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Do bankers really want to be plumbers?

I was preparing a presentation last week to deliver in Spain that had the sexy title: “Challenges for European banks in a crisis and post-crisis environment.”

It wasn’t a title I chose, but led to me creating an amalgam of many different threads of thinking, some of which you will recognise if you follow this blog.

First, I thought about all the things that we refer to today as phrases which mean something, and yet weren’t even around three or four years ago. These phrases include:

  • Credit Crunch
  • Subprime Crisis
  • High Frequency Trading
  • Flash Crash
  • Banksters

and my own personal favourite is the Vampire Squid that is Goldman Sachs.

These are now in the public psyche and are used regularly in conversation, along with other more complex terms like Structured Investment Vehicles, Credit Default Swaps and Mortgage Backed Securities.

I then thought about the things that policymakers are talking about in response to the above. This includes:

  • Austerity Measures
  • Quantitative Easing
  • Basel III
  • Liquidity Risk
  • Capital Ratios
  • OTC Derivatives

and more.

On Basel III in particular, the landscape is confused.

This was hotly debated at SIBOS for example, with Standard Chartered stating that the new regulations would lead to trade finance becoming 15% to 37% more expensive, with volumes reducing by 6% – equivalent to a $270 billion a year reduction in global trade – and a 0.5% fall in Global Gross Domestic Product (GDP).

Werner Steinmuller, who leads the transaction banking services for Deutsche Bank, agreed at the Frankfurt Euro Finance meeting I attended last week, saying that: due to trade finance issues, global trade will go down six percent, resulting in a twenty percent increasing in pricing for instruments and a 0.3% fall in Global GDP.

Interestingly the International Chamber of Commerce published a study looking at the default risk of trade finance instruments, and finds that the regulations are potentially punishing trade.

The study examined the trade finance activity of nine global banks from 2005 to 2009, which together arranged 5.2 million transactions accounting for $2.5 trillion. It found that only 1,140 of those transactions defaulted. Of the 2.8 million transactions arranged during the crisis in 2008 and 2009, only 445 defaulted.

Percentage wise that’s a 0.016% default rate. In olden parlance, that’s diddly-squat, and it makes you wonder whether the regulators are using a sledgehammer to bank in a very small nail.

After all they are doing the same with OTC Derivatives and other regulatory areas, and cannot even agree common definitions for half of this stuff, so regulations are a big of a confused mess.

Which brings me to the final area of background: the big issues.

The big issues remain the same: bank governance and behaviours.

Here we have phrases like:

  • Moral compass
  • Ethics
  • Bonuses
  • Lending

and other things in the fray.

In this area, the regulators and policymakers have little clue what to do as if they act on their own, they are likely to alienate the industry and find a huge loss of tax revenues if, as would be anticipated, the banks and their employees relocated. But waiting to act as a cohesive G20 whole is also just as unlikely, so these things will remain the same.

Nevertheless, I do think there will be a rethinking of the bank code of conduct, with the leadership of the industry taking a stand to try to improve the image.

In the UK, this has certainly been the case under BBA Chairman Stephen Green, who has created a lending taskforce during the Autumn, and I fully expect such coordinated response to be created for other areas, although bonuses doesn’t seem to be one of them.

The most important area however is the customer.

Not just the retail customer, the Gen “Y am I broke” customer or the business customer.

All customers.

Customers will demand a revolution of banking, and some already are

But the real revolution will come about due to the fact that this planet has now connected every individual, so that they don’t need institutions.

This is what Venessa Miemis and I were debating recently, and the ability to create new currencies through social P2P services is potentially very disruptive.

Except that the pipework and plumbing of payments will remain where it’s always been: with the banks.

And that’s the real question in this post-crisis, zero trust world of finance: can banks be anything more than just plumbing in tomorrow’s world?


Oh yes, and for those who are interested here's the slide deck that went with this presentation:


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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  • Ah the infamous management refrain: “We don’t want to be a dumb pipe/plumbing/infrastructure…” The root of so much misallocation of capital… And why the hell not? Or put another way, if you didn’t want to work for a utility, why did you not choose another career. The reality is that banks get to have their cake and eat it too (which is a massive failure of government) – ie they get all the advantages of being a regulated utility and natural oligopoly, without any of the constraints that other such businesses face. Why is it that a water company has a negotiated return on capital within a significantly constrained set of operating guidelines whereas banks are free to target whatever return they fancy and yet benefit from the protection of the same sort of barriers to entry that protect the water company. Banks – or more accurately, core banking services esp. payments – are utilities. And before too much angst is spilled, there is nothing wrong with being a utility. Of course bankers want to have their cake and eat it too – ah, human nature – but it is the job of society (ie government) to prevent this. I know this is a simplified view (what do you expect in a paragraph) but I believe the point is valid: the utility aspect of banks needs to be separated and ring-fenced from the rest of the services they provide. ATT was broken up. Not sure why banks should be immune…