After the 2008 financial crisis, the banking industry initially acted like a cartoon character who shoots over a cliff-edge at high speed and keeps going for a while before falling. Five years on, they are lying on the ground – and will never be allowed to return to their fast-paced ways.
“Fashionable management school theory appears to have lent undeserved credibility to some chaotic systems.”
This line leapt out from the 571-page UK parliamentary review of banking published on Wednesday. It’s in the conclusion to the passage criticising the way in which banks applied the “three lines of defence” risk control framework – line managers, risk controllers and compliance staff, and internal audit. Read more
You’re about to hear a lot more about “good banks” and “bad banks”. The report from the parliamentary banking standards commission, due on Friday, and Stephen Hester’s departure from Royal Bank of Scotland will reignite questions such as whether RBS should be split into “good” and “bad” operations (Mr Hester opposed this).
Running in parallel is a philosophical debate about how you ensure banks are “good” – in the sense of having a strong, positive purpose.
But there is also the question of whether banks that do good are always good banks. Read more
Bankers were “the Praetorian guard of capitalism”, Michael Noonan, Ireland’s finance minister, said last week. Given the scarring defeat suffered by the free market’s crack troops in the financial crisis, and the curbs now applied to their pay and rations, you might expect enthusiasm to replace them in the front line to be muted.
The chaos over the rescue of Cyprus – under which insured bank deposits were initially threatened but have been reprieved – has raised questions about whether depositors in other eurozone countries will feel safe.
But I wonder if the bigger long-term effect will be on offshore banking centres in general, rather than the eurozone. After all, Cyprus shows that a small financial centre that becomes overwhelmed by financial difficulties cannot stand behind a banking system several times the size of its economy. Read more
HSBC’s strategic overhaul is already heading for a place in the business school curriculum. This was, after all, the group that called itself “the world’s local bank” in its advertising campaigns and once relocated its chief executive to its traditional Asian hub in Hong Kong. But current, (firmly London-based) incumbent Stuart Gulliver has more modest international ambitions. Read more
As politicians, members of the European Parliament are justifiably proud of the bonus cap they have agreed to impose on bankers. They seem to have found a politically expedient, legally watertight, electorally popular way to use their limited powers to whack high finance where it hurts. That doesn’t mean that the measure, if confirmed, won’t have potentially grave consequences.
It will increase banks’ fixed costs, weaken the link between pay and performance, accelerate the inevitable drift of financial know-how and power from Europe to Asia, and instantly conjure up a thousand more complex, lawyer-driven alternative compensation structures to get round the rules. Read more
Adam Posen’s attack on the management and culture of the Bank of England may be the strongest yet, but it is by no means the first – and won’t be the last – criticism of a persistent and dismaying lack of robust governance at the UK central bank.
What is astonishing is that despite countless warnings – three independent reviews, several newspaper editorials and sundry MPs’ warnings – the central charge that the governor is over-mighty and under-governed still stands. Read more
“If you see a Swiss banker jumping out of a window, follow him. There is sure to be a profit in it,” Voltaire is once said to have remarked. These days, no action by a Swiss banker should be taken on trust.
The $2.6bn in fines levied against HSBC and Standard Chartered indicates that what used to be regarded as these banks’ biggest virtues – their exposure to emerging markets and new growth economies – are also weaknesses.
Foreign banks have been having a tough time at the hands of US bank regulators recently, and these fines have a hint of protectionism. There is clearly a feeling that foreign banks have destabilised the US financial system and systematically breached laws.
One indication of the mood in Washington is a proposal by Daniel Tarullo, a senior Federal Reserve regulatory official, to top up capital requirements on foreign banks to ensure they are in line with domestic banks. Read more
The Deutsche Bank case, in which three whistleblowers have accused the bank of hiding up to $12bn in derivatives losses during the financial crisis, is complex, confusing and opaque. But the underlying principle is simple and important.
Banks used to have a lot of leeway in how to treat bad loans at the bottom of the cycle. That allowed groups to avoid taking losses immediately, and instead to wait for the assets to rise in value again.
But the rules for recognising bad loans have tightened over the past three decades, while a lot of credit instruments are now carried on a mark-to-market basis instead of on the loan book. Their old freedom of manoeuvre has largely gone. Read more
It is somehow apt that the explanations for the sudden departure of Vikram Pandit from Citigroup this week were utterly baffling. “No strategic, regulatory or operating issue precipitated the resignation,” said Michael O’Neill, the bank’s chairman. “I had a very good conversation with Mike O’Neill,” insisted Mr Pandit.
Michael Corbat looks like the most conventional chief executive Citigroup has appointed for 10, even 20 years. Certainly over the past decade, for a blue-chip, Fortune 500 banking institution, Citi has been led by a remarkably diverse range of CEO types:
1) An entrepreneur: the irrepressible Sandy Weill with his gargantuan appetite for deals. Having alienated his protege Jamie Dimon, Mr Weill appointed….
2) A lawyer: Chuck Prince, his general counsel and long-time legal fixer, who lasted only four years before being forced out as the banking crisis built, to make way for…. Read more
Simon Fox of Trinity Mirror, the UK newspaper and publishing group, is the latest chief executive to attempt to give a restructuring plan a sense of focus, simplicity and unity by attaching “One” to the company name. “One Trinity Mirror” – which unifies the regional and national newspaper divisions under a “flatter, more efficient management structure” – follows in the footsteps of One Ford, One Siemens, and One Anglo (at Anglo American), to name just a handful.
I prefer the “One” theme to some of the other names applied to past restructurings. Among my least favourite: “Shape 2012″ at Metro, the German retailer (“Pear-shaped 2012″ would have been more appropriate, as one observer pointed out ); Reuters’ “Fast Forward” – a scheme that predated the Thomson merger and led to mordant humour among the newly redundant about having been “fast-forwarded”; and law firm Linklaters’ “Project New World“, with its sinister Aldous Huxley overtones. Read more
There is a contradiction at the heart of legal actions piling up against large banks, including Barclays, for distorting Libor. Half the plaintiffs are complaining that the rate was kept too high; the other half that it was kept too low.
One lawsuit filed in New York by Berkshire Bank in July accuses the Libor-fixing banks of hurting lenders by artificially depressing the lending rate. As the Wall Street Journal reported:
The lawsuit effectively argues that the alleged manipulation short-changed lenders by helping borrowers pay less for mortgages and other loans.