The Financial Services Club's Blog

Bankers bonuses in graphics

Money.co.uk just sent me this lovely graphic that puts the banker bonuses in context quite well ...

 

Chinese Bank buys majority stake in Citi

OK, I made that up.  Mind you, I made it up in 2006 when I presented at the BAI Retail Delivery Show.  My logic was based upon the inevitable march of Asia's tigers, and the fact that ICBC had just listed and suddenly became one of the top 10 banks in the world.

October 26th 2006: The largest IPO the world has ever seen took place when Industrial & Commercial Bank of China (ICBC) sold shares. The $19 billion sale dwarfed the $12 billion raised from 53 IPOs in the second half of 2006 on Wall Street. After the first day of trading, the Chinese lender had a market value of about $157 billion which made it worth more than Goldman Sachs Group and Lehman Brothers Holdings put together, and within striking distance of JPMorgan Chase.

Based upon such trends, my prediction was that four of the top ten banks of the world would be Chinese before the end of the decade and that, at some point soon, they would expand beyond Asia into global banks with global presence, for example by buying a big US Bank.

All of this went down real bad with the US audience, who haven't invited me back since.

Shame, particularly as many of those wild ideas have come or are coming true. 

So now I ask: “Will there come a day when the largest, strongest banks are all Asian?”

To answer that question, my good fried Emmanuel Daniel, founder of the Asian Banker, will speak at the FSClub on 23rd March on this very subject.

Emmanuel will profile the following:

• trends in the internationalisation of Asian banks today;
• where Asian banks are today in terms of operations, business, technology and risk configurations;
• Asian responses to global initiatives such as Basel II and the Financial Stability Board;
• the ability of Asian businesses in general to build regional and global models; and
• the place for Asian financial institutions in a global scenario of banking players in the next 10 years.

Emmanuel Daniel is the founder of The Asian Banker.

The Asian Banker is the foremost provider of strategic business intelligence on the financial services industry in the Asia Pacific and Middle East region with offices in Singapore, Kuala Lumpur, Beijing and Dubai, as well as representatives in Shanghai, London and New York.

This meeting will take place at 6.30pm on 23 March 2010, Institute of Directors, 35 New Broad Street, EC2.  If you would like to attend, just register.

Things worth reading: 12th March 2010

Things we're reading today include ...

Lehman bosses severely criticised - BBC
Lehman bosses ‘used lazy gimmick’ - The Times
Lehman 'hid billions' – report - The Independent
Swiss theft puts HSBC in spotlight over tax evasion - The Times
HSBC admits data theft hit 24,000 accounts - The Independent
Banking giant Sir Brian Pitman dies at 78 - The Times
Former Lloyds banker Sir Brian Pitman dies - The Independent
Wall St 'allergic' to OTC derivative reform - Financial Times
New York ties with London for finance crown - Financial Times
France and UK seek hedge fund deal - Financial Times

We think Basel's liquidity standards are rubbish

We have an FSClub Meeting on 16th March 2010 in London with the theme:

This house believes that the Basel Committee on Banking Supervision's new liquidity risk monitoring standards are built on sand ... a debate on the BCBS liquidity risk monitoring consultation due 16 April 2010.

Just before Christmas, the BCBS opened a consultation on radical new risk management measures for financial institutions. JP Morgan's research has shown the demands on banks to hold more capital could cost the industry $220 billion – of which $91 billion would be incurred by British banks.

New liquidity cover ratios, net stable funding ratios and market monitoring tools will certainly reshape today's business practices. However, we ask "will they be 'good enough'?" There is no common reference data set for much of what is required. This means that each firm is flying solo and the regulator left to wonder what good ratio systems and controls should look like.

Will one firm's calculations, based on market, counterparty, and instrument data, allow their ratios to be compared to another's? Judgements based on years of disparate legacy systems could have significant financial consequences if not appropriate:

• Will the industry be forced into a massive infrastructure upgrade? 
• Can new standards create new business opportunities?
• How will the regulators benchmark the banks' implementations?
• What standards are required to stand these pillars in solid ground?

Come and join the discussion, with an expert panel comprising of:

• Christopher Clack, ScD, Director, Financial Computing, UCL
• Bill Rickard, Head of Strategy and Policy, RBS Group Treasury
• Julia Sutton, Director - Global Reference Data, Royal Bank of Canada Capital Markets
• Alexander Dorfmann, Head of Product Management, Thomson Reuters 

The panel will be chaired by Capital Markets Chamber leader, PJ Di Giammarino. 

Click here to register.

Is it me or has CESR just screwed dark pools? (UPDATED)

Meeting with a mate last night, who happens to be on the inside track of EU regulatory matters as they relate to Capital Markets, he turned to me and said: "have you seen CESR's latest?"

Of course I hadn't, as I've been payments oriented all week and CESR is the European Regulatory body that created MiFID, the Markets in Financial Instruments Directive.  This is the regulation for managing equities trading across Europe.

"What are they saying?" I asked.

"Only that everyone now has to use EBBO!" he chortled.

EBBO is the European Best Bid-Offer pricing system.

What does EBBO mean?

It's basically a price that is dynamically updated with each change in the best price in any of the relevant markets where the instrument is traded.

Therefore, if you're trading in HSBC or Vodafone, EBBO will look across all of the execution venues where those stocks are traded and will tell you the best bid and offer for those stocks in real-time.

