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December 14, 2011

Things worth reading: 14th December 2011

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December 13, 2011

How The City Developed, Part Six: The Bank of England

Following the disaster of Charles II’s spending under the Stuarts, the newly reformed operations were stabilised under the new monarch, King William III.

Realising that his purse was haemorrhaging and that he couldn’t do the same as Charles, as in just default, William decided to create a new Bank that would enable funding whilst being guaranteed safe from Royal ‘confiscation’.

The idea was based upon the Bank of Amsterdam, created in 1609.  Its success had been copied by others, such as the Bank of Hamburg and the Bank of Sweden, and such safe banking agreements were viewed as critical for expansion of trade and commerce.

William Paterson, a Scotsman, proposed a new bank was created with a Royal Charter as banker to the government and country, with guarantees of safety.  The bank would loan £1.2 million to the Government and, in return, the subscribers would be incorporated as the Governor and Company of the Bank of England.

The subscription to the Bank’s capital was an immediate success with £300,000 raised on the first day when the subscription list was opened, and the entire £1.2 million within two weeks. 

Investors were attracted by the guaranteed interest returns of 8%, and the expectation that the first joint stock bank in the country would be profitable.

Investors of more than £500 were also given voting rights and, on 10th July, Sir John Houblon became the first Governor of the Bank of England and William Paterson, the originator of the scheme, became one of twenty-four Directors,  most of whom were City merchants.

The Bank’s Charter was sealed on 27th July 1694, and the Bank opened for business with just nineteen staff at the Mercers’ Hall in Cheapside.

Bank_of_England_Charter_sealing_1694

At their first meeting, the Directors considered how the Bank’s business would be conducted and, in particular, the issuance of banknotes.

Initially, they decided that deposits would be recorded in three ways.  First, a passbook held by the customer would record the transaction; second, instructions from the depositor to make payment to a third party via a notation similar to the modern cheque; and third, the issuance of a running cashnote, based upon the practices of the goldsmith bankers.

These notes were common of their day already, as the goldsmiths gave receipts in exchange of cash deposited with them.  These receipts became tradable in their own right, as merchants would recognise that £100 deposited with a goldsmith bank based upon these receipts would be honoured.

It was this final method that proved the most popular, and led to the introduction of the banknote as we know it today.

The notes were made out for the full amount of the deposit and endorsed by the Bank teller as and when part of the sum was cashed.

Oldbanknote

The notes were made payable to the named depositor or to the bearer, an option which allowed them to circulate as easily as cash, with a guarantee that any note could be converted back to gold upon presentation of the note to the Bank.

Three security features were quickly introduced: a medallion of Britannia, based upon the Bank’s seal; the use of highly distinctive watermarked paper; and the ‘sum block’ – a pound sign followed by the amount in white letters on a black background.

By 1725, the notes were made out in whole numbers as these were more convenient than making them out for odd sums, with the lowest denomination being £10 from 1759.

During the wars against France later that century, the drain on the Bank’s gold reserves led to the Bank revoking the promise to convert notes into gold in 1798 and, to meet the shortage of circulating currency, £1 and £2 notes were issued for the first time.

This gave the Bank its nickname: the Old Lady of Threadneedle Street - the Bank had moved to Threadneedle Street in 1734 - as, when the government ordered that paper money was no longer backed by gold, the well-known caricaturist of the period James Gillray published this cartoon.

The_Old_Lady_of_Threadneedle_St

The cartoon has the title: 'Political Ravishment, or the Old Lady of Threadneedle-Street in Danger!' and shows an elderly woman, representing the Bank and dressed in bank notes, sitting on a strong box. The Prime Minister William Pitt is shown making unwanted advances towards her, in an attempt to get to the contents of the strong box as she cries, "Rape! Ravishment!"  Also worthy of note are the loan notes under his hat, which show that the Bank had been required to make large loans to the Government to finance the war against France.

It just goes to show that over two hundred years later the relationship between Government and Finance is a strong and tense one, as the government of today is still raiding the Bank’s coffers to quantitatively ease the country though the current crisis.

