Page last updated at 12:32 GMT, Friday, 8 May 2009 13:32 UK

City Diaries: 7 May 2009

Man looking at a falling graph

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.

ANTHONY

Anthony (not his real name) works for an investment bank in the City

It was rather surprising that last week the Fabian Society, a left wing think-tank, debated 'Can we regain the public trust in the City'. It is certainly not the place where you would expect much sympathy for the banks and therefore it was encouraging for such an organisation to recognise that regaining public trust in banks is an important issue.

John McFall, MP
Has the Treasury select committee report helped to restore public trust in banks?
One of the panellists was John McFall, MP, who has just published his Treasury select committee report on the Banking Crisis. In the debate he used the powerful metaphor of a thrombosis on a human body to describe the impact of lack of trust in banks on the economy. But his report did nothing to alleviate the public's distrust in banks and instead in typical politician blame game mode went for the headlines.


The report talks about the "unresolved inconsistency between on the one hand, bankers' assurances that they are increasing the lending and on the other hand, widespread and clearly sincere complaints that credit is hard to obtain". There is no analysis of why that may be and thankfully Robert Peston recognises only too clearly what the issue is. Perhaps Robert should have written the report for the select committee and save us all the sight of the politicians' egos on heat while they made the bankers squirm.

Shutting the door after the horse has bolted

Robert's blog 'Making banks safe' points out the importance of a bank's capital ratio to its survival. Let me develop Robert's point a little further. Before the crisis the banks' minimum capital ratio required by the regulator was 8%. That means that for every £100 of exposure a bank must hold £8 in capital to meet the possibility that it might not get its money back. The impact of the crisis has proven that this is simply not enough to meet losses. In a clear case of shutting the door after the horse has bolted the FSA is already indicating very strongly to banks that it wants this capital to increase substantially.

How do they do this? The FSA says that banks should stress their exposures by introducing severe risk scenarios which might cause them to lose their shirt and then calculate the impact on their capital if such an event should occur. And what scenario should they use?

The FSA says banks should stress their exposures by introducing severe risk scenarios
Not surprisingly the bankers collapse of 2008! What that means is that banks have to hold more capital to cover the eventuality that the events of 2008 may occur again tomorrow.

So if the banks have to hold up to 30% more capital now then that is billions that they cannot lend to get the economy going again.

Mr McFall's report also says that "due diligence has been seemingly ignored" which is another way of saying that banks have been lending irresponsibly. What that means is that lending that was available before the crisis is no longer available because banks cannot be irresponsible and take undue risk.

Liquidity

There is also the problem of liquidity. Banks traditionally borrow short term and lend long term. Doing that caused the Northern Rock failure when all those short term depositors wanted their money back so now the FSA requires banks to keep a larger pot in easily saleable assets such as cash or government bonds to meet a liquidity shortage should one arise.

In summary, regulators are requiring banks to hold more capital, hold more cash and not lend irresponsibly. This is why "credit is hard to obtain". The banks have had to divert funds to meet those needs. The government, through the FSA, is telling the banks to stop lending for these three reasons while telling the public that those nasty bankers won't lend.

If trust is to be regained something has to give
But if trust is to be regained something has to give and the only way that can be done is with government support.

First, governments have to ensure that deposits are guaranteed up to £100,000. Second, banks have to be allowed by regulators to take more risks but not in the highly speculative private equity market or in derivative trading but in the areas where small business and first time buyers are helped most. If governments are to guarantee lending to first time buyers and small businesses that provide real jobs, while at the same time requiring banks to hold more capital for speculative market risk, trust will be rapidly regained.


To regain trust, the mission of banks has to change from maximising shareholder value to being socially aware organisations that have a fundamental responsibility to ensure the survival of the global economy.


LAURA

Laura (not her real name) works for a commercial bank in London.

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.

MARK

Mark (not his real name) works for a stockbroker outside London.

Pharmacy worker wearing surgical mask
Did bankers create swine flu?
Swine flu was a welcome distraction from the recession and our woes as a country this week. Strange that a flu could actually be a welcome distraction but people were actually talking about this rather than the recession or the threat of job losses. Although what I did not realise was that swine flu was also down to the bankers.

If you look closely, the bankers created swine flu. Spreading it? Definitely the bankers. They are also responsible for the terrible weather we had recently. Anything can be blamed on them to be honest, go on, have a try. Marriage going down the pan? Blame it on the bankers. Boiler broke? Blame it on the bankers, especially if you cannot afford to get a new one! I have yet to find one but I am sure there is an internet game where you can blame it on the bankers, or, in this day and age, shoot the banker.

The FSA certainly does not seem to have covered itself in glory
It is, frankly, quite boring. There were so many other people responsible for this crisis, across the globe, that I don't think one area should come in for such criticism. What about, for example, the FSA, the Financial Services Authority? Actually, the FSA, the Food Standards Agency, may have done a better job regulating financial services and they would have realised it was near boiling point! The FSA, the financial one this time, certainly does not seem to have covered itself in glory.


Bank run

There was also the role of the press. Yes, the press is there to report and journalists do a fantastic job. However, I remember watching as hordes of people, across the country, queued to withdraw their cash from Northern Rock. Then the reports came that people had been mugged or burgled and their life savings had gone. This was blamed on Adam Applegarth for running the bank into the ground however, this, for me, was the fault of the press because it failed to report that the Financial Services Compensation Scheme would have covered most of the small deposits. This was reported too late and the first run on a bank I had ever seen, had started.

We seem to forget that it costs nothing to open an account
Now we are being asked if banks are too profitable. Again, I have concerns over this. I am a big fan of Keynesian economics and demand and supply. The banks supply an excellent product. We seem to forget that it costs nothing to open an account (a general high street account that is) and for that, we get access to bank cards, cheque books, direct debit and standing order systems and various other perks that as individuals, we would not be able to replicate ourselves.


To do this, the bank holds our money and uses that money, via lending on mortgages, loans or as cash on deposit, to make money to cover these operations. The banks need to make money to be able to invest in the future. Technologies such as chip and pin and the fight against fraud, again, all cost. If people hate banks so much, close your account and get your salary cash in hand and see how difficult it would become to operate. You are not forced to have an account, you have an account because you demand one as a consumer. You like the ease of a direct debit or being able to use a card.

So with this week's update, I'll stop talking about banks. There are other things in the economy to talk about!




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