So what are CESR saying?

Looking at their website, they've updated MiFID with a new ruling on price waivers for execution venues as from Tuesday of this week (did anyone notice?).

Here's the exact text:

Waivers from Pre-trade Transparency Obligations under the Markets in Financial Instruments Directive (MiFID) - Updated 9th March 2010

...

All orders will be submitted to the system for execution/crossing at the midpoint of the European Best Bid and Offer (EBBO). The European Best Bid price is the highest binding bid (or buy) price available in the central limit order books of the regulated markets and MTFs contributing to the determination of the EBBO. The European Best Offer price is the respective binding lowest offer (or sell) price. Thus the EBBO will always deliver the tightest spread available in the contributing trading platforms.

...

The document says a lot more, but the heart of it seems to be getting at the opaqueness of pricing and lack of a single price feed.

Hence, by enforcing a new rule whereby every participant has to guarantee Best Bid-Offer or - if crossing - the mid-point, they have wiped out much of the motivation for dark pool trading overnight.

Why?

Because dark pools work at giving you a better spread than on the open market based upon a volume order, as well as allowing block trading unseen.

You want a 1,000 HSBC or Vodafone stocks?

Old days: you look at the markets and make a Visible Bid for them.  If someone can trade at that price then they make a Visible Offer.

New days: you place your order into a dark pool and it sits waiting to be filled at the price you specify, a Dark Bid.  This bid is often a price that is better than on the open markets, e.g. not the European Best Bid-Offer but your, discounted Best Bid-Offer which can only be met by other 'dark' players who make a Dark Offer that is also unseen by the markets.

If you want to know more about how dark pools work, the flash illustration on Turquoise's website shows this well.

CESR's new ruling wipes out the new days overnight, as you are now only going to get that order filled by placing visible pricing levels.

Or that's how my friend reads it.

Download the full documentation here (19 page pdf).

Meanwhile the question that arises is that Nomura and UBS have just launched into dark pool territories in the recent weeks ... has this just screwed their efforts big time?

UPDATE #1 13:45 11th March

Ben in France points me to references that the CESR rules allow Primary BBO (PBBO), and is not restricted to EBBO therefore.  PBBO is explained well on Chi-X's website.

Ben says he's asked CESR and they've confirmed that PBBO is OK.  Might have been worth them putting that in the document more clearly in my view, e.g. PBBO isn't mentioned once but EBBO is everywhere.

And it still doesn't answer the basic question: by forcing dark pools to use mid point pricing for all trades undertaken removes the raison d'etre as this gives bank owned dark pools a significant reduction in spread, and therefore P&L, due to the price being a mid price set from an external source.

On the other hand, people like Nomura were fully aware of this.  In fact, it's part of the reason for bringing NX to market (see page 5):

'NX Mid Match (NXMM) operates as a dark mid point crossing venue, with executions made with
reference to the mid point of the Primary Market where the Security is listed.  NXMM operates under a MiFID pre trade transparency waiver with mid-point crossing only as per Example 3 of “Acceptable crossing logics” in the CESR document “Waivers from Pre-trade Transparency obligations under the Markets in Financial Instruments Directive (MiFID)”.

'The NXMM matching logic has been designed to achieve the following characteristics:

• Simple structure;
• Minimal information leakage;
• No gaming;
• No timing advantages; and
• No probing.'

So why would Nomura, Barclays and UBS make announcements and investments in dark pools if it gives them no major P&L advantage?

According to Ben, it's motivated by the need to access the LSE's Turquoise strategic steering committee ... and so the game rolls on.

My City friend agrees that Nomura understand what they need to do in their MTF (Multilateral Trading Facility), but that the real issue is whether banks can still put their trading desk up as a counterparty to a customer order at anything other than a mid price?

This cuts to the heart of being a Systematic Internaliser, which none of them want to be and is the reason for the rush to be a dark MTF.  However, if the rules are interpreted as above and all customer orders go into a dark pool, then the issue of where they are crossed with the prop book arises.

Does the FSA allow the prop book to cross a customer order outside the MTF or is it more likely that crossing with the prop book will need to be done within the MTF at the midpoint, which then cuts the P&L and internaliser gains?

Things worth reading: 11th March 2010

Things we're reading today include ...

Today's must watch:

Joe Garner of HSBC speaks about Trust in Banks at the launch of the Edelman Trust Barometer last year.

Download this year's report ...

 

Regulators

Turner orders tougher bank stress tests - Financial Times
FSA tells banks to stress-test for two more years of recession - The Times
Commercial property may cause new crisis, says FSA - The Independent
Financial Services Authority to tighten watch on rogue products - The Times
Markets must be able to punish offenders, Lord Myners says - The Telegraph
Plans to make banks reveal salaries over £500,000 - The Independent
Europe eyes ban on CDS contracts used against Greece - The Telegraph

Companies

Former Cazenove banker found guilty of insider dealing - The Independent
Smaller losses at Northern Rock - BBC
Barclays' shareholders warn bank against deal for a US retail bank - The Telegraph

 

Quote of the Day:

"The Prince Charles Cinema in Leicester Square is showing Michael Moore's documentary Capitalism: A Love Story next week and is so concerned about the plight of our poor City folk that the first 50 bankers at each screening can get it in for free."