Meanwhile, the introduction of £1 and £2 notes brought the use of paper money to a much larger section of the population.  It also brought a massive rise in forgery, as the hurriedly-produced small notes could be easily forged and most people could not tell the difference between genuine and fake ones. 

Onepound

As a result, the government introduced a strong deterrent and made the use of a forged banknote punishable by death or being sent to Australia, or somewhere equally as horrible.

As the number of death sentences rose, due to the increased temptation to forge £1 and £2 notes, there was an interesting protest made by the satirical cartoonist George Cruikshank.

Cruikshank published this satirical but macabre banknote:

Forged banknote

The note shows the standard features of the Bank of England's notes, but these are replaced by gruesome ornaments such as skulls, a hangman's noose, ships for transportation and a terrible Britannia gobbling infants.

The note is signed J. Ketch who was a notorious executioner in the seventeeth century due to his seriously bad aim with the axe.

Even so, forgery was still rife due to handwritten notes, notes being issued by provincial banks as well as the Bank of England, and the generally poor security features.

This led to the Bank Notes Act of 1833, which gave the Bank of England sole rights to issue banknotes as ‘legal tender’ in England and Wales, subsequently strengthened by the Bank Charter Act in 1844, which meant that no other bank could start issuing notes.

The last private banknote was issued by Fox, Fowler and Company, a Somerset bank, in 1921.

Last private note

Although the 1844 Act gave the Bank the right to issue notes, it also restricted its ability to compete.

At this time, the Bank was in the same position as the other joint-stock deposit banks (today Barclays, HSBC, Royal Bank of Scotland and Lloyds).

This meant that, during the nineteenth century it was overtaken in size by these depositary clearing banks as they merged together and, as a result, the Bank chose not to compete directly with them but to develop its role as the central bank.

In this capacity, the Bank was charged with two key functions: to be the guardian of the gold reserve and the supplier of liquidity of last resort; functions that still exist today, although recent governments have ravished these core features somewhat, in a similar way to William Pitt.

The Bank established the concept of lender of last resort - the ultimate reserve of the banking system – during a succession of banking crises in the late nineteenth century as banks such as Overend and Gurney collapsed in 1866 and Barings in 1890.

When such events occurred, the Bank would mobilise its resources and those of the City, to ensure that a financial crisis at a single bank did not spill over into a collapse of the financial system as a whole.

It would do this by routinely using its ability to leverage the banking system's liquidity by increasing the supply of money to the banks, when no-one else could, and to set interest rates in London at what it judged to be the right level.

The First World War saw the link with gold broken again.  Although an attempt was made to return to the discipline of the gold standard in 1925, it proved to be unsustainable and the gold standard was finally and completely abandoned in 1931.

Probably the part of the banks history that few would have realised is that it was actually privately owned for much of its life.

The bank was launched as a joint-stock bank in 1694, and remained private until 1946, when it was nationalised as a result of another War and a drain on the country’s reserves.

The Nationalisation Act also gave the Government the power to issue "directions" to the Bank which the Bank claims have, thus far, not been used.

Some might beg to differ.

Meantime, if you weren't aware, there are £1 million and even £100 million notes being used by the Bank.

MillionPound_998598c

They are purely for internal transfers, but wouldn't you like to get your hands on one of those?

This is the sixth in a series about how the City of London developed its financial prowess and system.  

Previous entries include:

 

 

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Things worth reading: 13th December 2011

Things we're reading today include ...

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December 12, 2011

Banker commits murder and gets away with it

A year ago, the FSA issued a short 298-word statement saying that after an extensive 17 month investigation into the collapse of the Royal Bank of Scotland (RBS), no action would be taken against Sir Fred Goodwin or others. There was a general outcry, so much so that after initially dismissing any indepth report, they decided they would write one.

It was released today – all 450 pages of it – although it doesn’t add to much more than what we knew a year ago:

(a)    the market conditions allowed it to happen; but

(b)    it was the CEO Sir Fred Goodwin and his management team that were at fault; and

(c)    the FSA messed up by not challenging them.

