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The Chancellor’s speech is one of the worst ever

So George Osborne, the UK Chancellor, made a big speech at
JPMorgan’s HQ in Bournemouth yesterday.

The speech announced the details of the UK Banking Reform
Bill which will implement the recommendations of the Vickers’ Independent
Commission on Banking (ICB) for ring fencing, account switching and more.

The speech is based upon four foundation principles for a better future for banking through:

  • Better regulation;
  • Better regulators;
  • Better choice; and
  • Better people.

Better regulation is regulation that ensures the next time a
bank fails, the taxpayers don’t have to bail them out and the economy can
continue to function. In other words, regulations that ensure no bank is too
big to fail.  The government has accepted the recommendations of the ICB, and this means that banks will become holding companies where their retail and investment arms are separated, with separate management teams and separate funding.

Better regulators is to ensure that the regulator is effective
and has teeth.  It is believed that the
triumvirate split of the regulators between the Bank of England, the Financial Services
Authority (FSA) and the Treasury failed under the last government so better
regulators is to create three new authorities out of the FSA:

The
Financial Policy Committee (FPC):

    • A committee of the Court of the Bank of England;
    • Purpose: to protect financial stability
      (macro-prudential regulation, regulation of Clearing Houses and settlement
      systems)

    The
    Prudential Regulation Authority (PRA):

      • A subsidiary of the Bank of England;
      • Purpose: stable and prudent operation of deposit
        takers, insurers, and investment banks (micro-prudential regulation)

      The
      Financial Conduct Authority (FCA):

        • An independent company
        • Purposes: confidence in financial services and
          markets (will regulate exchanges and other trading platform providers, and
          market participants); and for improving consumer protection and market
          integrity (regulating conduct of business for all firms)
        [More on the FSA’s restructuring can be found in this
        presentation
         from the FSA]

        Better choice is all about improving competition and
        competitive forces by opening the market to easier entry, encouraging new
        entrants, making it simpler for people to move their accounts between banks and
        providing an overhaul of the payment systems to allow any firm to connect.

        Better people is all about improving professional
        standards.  The Chancellor doesn’t say it
        explicitly but it implies that to be a bank leader will involve some form of
        certification or charter, although many of the bank leaders of the last decade
        should be certified anyway.

        The problem with the speech is that it says nothing new.

        It just wraps up the stuff that’s already been agreed and
        puts it into a new light for catching some headlines.  For example, the big headline yesterday is
        that the ring fence between investment and retail banking will be
        electrified.  Big deal.

        What that means in practice is that if the bank does not
        ring fence under the new laws at a good speed, then they will be forced to separate
        their retail and investment bank arms in a Glass-Steagall style split. 

        The government does not need to electrify the fence however, as any UK bank that
        doesn’t conform will get beaten over the head with a sharp stick anyway.  The only thing that might justify an electrified ring fence is to make sure banks keep confirming with this separation of retail and investment arms ten or twenty years from now.

        The speech has all sorts of other political clap-trap:

        “2013 is the year when we re-set our banking system.”

        “A banking system that works for you … is what I’m working night
        and day to deliver for you.”

        “The Bank of England will be the super cop of our financial
        system.”

        “Anger is not enough – we need to channel the anger into
        change.”

        In fact, I took particular note of his comment: 

        “Why, in the age of
        instant communication, do small businesses have to wait for several days before
        they get their money from a credit or debit card payment? It should be much
        quicker. Why do cheques take six days to clear? Customers and businesses should
        be able to move their money round the system much more quickly.”

        Has he not heard of Faster Payments?

        Is our UK Chancellor unaware that banks tried to get rid of
        cheques to move people and companies towards real-time payments, but the media
        and markets rejected these incentives?

        Does he not know that almost any payment can move at light
        speed today, as long as the customer does not use paper?

        My honourable friend, that part of your speech really was
        political grandstanding of the highest order [you can read more critique on this part of his speech at my friend Gareth Lodge's blog]. There’s also more of this speech.  You can read the whole dirge if you’re desperate, but it's not worth it as there’s nothing new.

        So what is the point here?

        Well my point is that, after five years of crisis analysis, we
        have produced a solution for the wrong problem.

        The solution presented yesterday is to separate a bank’s
        retail and investment arms but, as so many have pointed out including myself,
        it was retail banks that failed more than investment banks in Britain.

        In Britain, only three banks had investment banking arms of
        any worth: HSBC, Barclays and RBS.  Of these, HSBC and Barclays survived this crisis
        far better than our retail banks such as Halifax Bank of Scotland and Northern
        Rock.  Equally, RBS caused their problems
        through diluting capital irreversibly in an ego-driven acquisition of ABN AMRO,
        which was primarily motivated by one-upmanship over Barclays. 

        Shame.

        This means that the issues we should be regulating is the fact that UK banks escalated risk
        exorbitantly because they could securitise funds in the investment markets.

        It has nothing at all to do with having a retail and investment
        bank.

        Nothern Rock, Halifax Bank of Scotland and others in the retail financial markets were dipping their
        fingers, toes and whole bodies into the investment markets to feast on funds.  That was the issue.  By feasting on those funds, they could generate profits and increase shareholder returns.  