Business Diary: Free cinema tickets for suffering bankers - The Independent

 

A few choice regulatory quotes

There was a great panel session at the IPS payments show this week on the future of regulation.  Here are a few choice quotes:

“This is the G20-isation of regulations.”
Philippe Mongars of the Banque de France

“By the end of 2010, there will be an agreement of a new macroprudential supervisory structure by the G20 ... the main focus areas will be in strengthening bank capital, strengthening risk management, introducing liquidity standards , mitigating cyclicality and ensuring improvements in governance.”
Shunsuke Shirakawa of the Japanese Financial Services Authority

“We have experienced a once in a century financial crisis twice in the last few years: one generated by domestic issues and one that is global in origin.”
Shunsuke Shirakawa, the Japanese Financial Services Authority

“The immediate crisis has gone and not a lot has happened in the regulatory structures yet ... but the level of cooperation (between supervisors) has been unprecedented. We will get a set of rules as a result, and then the question will be whether everyone applies those rules with the same rigour. This is why the European Union has created a supranational structure to check that the new regulations are followed consistently within the EU (this is CEBS, ESMA and CIOPS).”
Sir John Gieve, former Deputy Governor of the Bank of England

“Banks will require more capital and it must be real capital, as in equity capital.”
Sir John Gieve, former Deputy Governor of the Bank of England

“From a payments viewpoint, the main issue will be the loss of profits due to the loss of the leveraged model of trading. Most profitability in the past years has been as a result of bank leverage. That loss of profit stream will create a much greater focus upon costs, which will lead to outsourcing and other cost reducing programs, as banks need to find new ways to generate profitability.”
Sir John Gieve, former Deputy Governor of the Bank of England

“The book ‘Too Big To Fail’, which provides the inside track on the collapse of Lehman Brothers, has over 500 pages. Some call it ‘Too Big To Read’. The UK authorities first appear on about page 380 and then disappear on page 383, and yet we get the blame for the crisis!”
Sir John Gieve, former Deputy Governor of the Bank of England

Taking the pulse of the payments markets (Part Two)

More voting at IPS2010, with some interesting views expressed.

The session opened with three short questions which were quite telling.

Question 1
Does the banking industry need to change as a result of the financial crisis?
93.2% Yes
6.8% No

Most of the audience are from banks, so that’s quite telling ... and who exactly were the 1 in 20 who voted ‘no’? Oh yes, about 5% of the audience were from regulators (lol).

Question 2
Which areas will be impacted the most by changes made to avoid another financial crisis?
29.9% Regulations to limit bank activities
20.1% Increasing needs for transparency in bank reporting
19.4% Changes to bank governance
11.8% New capital adequacy rules
10.4% New liquidity rules
8.3% Limitations on bank compensation structures

I was surprised by the bonus scheme limits being bottom of the list ... or, bearing in mind it’s mainly bankers in the room, was I?

Question 3
Are regulators co-operating closely enough to deliver a regulatory regime that is consistent?
2.7% Yes
27.2% Somewhat
36.4% Not really
33.8% No

Bit of a silly question really, as when did a regulator ever draft a regulation that was consistently implemented (see PSD, MiFID, Faster Payments ...).

Anyways, we then had lots of dialogue about regulations and rules with the FSA Japan, Banque de France, Sir John Gieve (formerly of the Bank of England), Clifford Chance (lawyers) ... all good stuff and source of commentary and blogging later.

After coffee, we then went into a corporate treasury focused stream with seven more questions for the crowd.

Question 1
Are you from:
58.5% A bank or payment services provider
11.5% A corporate user
30.0% Other

Question 2
Has the financial crisis increased or decreased your efforts to rationalise your banking partnerships?
72.9% Yes, we are rationalising
27.1% No, we are staying as we are

Question 3
Has SEPA made payments easier and cheaper for corporates?
38.9% Yes, SEPA has made it easier and cheaper
41.7% No, SEPA has not made it easier and cheaper
19.4% Don’t know

Question 4
Which area needs the most support for a corporate treasury operation?
35.9% Working capital
31.1% Liquidity management
20.8% Operational efficiency and BPR
12.7% Risk management

Question 5
Is your organisation working on full automation or outsourcing of the procure-to-pay cycle?
30.7% Yes, we are working on this
27.3% We are planning to
19.3% No, but we might in the future
22.7% Not interested in this

Question 6
How would you define the best payment services providers?
61.9% Excellence in End-to-End Processing
13.3% Operational Excellence
12.4% Good Value for Money
8.6% Innovative
3.8% Provides Working Capital Support

Question 7
In five to ten years, which of these are best placed to service corporate needs?
67.3% Banks
15.9% Non-banks
9.4% Corporates’ in-house banks
7.5% Technology firms

Bearing in mind that almost 60% of the audience came from a bank (Question 1), this answer may be somewhat skewed!

Things worth reading: 10th March 2010

Things we're reading today include ...

Today's must read

What’s next for global banks - McKinsey

In 2008, as the credit crisis broke, banks underwent near-death experiences on a massive scale. Last year, many enjoyed a recovery that was nearly as abrupt. In the intense uncertainty that ensued, bankers around the world have rightly shifted their focus away from growth and toward survival as they confront ambiguity about markets, risk, regulation, and demand.