The report does however make clear that there is more to what happened than can be generally perceived, and provides some interesting insights about the history, issues and prevailing culture within the bank at the time.

For example and in hindsight, it’s obvious that the megalomaniacal Fred Goodwin was doing too much unchallenged.

How megalomaniacal was he?

Well, he was almost Machiavellian according to many reports.

I still remember the fact that he wanted to rename Scotland’s capital city Fredburgh, and that the corporate HQ at Gogarburn was his testament to history with its own golf course.

The fact that he would override decisions made by his management team, including those of the Chief Risk Officer, if he felt it was the right thing to do.

And the reports that have come to light that he even would go mental if the wrong sort of biscuits were served at meetings, goes to show the lengths he had reached in his boardroom seat.

Then the world collapsed for him as the disastrous ABN AMRO acquisition, plus a catalogue of other errors, meant that the bank’s capital and liquidity position had become over-exposed.

This is all in the FSA report, although not in the terms many would use.

For example, a section of the report is headed: “The ABN AMRO acquisition: an extremely risky deal”.

It was originally titled: “an extremely risky gamble”, but Fred’s lawyers forced the FSA to take out the word gamble as it could be used in a case against him, should one ever come to court.

It won’t be, as there is nothing in the legislation today that says that a bank CEO who screwed his bank can be brought to court.

This is one of the changes recommended by the FSA’s report, which elects to offer either a strict liability or clawback basis for curtailing a bank executive’s bonuses, pensions and more, if he or she causes the bank to fail.

But that’s for the future, not for the past, and hence Fred and his team get off scot-free so to speak.

What really gets me in this report is that the FSA knew he was a rogue CEO as far back as 2003.

I would rewrite it, but today’s Guardian summarises this piece well:

The FSA said that between 2003 and 2006, its supervision team highlighted "chief executive dominance" during meetings with the then RBS chairman Sir George Mathewson and that, with hindsight, more senior regulators should have been involved in a review of the bank at this stage.

The FSA sets out how it attempted to assess the risks posed by Goodwin's dominance. In October 2004 because of a "poor regulatory relationship" and lack of access to non-executive directors, its supervisory team recommended that a "section 166" review be commissioned. These reviews – named after the clause in the FSA's rules – require banks to hire independent firms to conduct a review of certain activities and report back to the FSA.

In the event, the FSA did not commission the review because its supervisors met a group of non-executives in December 2004 who were able to provide examples of where they had challenged Goodwin. One example was when Goodwin had wanted to launch an electronic bank which was rejected by the non-executive directors.

The FSA's report into what went on at RBS concludes that if a section 166 review had been commissioned, as first intended, it "would have sent a strong message to RBS, including its board, and might have provided the FSA with more information on the effectiveness of governance, particularly around the potential dominance of the chief executive".

In the event, the FSA kept reviewing the board structure of the bank until October 2006 when it concluded that the "risks associated with CEO dominance and challenge to him had been mitigated sufficiently that the issue could be closed". It was convinced that the appointment of a new chairman, Sir Tom McKillop, and new finance director would provide a new challenge to Goodwin.

But, with hindsight, it says that a "key missing element" in deciding to close the review about corporate governance was "engagement at the most senior FSA executive level".

"This reflects a more general tendency in the FSA's pre-crisis supervisory approach for key supervisory decisions and responsibilities to be delegated several layers below the FSA's CEO," the report said.

Another area of anger is that we all knew the ABN AMRO acquisition could be disastrous back when it happened.

Back then, it was obvious that a battle with Barclays over ego had taken place, and Fred just wanted to win at whatever the cost, in order to stick two fingers up to John Varley, the Barclay CEO.

He therefore not only outbid Barclays in over-valuing ABN AMRO, but ABN also sold key assets in the USA before the acquisition went through, devaluing the bank.

So the result was an overpayment for a smaller bank than the one Barclays originally bid for, just to satisfy the ego of Fred Goodwin.

This is corroborated in the report, which states that “due diligence was inadequate in scope and depth and hence was inappropriate in light of the nature and scale of the acquisition and the major risks involved”.

