Friday, 14 June 2013

Bad Banks Good Business

Finally Stephen Hester, the CEO of RBS, has fallen on his sword.  The fact that he seems relaxed about this act of self destruction tells us quite a bit about the relationship between him and his owners (the HM’s Government).   It’s probable that Hester is a good banker, good enough to have turned around RBS and secured a return on investment for the tax payer.  Having inherited a bank with a balance sheet larger than the UK's economy and with over 250,000 employees he has been chipping away at the bad bits and selling non-core business to create something that resembles a stable universal bank.  The problem he has had is that he has been working work a government and the Bank of England who have absolutely no vision or plan for our Financial Services industry.
At the outset RBS should have been split into a nationalised Bad Bank, with all the most distressed loans and risky businesses under one roof and a Good Bank made up of the safer business.  Instead of this we have a part nationalised quite bad bank that is unable to perform its part in our financial infra-structure.  As a result lending is down and we are still months away from returning RBS to the private sector, this is distorting the market for financial services and holding back the recovery.
We need to protect our greatest economic asset - The City of London
It’s this total lack of planning and direction that marks out the coalition’s approach to our economy.  Cameron and Osborne had the advantage of watching labour screw up things between 2007 – 2010 and they should have had a very clear picture of how to turn things around.  Instead, like all weak administrations, they relied on a commission on banking (Vicker’s inquiry) to do their dirty work for them, this wasted two years and didn’t move the debate forward.  The central questions of the UK’s banking sector are quite simple and we just needed to make up our minds and get on with it.
Should Retail Banks be allowed to play the in the capital markets and be investment banks?  The answer to this is obvious. No!  There must be a reasonable number of retail banks in the UK who can support the market for deposits, transfers and loans.  They should access the capital market through Broker Dealers who do not have retail clients and they should be limited in the activities and products they can provide to corporate clients (businesses).
The second question is – should the capital adequacy rules be the same for Retail Banks and Investment Banks?  And the answer to this one is also obvious. No!  Retail banks don’t need the leverage or risk profile that investment banks might want, they should be extremely well capitalised with a high percentage of liquid assets (cash), this might be a ratio of 30%+ rather than the 17%+ target that the Basel 3 regulations envisage.  Investment banks need more rope and leverage and this inherent risk will be obvious to their sophisticated clients.
The third question relates to Private Equity businesses and their relationship to the banks.  It is a national disgrace that we have so few small and medium sized businesses that become global players and the way we fund business expansion is directly responsible for this.  Should we allow the short termism associated with Private Equity ownership to mar our industrial and services landscape in the way that it does today?  The leverage buy-out and the associated loss of productivity is killing off large swathes of our commercial infrastructure; companies as varied as Boots and Manchester United FC are unable to compete globally because greedy management and Venture capitalist have saddle the business in debt for the single purpose of personal wealth creation.   The tax laws need to be changed to ensure commercial logic rather than personal greed drive our private sector, it is a scandal the Boots has paid no corporation tax in the last 5 years despite making profits in excess of £5bn.
The fourth problem is the whole business of wealth management and the management of long-term savings. The great explosion of hedge funds and their incestuous relationship with the Prime Brokers (our largest investment banks) is another can of worms. There needs to be clear separation between the various types of asset managers and all of these must be separate from the dealer broker investment banks.  As consumers we should have a more distinct choice to reflect our varying risk appetites
We need to remember that the Financial services industry is our best and most productive sector.  We are the world’s leaders in finance innovation and London’s geographical position between the Far East and New York, combined with our language makes us the natural home for the finance capital of the world.  It is a scandal that the government has no plan or vision for the regulation, development of this core business, and this is symptomatic of their idle approach to structural change and recovery

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