Amid such extreme mood swings, long-term structural changes now under way will fundamentally affect banking in the years to come. To understand these changes, we undertook research that combined a historical view of the industry with an analysis of 25 global banks to see how various portfolios of banking businesses and geographic distributions would fare under different macro and regulatory scenarios. Among our findings:

• Under a scenario of lower global economic growth and tough regulatory restrictions, all but emerging-market banking giants will probably destroy value over the next four years. Funding costs will remain high, further hurting profitability.

• Without any management moves, banks of every type will need more capital—as much as $600 billion over the next five years for the 25 banks we modeled. That suggests a real danger of a capital crunch, further forced asset sales, and the need for additional government help.

• The range of performance by banks using similar business models will widen. Big European banking groups, for example, will see returns on equity (ROE) ranging from 9 to 18 percent.

Other news ...

Top 15 core banking system vendor iRanking table - inntron
Banking fraud 'moves to internet' - BBC
Rescued banks have not mended their ways, says Commons inquiry - The Telegraph
Dresdner economist David Owen sues bank for £500k - The Telegraph
American Express Will Pay You $5 an Hour to Volunteer - The Daily Green
Regulators home in on derivatives - Financial Times

Is he having a laugh?

According to yesterday's Evening Standard, Rory Bremner compered the Private Asset Managers' Awards at the Dorchester over the weekend and cracked a number of edgy jokes.

Asked Bremner: “Anyone here Dutch? Great salesmen, the Dutch. Anyone that can sell ABN Amro...”

 He still got a laugh for that, unlike the crack that he “once had dinner with Sir Fred Goodwin. Halfway through, he said, Shall we go Dutch?'”

But the biggest laugh came with his jibe about Tory tax dodger Lord Ashcroft.

This is the discovery that Ashcroft has claimed a non-domicile status in the UK to avoid tax payments for many years.

“What is the difference between a condom and a non-dom?

“If you make a mistake with a condom, it takes nine months to find out. If you make a mistake with a non-dom, it takes nine years.

“But either way, when you find out, you're completely f**ked.”

Taking the pulse of the payments markets

I’m here at one of the largest jamborees of the payments year behind SIBOS, IPS2010.

The conference opened with a lengthy interactive voting session with the 400-strong audience.

Here are the results:

Question 1

What will have the biggest impact on transaction banking in 2010?

46.5% New regulations
16.0% New payments providers
12.3% Interest rates
12.3% Growth in the core G8 countries
8.0%   Technology change
2.1%   FX volatility
2.7%   None of the above

Question 2

What are the main constraints within your transaction banking business?

45.7% Regulations
37.8% Investment
9.2%   Costs
7.3%   Credit

Question 3

Are you increasing or decreasing your investments in transaction banking?

84.6% Increasing
15.4% Decreasing

Question 4

Are you investing for:

45.0% Lower operational costs
44.4% Long term growth
10.6% Short term revenue gains

Question 5

Where will growth come from this year?

45.3% Existing clients
33.2% Emerging markets
15.5% Acquiring weak competitor’s customers
6.1% No idea

Question 6

What is your strategy for emerging markets?

30.8% Grow organically
17.9% Grow through M&A
47.2% Grow through a mixture of both of the above
4.1%   No idea

Question 7

Will there be more banking M&A this year?

83.7% Yes
16.3% No

Question 8

Which business area makes your CEO smile the most?

36.5% Commercial Banking
26.0% Retail Banking
16.7% Trading
10.9% Corporate Finance

Question 9

Is lending a:

45.8% Part of a suite of banking products
44.9% Core banking product
9.4%   Necessary evil

Question 10

Where will interest rates in the Eurozone be, by the end of this year?

9.3% Lower
26.2% The same
43.7% 25 basis points higher (0.25%)
14.2% 50 basis points higher (0.5%)
6.6% More

 

Question 9 intrigued me the most.  One out of ten bankers think that lending is a 'necessary evil' ... no wonder access to loans is so hard right now!

Things worth reading: 9th March 2010

Things we're reading today include ...

Today's must read:

Banknotes: facts and figures - The Telegraph

• 1.5 billion - the number of £20 notes (worth £30 billion) in circulation, of which an estimated 150 million (worth £3 billion) are Elgar notes.
• £48 billion - the total value of bank notes in circulation, up by £10 billion in the last two years alone.
• 1024 A.D., the year the first use of a paper banknote was recorded in China
• 1694 - the year the Bank of England issued its first note
• 830 million - the number of notes, worth £11.4 billion, taken out of circulation and destroyed last year because they had become so poor quality
• 2,529 - the number of requests received by the Bank of England from consumers to replace notes – worth £82,000 – that were damaged because they had been "washed".

No encore for Elgar as £20 image disappears - The Times

 

Companies
I am not a criminal, insists billionaire behind Icesave - The Telegraph
Virgin Money to charge customers - BBC
UBS to set up dark pool in Europe - Financial Times

Markets

UK promises flexibility after Iceland shouts 'no' - The Independent
Markets must be able to punish Lord Myners says - The Telegraph
Treasury 'risks damaging shareholders in banks' - The Independent

Regulations

Britain in final push to tone down EU hedge fund rules - The Independent
British banks given a year's grace on liquidity - The Telegraph
Brussels to mull 'European IMF' - BBC

Bonuses

US senators try to impose a one-off 50pc bonus tax - The Telegraph
City workers face highest tax bill from next month - The Independent
Broker admits court’s tax ruling has put paid to City exodus - The Times

Technology

Internet access 'a human right' - BBC

Towards Currency Union

I've been studying developments in the Middle East lately, and particularly the countries of the Gulf Cooperation Council (GCC). The GCC has been running since 1981 and comprises six core states of the Persia Gulf Region: the UAE, Saudi Arabia, Kuwait, Bahrain, Oman and Qatar.