It asks:

  • “Whether the Board’s mode of operation, including challenge to the executive, was as effective as its composition and formal processes would suggest.
  • Whether the CEO’s management style discouraged robust and effective challenge
  • Whether RBS was overly focused on revenue, profit and earnings per share rather than on capital, liquidity and asset quality, and whether the Board designed a CEO remuneration package which made it rational to focus on the former.
  • Whether RBS’s Board received adequate information to consider the risks associated with strategy proposals, and whether it was sufficiently disciplined in questioning and challenging what was presented to it.
  • Whether risk management information enabled the Board adequately to monitor and mitigate the aggregation of risks across the group, and whether it was sufficiently forward-looking to give early warning of emerging risks.”

It’s just a shame that it cannot say that this was the case, but had to wrap it up in whethers and possibles due to the legalese issues, in the same way that it couldn’t call the ABN AMRO deal a gamble, as this is exactly what it was.

The report concludes that there were six factors predominantly at play here, on top of the poor management controls internally, namely:

  • “significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;
  • over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;
  • concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;
  • substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be;
  • the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and
  • an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.”

Well worth the two and a half years of researching and writing such analysis, not!

Meanwhile, fyi, Fred’s back on the prowl  looking for a job in the City … and knowing his ability to avoid shit hitting his fan, he may well find a new fan to fuel for the future.

Just like several other characters I could name.

So Machiavelli is maybe a good comparison after all: “the question whether it is better to be loved rather than feared, or feared rather than loved. It might perhaps be answered that we should wish to be both: but since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.”

 

 

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How The City Developed, Part Five: The Stuarts

After the Tudors, England went through a period of massive turmoil under the new Royal Household of the Stuarts.

Throughout the 17th Century, the Royal Household (the Crown) and Government (Parliament) were at war, both figuratively and literally.

The 1640s saw a massive revolution in the country, with the execution of King Charles I, and was followed by another in 1688.

This tension between the Crown and Parliament was only resolved at the end of the century and led specifically to the creation of the Bank of England and many other financial reforms, most of them under the leadership of the hedonistic King, Charles II.

For example, Charles’s household laid the core tenets of today’s Treasury, Exchequer and Central Bank operations.

The core of these changes were around the separation of the Treasury from the Exchequer.

The Exchequer was established in England in the 12th century during the reign of Henry I. Its original purpose was for collecting and issuing money, and to audit money paid to the Crown.  Part of the Exchequer was the Treasury, the place used to keep the King’s treasures.

The Exchequer gradually took on other functions, such as the collection of taxes, and acted as a court of law to decide what was legally owed to the Crown, and was named after the chequered cloth on the table where the treasurer inspected the accounts of the sheriffs, the men responsible for the king's interests in the counties.

Exchequer

For most of the medieval and Tudor period, the office of the Treasurer was part of the Exchequer but it became clear during their period that the Exchequer wasn’t very good at its job.

For example, England’s war with France had led to a deficit of £30,000 in 1433, the equivalent of over £100 billion today, which caused the collapse of many Italian banks.

You would think the banks would learn their lesson but, by the 1670s, the Royal Household was in dire straits once again.

This was down to the Stuarts – the Royal Household for England, Scotland and Ireland during the 17th century – undergoing a time of extremes.

In particular, England’s Civil War (1642-1651), the Great Plague (1663) and the Great Fire of London (1666) had left the King’s finances in a poor state.

This dire situation with the King’s finances is easily illustrated by the fact that the English Navy was so seriously underfunded that its flagship, the Royal Charles, was seized by the Dutch in 1667.

Jeronymus-van-Diest-II-Het-opbrengen-van-het-Engelse-admiraalschip-de-Royal-Charles

Arrival of the English Flagship Royal Charles, painting by Jeronymus van Diest II from the Rijksmuseum Amsterdam (note the Dutch flag at the rear and English flag flying upside down from the main mast)

Charles decided to do something about it and appointed a Commission to replace the Treasurer.