        However, by feasting on those funds they also created risk. 
        That is why they had bet the farm on never-ending access to funds and is why the whole farm was at risk when those markets
        stopped the funding.

        So it is the risk models of banking that were at fault, not
        the structure of the banks themselves.

        The only thing the ring fence is good for, is that it can help a government or regulator unwind a bank more easily
        the next time one fails.  It is a prescription,
        not a cure.

        For that reason, it is being considered for adoption across
        Europe.

        But that brings me to the real point of yesterday’s speech that
        the Chancellor truly failed to respond to and damages Britain’s future more
        than anything else this government is doing.

        The reforms in the Bank Reform Bill will make Britain’s
        banks wholly uncompetitive with any other bank in the world because we have
        acted unilaterally to ensure they are ineffective in a global arena.

        UK banks now need to reserve capital against each part of
        their bank operations: retail banking, commercial banking and investment
        banking, and for each and every subsidiary operation.

        That’s good, but American banks don’t have to do that.  They just have to stop trading their own bank
        funds in the investment markets under the Volcker Rule, which will outlaw proprietary
        trading.

        Add in Basel III and what this means in practice is that US
        banks will operate at a Tier One Capital Ratio of around eight percent, but our
        banks will operate at a level double that or worse, due to reserving against
        each and every part of the bank at Basel III ratio’s.

        The net:net is that American banks will be able to leverage capital
        for profits far more easily than UK banks, and hence American banks will
        attract investors and UK banks will not.

        Furthermore, and here’s the real disaster, it means our
        banks will be reserving funds that could have been used for lending, fuelling the
        economy, creating commerce and growth and getting us out of this mess.

        Instead, they will be sitting on funds and letting them
        fester in their vaults.

        Money that effectively will be like leaving money under the
        mattress that could have helped Britain recover faster instead.

        That’s the real rub of what the UK Banking Reform Bill does:
        speeds our banks towards being less risky and less competitive, whilst ensuring
        the economy teeters and tumbles through the next decade in a poorer fashion
        than it ever was before.

        Thanks George.

        You can watch my reactions in real-time if you want, as I talked about this with Jeff Randall on Sky News last night (11 minute video, my bit starts just after 6 minutes).

        And then more on the BBC

        About Chris M Skinner

        Chris M Skinner
        Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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        3 comments

        1. The usual high standard of knowledge, judgement and presentation from Chris Skinner. I have to confess that I was pretty well prejudiced from the point when Osborne remarked that of how the USA fines are to be paid by RBS; “That could potentially have been the cause of real public anger this spring.”
          That is so far behind the reality of where public opinion in the UK already is, that for me it discounted most of what was subsequently said. In addition, what was said (nothing new as Chris points out)did little but reinforce the impression of an ungracious and reluctant Chancellor forced by the sheer strength of public – and business – opinion to make this minimalist detailing of conceded ground.
          Now can we have something of the same on ‘Austerity and Plan A’

        2. Well at least they’re paying attention.
          On the narrow point of having heard of Faster Payments, the Chancellor may simply be reflecting public opinion. Few people (outside the payments cognoscenti who read your blog) have; and where they have, it’s not really valued – partly because for consumers it’s free. Faster payments is expected in the smartphone era, not valued.
          My dentist collects most of his payments across plastic card. I quizzed him on how much this costs him. I then asked him why he didn’t use Faster Payments? He has a tablet in reception, most customers find themselves waiting for a while. ‘What is Faster Payments?’ So I called a relationship manager at his bank. ‘We’re motivated to sell the card schemes, not FP’.
          Discussion with a marketeer heavily involved in the payments industry revealed a similar story. ‘I only accept payments for my events thru’ Paypal, as it is so much easier to reconcile and manage everything. I don’t have time to spend on admin’. All credit to Paypal (no pun intended).
          Whilst the press and regulators castigate banks for selling the wrong things, we also need to promote the right things. Give consumers and SMEs the choice. Where can my dentists get an FP sticky logo, to go alongside the VISA and Mastercard etc ones?
          But the door is ajar; change is in the air; it is up to us whether it’s bad or good. Celent have a manifesto (the link is in the blog above.) My vote goes to the Archbishop of Canterbury, who wants to make Britain’s banks the most ‘flexible and effective’ in the world. Though I’d widen it to include regulated PSPs, and the national infrastructures.

        3. credit and debit card payments still take more than a day to arrive, in most cases it is still the 3rd day. The volume of merchant payments cannot even be compared to P2P payments for which faster payments serve. What is needed is something like EFT-POS, wherein you can get rid of the card companies that are much more expensive and get transactions settled by a scheme like faster payments and this is much easier to implement for debit cards than for credit cards. The total value of merchant / card puraches can sometimes be half of the value of GDP and imgaine 2% of these going towards transaction costs ? wuhh .. a lot of which goes to card companies. With something like faster paymens , efforts should have been made to move the high volume merchant kind of transactions of ‘faster’ mode of payments which are not only faster (immediate) but also cost a lot less. I see no effort being made in this direction and that is such a shame. Countries like China dont entertain visa and mastercard because they realize that in a cash free world (which we may be heading towards), the cost may just be too much that these companies take away.

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