The GCC is a bit like the EU, which formally established in 1957, in that its aims are to:

• create similar regulations in areas such as the economy, finance, trade, customs, tourism, legislation, and administration;
• foster scientific and technical progress in key areas of industry, mining, agriculture, water and animal resources;
• establish scientific research centres;
• set up joint ventures;
• unify the military presence for the Peninsula Shield
• encourage cooperation of the private sector;
• strengthen ties between the peoples of the GCC; and
• create a common currency by 2010.

Ah, there’s the key one at the end there. A common currency.

I’ve been visiting the region regularly for about ten years now, and this currency has always been on the agenda. Now, after a decade, it’s still on the agenda, and that’s about it.

That’s surprising as the GCC is very closely harmonised already; unlike the EU where there has been a massively fragmented region of economies, cultures, languages and monetary policies.

So you would think it would be easy.

In particular, the GCC countries are all closely pegged to the US dollar and, apart from the UAE’s wild child Dubai, pretty stable economies.

So what’s holding it back?

Politics.

It is a political issue about harmonising currencies that is the gating factor to a GCC currency or an Arabic currency. On this later point, assuming the GCC succeed, there is a plan for a single currency for the 18 member countries of the Council of Arab Economic Unity. These include the six GCC states, plus Yemen, Egypt, Iraq, Lebanon, Libya, Sudan, Syria and a number of other countries.

What are the political issues?

Firstly, what to call the currency.

If you call it the riyal then it means that Saudi, Oman and Qatar wins, as the dirham is the currency of the UAE whilst the dinar is used in Kuwait and Bahrain.

This is why the region voted to call it the ‘khaleeji’, which means ‘of the Gulf’, although no-one refers to the khaleeji, they just talk about the ‘currency union’.

So there is no official currency name as yet.

I did discover some currency designs:

 

 

But these are fake as none of the bankers I met had seen these designs, and the fact its called dinar gets thrown out of court straight away ... as does the fact that half is in English rather than Arabic.

In fact, the only thing folks liked about these notes is the six flag logo, so that might stay.

Even if the region gets a currency name that all nations can agree upon, where will they headquarter the Gulf Central Bank?

As soon as it was chosen to be in Riyadh, the UAE walked out. Meanwhile, Oman had said it wouldn’t join the currency and Kuwait has issues due to being linked to a basket of currencies, rather than just the dollar.

Nevertheless, five nations have agreed to create a Gulf Monetary Council and move towards union by 2015 rather than 2010. GCC Secretary-General Abdulrahman Al-Attiyah has stated that the first meeting of the joint monetary council will take place at the end of this month, and that is considered to be an important milestone towards the monetary union.

Some say 2010 was just the start date towards union anyway.

All in all, like the EU efforts, the GCC has a long road ahead. At least they have the oil resources to motor along it.

Things worth reading: 8th March 2010

Things we're reading today include ...

RBS branch sell-off hits the buffers - The Times
Santander leads race for £4bn RBS branches - The Times
RBS set to pull coverage of small firms - The Independent
Northern Rock still in red for third year running with £400m losses - The Telegraph
Metro Bank gets official go-ahead - BBC


Britain in final push to tone down EU hedge fund rules - The Independent
London's 'billion dollar club' of hedge funds shrinks by 15pc - The Telegraph
Canadian paper money to become plastic - UPI
US public 'will pay Obama's $90bn bank levy' - The Telegraph
Icelanders snub Britain in vote over £3.5bn loan repayments - The Times
Standard Chartered boss steps up attack on banking reforms - The Telegraph
Bankers in demand says jobs firm - BBC

Quote of the Day:
"I won’t use Twitter because it has the word twit in it."
Paul Bettany, Actor

The Finanser's Week: 1st March - 7th March 2010

The biggest news stories of the week include ...

• How Obama Screwed Volcker - The Daily Beast
• Record profits at Standard Chartered but bad debts rise The Independent
• HSBC's £7bn profits to offer insight into Asian economy The Telegraph
• Turner: Cost of bank bailout was small compared to instability The Independent
• 'Robin hood' bank tax wins backing of Japanese foreign minister The Telegraph
• Barnier refuses to back down in EC battle with hedge funds The Independent
• US banks veto 'socialist pay' in secret talks The Independent
• City headhunter warns of banker exodus over bonus row The Telegraph

And our biggest stories of the week are ...

When should a bank change?

When should banks move to dump branches, rearchitect for electronic connections and move away from old style paper processes?  When do we see the tipping point and how do you deal with it?

How to deal with too much data

Did I mention that I’m in love with the Economist’s 16-page supplement on a deluge of data. There are diamond and gold nuggets of information throughout the report.  Here are a few highlights ...

How to spot the next bust

One of my banking colleagues provided me with a major revelation yesterday.  He said: “if you want to spot the next country to be in distress, look for a skyscraper.”

Adventures in identity: are you paranoid or schizophrenic?

For a while now, the industry has struggled with secure identities. Now SWIFT has created a new approach, the Personal Digital Identity (PDI) token. Is this a good thing or creating even more confusion?