George Downing, who built Downing Street, was appointed Secretary to that Commission and was instrumental in major reforms which led to the Treasury breaking away from the Exchequer.

This was in June 1667, when it was determined that all money voted for by Parliament must also have specific Treasury approval before it can be given.  This rule still holds today, and is the reason why Parliament, the Chancellor and the Treasury release an annual budget statement.

It was during the Stuarts reign that goldsmiths ran England’s banking system.

As mentioned previously, it was during the Tudor period that goldsmiths changed from passive deposit takers, offering physical security for the wealth of their clients, to offering credit on the security of the assets at this disposal.

By the mid-17th century, the goldsmith bankers had a virtual monopoly on banking and had made extensive loans to King Charles II.

In 1672 however, Charles II had become so heavily indebted that he could not pay, and announcement that he would suspend repayments of loans to his bankers for a year.

This resulted in five of the leading goldsmith banks going bust.

There was obviously unease about the situation, with more talk of Civil War, unless some form of guarantee was put into play for Royal, or rather governmental loans.

This was when George Downing – who was looking after the Treasury separating from the Exchequer,  working with several other people including Isaac Newton who was Master of the Mint – introduced the idea of raising money by selling marketable Treasury orders with a guaranteed repayment date.

Today, these are known as government bonds and eased the pressure a little on the Royal office for funding the Anglo-Dutch war.

It didn’t solve the situation however, as the King once again defaulted on loans with this speech given to his bankers on February 8th 1676:

Gentlemen,

I have always resolved to show myself an honest man in paying my debts, and its not my fault that I cannot repay you with the same frankness you used ... in lending it, but having been so honestly dealt with by you, I will pay it as well as possibly I can. And to that purpose tomorrow will pass an Order in Council for the Settling ye Interest of it, till I can pay the principall and according to your owne desires too, upon the Excise.

Speech 1676 

Speech plate as shown in the Bank of England Museum

Some say that his debt difficulties weren't just due to war, as the King regularly dipped into the country's purse to fund his hedonism.

The financial issues, combined with disagreement over foreign and religious policies, meant that the  Crown and Parliament had more arguments for years to come until Parliament was dissolved in 1681 and King Charles ruled alone.

These actions led to Revolution once more, with William and Mary taking the throne in 1688.

The new monarchs represented a far more stable political environment, but their finances were still deteriorating badly due to war with France.

By 1694, King William III was spending over £2½ million a year on the army alone, and were in desperate times.

Times were so desperate they launched a lottery to raise £1 million, with large cash prizes on offer.

Lottery tickets

Lottery tickets dated 1769, as shown in the Bank of England Museum.  The tickets are signed by John Bridger, Chief Cashier at the Bank of England and lotteries were used regularly from the late 17th century to the 19th century as a fast way of raising money to meet state expenditure needs.  The Bank acted as registrar and received subscriptions on behalf of the government.

It was in this moment that the Bank of England was born.

More about that in the next part of How the City Developed.

Previous entries include:

 

 

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Things worth reading: 12th December 2011

Things we're reading today include ...

RBS report: FSA's analysis of banks was 'deficient'
BBC

 

 

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December 11, 2011

The Finanser's Week: 5th December - 11th December 2011

Our biggest stories of the week are ...

How The City Developed, Part One: The Romans

In Roman Times, the centre of London was at Cornhill, where the Bank of England is based, and Leadenhall market, where Lloyd’s of London is based.  At Leadenhall, the Romans built a Basilica, a combination of a town hall and law court …

How The City Developed, Part Two: The Vikings

Following on from yesterday’s post about the Romans building London, they left in 410 A.D. and the City went to rack and ruin over the following centuries as the buildings were left untended. Then, in the ninth century, the Vikings...

How The City Developed, Part Three: Medieval Times

The first proper bridge in London was built in 1176 and completed in 1209. There had been other bridges built by the Romans and Vikings, but these were always of wood and generally got burnt and pulled down. The bridge...

