleague faces the task of calling on their personal guarantee which will probably involve tears. You spend years trying to build a relationship with your customers, often extending to a personal one, and suddenly you find yourself having the kind of conversations you wouldn't want to have with anyone - let alone someone you like.




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