A rich round of bank analysis 

This month had a real crop of great items in Fortune, Bloomberg and the Economist: from Alan Greenspan's fightback to the future of reading; from a deluge of data and how to cope with it to living through the meltdown of AIG; from why Canada is best for banking to the Absolute Banking Nightmare that RBS discovered at ABN. Here's a summary of these key stories. 

Monthly MiFID MTF Monitor: February 2010

In our second month of monitoring the MTF performances in European Equities trading in partnership with Thomson Reuters Equity Market Share Reporter(EMSR) - for last month's figures and charts, click here - we find that Chi-X continues its success, whilst LSE win this month's battle with Xetra for second place.

SEC to crack down on HFT?

As folks who read this blog regularly know, I often return to the theme of latency and high frequency trading (HFT).  So a friend tipped me to look at the SEC's latest consultation document released in January on trading in American equities markets.  Interesting section at the bottom of page 62 ...

If the Banks are United, they will never ... 

Watching the Carling Cup Final yesterday, I noticed a chap who obviously didn't realise that sitting next to England Manager Fabio Copello would immediately get him noticed ...

Great customer experiences are like this ...

Nice ad from ANZ Oz.
 

 

The Financial Services Club is sponsored by:

 

For details of sponsorship email us.

When should a bank change?

When should banks move to dump branches, rearchitect for electronic connections and move away from old style paper processes?  When do we see the tipping point and how do you deal with it?

This has been the core of lots of chat this week, specifically talking about old bank models versus new ones. Branch distribution versus online and mobile. Letters of credit versus open account. OTC trading versus algo trading. SWIFT versus secure cloud networks. Clearing and settlement versus real-time. KYC, AML and regulations versus customer service and sales.

You name it, and I’ve probably talked about it.

The common theme is how to deal with the old style of banking business, based upon paper-based forms and documentation versus the new style business, based upon electronic media and communications.

The old style business is cumbersome, unwieldy and hard to monitor; the new one is fast, completely transparent and easy to track.

But it’s not simple because it means dumping the old model at some point to fully transition to the new one and the question is: when?

Banks were built on the unwieldy old style business of branches issuing documentation to clients and tracking transactions via log books and double-entry book-keeping.

This new style business doesn’t fit with that model.

The new style business is based around an electronic centre which purely connects folks with online accounting.

It’s zero-overhead, straight through processing, hands free banking.

It doesn’t fit.

How do we transition from the old model to the new without killing our existing profitable business?

How do you move from bricks and paper to click and mobile?

This struggle is not a new one. It’s been around ever since we moved towards online customer self-service.

It’s just that it’s getting faster and faster as a conundrum, as the deluge of electronic reformation hits the industry.

Ten years ago, the industry made early moves to exploit the situation by closing branches as customers moved to internet service.

That was a failure of timing.

The branch closures were too early and too soon – the customers’ weren’t ready and the systems weren’t fault-tolerant enough or pervasive and ubiquitous enough to support such debunking.

Now that has changed but, due to the bad experiences of a decade ago, bankers are reluctant to try this approach again today.

But they should.

Because now the timing is better, the customer is readier, the technology works and the processes are robust.

But now the difficulty is different as every time we talk about moving from the old world of bricks and paper to the new world of click and mobile, the issue is how to let go of the profitable past and move to the unprofitable future.

Banks make their money out of processing the non-standard. If everything is standardised, cheap and easy, how do they make money?

This is well illustrated by the SEPA implementation, and the fact that the loss of cross-border processing of non-standard payments for standardised cross-border money movements reduces margins to a fraction of the past.

Put that on a scale of all transactions and interactions, and banks are reluctant to change ... especially as they don’t need to thanks to the protection of regulatory licences and government approvals as the major barrier to entry into this industry.

Well that’s all about to change too, because the newbies operate around the fringes of banking.

Take PayPal.

They began as a superset on the old banking systems that made online payments easy.

Once they attained critical mass, they applied for a banking licence and got one.

Now they’re a bank processing over $60 billion in transactions per annum.

The minnow becomes the whale.

So what to do, what to do?

Well there are answers, and most of it leads back to one of my favourite management writers Clayton Christensen.

Having blogged about his concepts of disruptive movements and the innovator’s dilemma, I won’t repeat all that again today, except to say that the premise is: a new operator enters your industry offering something that looks irrelevant; before you know it, the irrelevant operators subsumes you and the industry by changing its economic paradigms.

The best example is Japanese car operators in the USA in the 1950s who offered cheap new cars. Ford and GM thought they were rust buckets and dismissed them as such. However, Americans could suddenly buy new cars and they did en masse. The second hand car market disappeared and, over the years, the Japanese car manufacturers upscale and produced cheap luxury cars. After half a century, Ford and GM were on their knees and the Japanese had won (until Toyota messed up their brakes that is).

Read more about the theory here.

Anyway, I was struck by this dilemma again as I read Fortune magazine’s insightful piece on the future of reading.

Here’s a key few thoughts:

Magazines, books, newspapers -- all that printed stuff is supposed to be dying. Advertising pages, which have been steadily declining, dropped 26% in 2009 alone ... The better news is that with the arrival of Apple's forthcoming iPad and other tablet computers -- touch sensitive, full color, easy to watch video on, network-connected to virtual newsstands and stores -- the publishing industry might once again have a remunerative way of giving it to them.

Later in the article, the author (Josh Quittner) asks the key question: can traditional publishing companies reorganize and move fast enough to embrace and serve new platforms?

Think of this as “can traditional banks reorganise and move fast enough to embrace and serve new platforms?” and I’ve replaced the words related to publishing to make this bank specific. So here’s the answer:

Banks have had 15 years to reorganise to embrace and service new platforms so since the commercial browser came out. They haven't reinvented or reimagined themselves. The talk we're hearing now is not at all about reinvention and reimagination -- it's again about trying to shoehorn old models of business into this new reality.  The reason why banks haven't reinvented or reimagined themselves is because the old way of doing business has been blindingly successful.

In the case of publishing, it’s different to banking. The reason is that content became free online, and that has disrupted their business model. In the case of banking, the change is very different – namely that distribution and service has become free so branches are less needed, apart from providing sales.

But if you look at the future of reading article, the question is the same: how and when do you move from an old business model to a new one, when the new one kills your old one, its profits and it structure?

You wipe out your old business overnight, and you move from a profitable past to an unprofitable present to build for a profitable future.

The answer is clear however.

You build your profitable future by using your profitable past to subsidise the unprofitable present.

What does that mean?

Start a new business model under a different business entity unrelated to your existing one.

This is what happened when call centres disrupted – First Direct, Direct Line, etc all flourished as newbies under oldies umbrellas – and this will happen again for those who are wise.

For those who aren’t, the tipping point will come when their profitable past becomes unprofitable.

However, at that point, desperation sinks in as the margins have been whittled down to worthless.

Transition now, don’t wait and do it before it’s too late.

For more insights into these areas, click onto our directory of social finance or banking-as-a-service presentation.

Things worth reading: 5th March 2010

Things we're reading today include ...

Bonuses

HSBC boss Michael Geoghegan paid £800,000 a year to move to Hong Kong - The Telegraph
City headhunter warns of banker exodus over bonus row - The Telegraph
Brokers escape bonus tax - The Telegraph

Companies

Citigroup chief thanks US taxpayer for bailout - The Times
BofA warrants net $1.5bn - Financial Times
Liffe proves its worth to NYSE - Financial Times

Countries

Icesave deal hangs in the balance, says Iceland's PM - The Independent
Safe haven for your cash? Germans call on Greece to sell off its islands - The Times
The European tortoise versus the Asian hare - The Times
US economic growth 'hit by snow' - BBC
US banks urged to reveal credit scores - Financial Times
Barack Obama pushes on with controversial Volcker rule - The Telegraph

Technologies

Blogs air views on stifled Gulf finance - Financial Times
Money sharing comes to Facebook - BBC

 

Quote of the Day:

"If Peter Sands’ wife, the author Betsy Tobin, needs a hero for her next historical novel, she could do worse than pick her partner – the Standard Chartered chief executive." 
Questor share tip: Buy Standard Chartered - it's the pick of the banks - The Telegraph

How to deal with too much data

Did I mention that I’m in love with the Economist’s 16-page supplement on a deluge of data. It just crystallises so many thoughts from my career in technology and where we’ve gotten to today.

There are diamond and gold nuggets of information throughout the report.

Here’s a few highlights:

• The amount of digital information increases tenfold every five years.

• By 2013 the amount of traffic flowing over the internet annually will reach 667 exabytes, according to Cisco.

• According to a 2008 study by International Data Corp (IDC), around 1,200 exabytes (1.2 billion terabytes) of digital data will be generated this year.

• Researchers at the University of California in San Diego (UCSD) examined the flow of data to American households. They found that in 2008 such households were bombarded with 3.6 zettabytes of information (or 34 gigabytes per person per day). The biggest data hogs were video games and television. In terms of bytes, written words are insignificant, amounting to less than 0.1% of the total. However, the amount of reading people do, previously in decline because of television, has almost tripled since 1980, thanks to all that text on the internet.

• Providing access to data “creates a culture of accountability”, says Vivek Kundra, the federal government’s CIO.

• Where traditional businesses generally collect information about customers from their purchases or from surveys, internet companies have the luxury of being able to gather data from everything that happens on their sites. The biggest websites have long recognised that information itself is their biggest treasure. And it can immediately be put to use in a way that traditional firms cannot match.

• Experiments at the Large Hadron Collider at CERN, Europe’s particle-physics laboratory near Geneva, generate 40 terabytes every second.

• Wal-Mart handles more than 1m customer transactions every hour, feeding databases estimated at more than 2.5 petabytes—the equivalent of 167 times the books in America’s Library of Congress.

• Cablecom reduced customer defections from one-fifth of subscribers a year to under 5% by crunching its numbers. Its software spotted that although customer defections peaked in the 13th month, the decision to leave was made much earlier, around the ninth month (as indicated by things like the number of calls to customer support services). So Cablecom offered certain customers special deals seven months into their subscription and reaped the rewards.

• Best Buy found that 7% of its customers accounted for 43% of its sales, so it reorganised its stores to concentrate on those customers’ needs.

• The Royal Shakespeare Company (RSC) sifted through seven years of sales data for a marketing campaign that increased regular visitors by 70%. By examining more than 2m transaction records, the RSC discovered a lot more about its best customers: not just income, but things like occupation and family status, which allowed it to target its marketing more precisely.

• [Using Hadoop, a form of cloud computing] Visa crunched two years of test records, or 73 billion transactions, amounting to 36 terabytes of data. The processing time fell from one month with traditional methods to a mere 13 minutes.

• One company that capitalises on real-time information flows is Li & Fung, one of the world’s biggest supply-chain operators. Founded in Guangzhou in southern China a century ago, it does not own any factories or equipment but orchestrates a network of 12,000 suppliers in 40 countries, sourcing goods for brands ranging from Kate Spade to Walt Disney. Its turnover in 2008 was $14 billion.

• One of the most important technologies has turned out to be videoconferencing. It allows buyers and manufacturers to examine the colour of a material or the stitching on a garment. “Before, we weren’t able to send a 500MB image—we’d post a DVD. Now we can stream it to show vendors in our offices. With real-time images we can make changes quicker,” says Manuel Fernandez, Li & Fung’s chief technology officer. Data flowing through its network soared from 100 gigabytes a day only 18 months ago to 1 terabyte.

• “What we are seeing is the ability to have economies form around the data—and that to me is the big change at a societal and even macroeconomic level,” says Craig Mundie, head of research and strategy at Microsoft. Data are becoming the new raw material of business: an economic input almost on a par with capital and labour.

• “They are uncomfortable bringing so much attention to this because it is at the heart of their competitive advantage,” says Tim O’Reilly, a technology insider and publisher. “Data are the coin of the realm. They have a big lead over other companies that do not ‘get’ this.”

• Google handles around half the world’s internet searches, answering around 35,000 queries every second.

• Google’s innovation was to count the number of inbound links from other web pages. Such links act as “votes” on what internet users at large believe to be good content. More links suggest a webpage is more useful, just as more citations of a book suggests it is better. But although Google’s system was an improvement, it too was open to abuse from “link spam”, created only to dupe the system. The firm’s engineers realised that the solution was staring them in the face: the search results on which users actually clicked and stayed. A Google search might yield 2m pages of results in a quarter of a second, but users often want just one page, and by choosing it they “tell” Google what they are looking for. So the algorithm was rejigged to feed that information back into the service automatically. From then on Google realised it was in the data-mining business. To put the model in simple economic terms, its search results give away, say, $1 in value, and in return (thanks to the user’s clicks) it gets 1 cent back. When the next user visits, he gets $1.01 of value, and so on ... Together, all this is in line with the company’s audacious mission to “organise the world’s information”. Yet the words are carefully chosen: Google does not need to own the data. Usually all it wants is to have access to them (and see that its rivals do not). In an initiative called “Data Liberation Front” that quietly began last September, Google is planning to rejig all its services so that users can discontinue them very easily and take their data with them. In an industry built on locking in the customer, the company says it wants to reduce the “barriers to exit”.

• In a study by IBM half the managers quizzed did not trust the information on which they had to base decisions. Many say that the technology meant to make sense of it often just produces more data. Instead of finding a needle in the haystack, they are making more hay.

 

How to spot the next bust

One of my banking colleagues provided me with a major revelation yesterday.

He said: “if you want to spot the next country to be in distress, look for a skyscraper.”

“What?” I responded.

“Every time a capital city builds a major monolith, you know disaster looms”, he expounded.

I thought about it, and then thought: “yes, there might be some truth in this”.

The conversation began with a discussion about the issues in Dubai and hence, when we chatted in awe about the opening of the Burj Khalifah, the world’s tallest skyscraper, the comment arose that every time a city builds such a structure, you know trouble looms.

“The reason for this”, said my banking friend, “is that they start the planning of these structures in the boom times.” He gravely added, “and whenever there is a boom, you know a bust is coming. But the bust occurs just after they finish the building of these white elephants.”

So I thought about the world’s tallest buildings: the Sears Tower, the Empire State Building, our very own Canary Wharf and Malaysia’s Petronas Towers; and sure enough, you can date almost each of these with a bust.

Empire State Building, New York, USA

Completed: 1931

The Great Depression started 1929 but really kicked in in 1931.

Sears Tower, Chicago, USA

Completed: 1973

In 1973, one of the worst stock market crashes occurred since the Great Depression.

Canary Wharf, London, UK

Completed: 1991

Black Wednesday 1992, when the UK had to leave the European Economic & Monetary Union due to a crash in sterling prices. Meanwhile, the UK had moved into recession in 1991 with a property market bust, resulting in the builders of Canary Wharf having to declare bankruptcy.

Petronas Towers, Kuala Lumpur, Malaysia

Completed: 1998

Asian markets meltdown in 1997 and the KL Stock Exchange lost over half of its value during 1997-1998.

Burj Khalifa

Completed: 1st October 2009

Dubai World and Nakheel implode in $80 billion of debt on 26th November 2009.

 

Pictures sourced from: Our English, David MacDonald, Graphics Hunt, Trip Advisor and Trends Updates.  

 

Things worth reading: 4th March 2010

Things we're reading today include ...

• Record profits at Standard Chartered but bad debts rise - The Independent
• Standard Chartered to be listed in Mumbai - The Times
• AIB £2.4bn loss is just the start of its problems, say analysts - The Telegraph
• Hedge funds raise bets against euro - Financial Times
• Money sharing on Facebook - BBC
• Peter Mandelson frowns on America's unilateral financial reforms - The Times
• Wall Street watchdog Sheila Bair blasts 'shameful' bonuses - The Telegraph
• Lord Turner tries to remind MPs of the social usefulness of being a brainbox - The Telegraph