How The City Developed, Part Four: The Tudors

We finished Part Three of our History of the City with a nod to Sir Thomas Gresham, Banker to Queen Elizabeth I and forefather of all things in the City of London today. Thomas was the son of Sir Richard...

UK banks pay £53.4 billion in taxes

Just got a press release that I would usually ignore ... but this one's interesting. It's from Open Europe, a think tank, and say that the City not only pays over £50 billion in taxes but is in danger of being squashed by the EU ...

The London Protest #OccupyLSX is useless

I’ve been down to the #OccupyLSX, or #OLSX for short, site several times. That’s the Occupy London Stock Exchange site for those not following them on twitter. They were inspired by the #OccupyWallStreet, or #OWS folks, who began protesting back...

 
The major general news stories of the week include ... 

Top ten banker jokes - The Telegraph
Bankers don't have much to smile about but Lloyds Banking Group has managed to have a giggle - the taxpayer-owned bank is running staff training at the Comedy School. To share the joke, here are the top ten wise-cracks about bankers:

Europe's banks have £1.5 trillion of toxic assets - The Telegraph
Europe's banks must dispose of a pool of toxic assets larger than the entire British economy if they are to return to profitability and meet new capital rules.

City in derivatives depository boost - The Telegraph
London has become home to the world's first trade repository for the £356 trillion interest rate derivatives market in a major boost for the city's place as one of the world's major financial centres.

Lloyds Banking Group laughs all the way to the bank - The Telegraph
Heard the one about a taxpayer-backed bank taking leadership lessons from The Comedy School? Nope, we hadn't either. But at Lloyds Banking Group, it seems, managers have been having a laugh.

Bank of France debts jump tenfold on capital flight - The Telegraph
The Bank of France faces surging debts to Germany's Bundesbank and fellow central banks in the EMU system as foreign investors pull large sums out of French accounts.

Citigroup plans to cut 4,500 jobs - BBC
US banking giant, Citigroup, says it is to cut 4,500 jobs around the world in an effort to reduce its costs.

Exodus: Movement of rich people - BBC
Why high-fliers increasingly live and work abroad

Billionaire behind Northern Rock - BBC
The billionaire behind the Virgin buyout of Northern Rock

This week could be the last chance to save not just the eurozone but all of Europe - The Independent
Tomorrow a week begins that could propel the eurozone towards fiscal unity, change Britain's relationship with its euro partners, and offer a potential route out of the debt crisis and renewed credit crunch which now accompanies it.

'Dismissed' partner accuses Ernst & Young of corruption - The Telegraph
Accountant Ernst & Young is facing an allegation of corruption at one of its global headquarters as part of a whistleblowing case brought by one of its ex-managing partners..

 

If you like the Finanser, check out the books of the blog: the new Complete Banker Series

 

The Financial Services Club is sponsored by:

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December 09, 2011

How The City Developed, Part Four: The Tudors

We finished Part Three of our History of the City with a nod to Sir Thomas Gresham, Banker to Queen Elizabeth I and forefather of all things in the City of London today.

Thomas_Gresham

Thomas was the son of Sir Richard Gresham, a merchant who also became Lord Mayor of London in 1537.

Richard had a partnership with his brother, John Gresham, exporting textiles and importing grain from the continent, supplying King Henry VIII with velvets and satins, from which he built a large fortune.

Thomas Gresham followed in his father’s footsteps, and was soon respected as a liveryman in the Worshipful Company of Mercers – the #1 livery company in London at that time, representing merchants – and soon was in the company of royalty and government through the livery meetings.

When, in 1551, the government got into shtick over debts, they sought his advice to see what they could do.  Gresham proposed to raise the value of the pound sterling at the expense of their European counterparts.  It was quite unfair but worked, and ever after Thomas worked for the Royalty in their financial dealings.

He became incredibly wealthy through such work, and proposed the building of London’s own bourse in 1565.

This became the Royal Exchange, and was modelled on the Antwerp bourse.

Royal Exchange

This Royal Exchange was burnt down during the Great Fire of London in 1666, and a second Exchange was built.  This one was also destroyed by fire in 1838 with the new one built and opened by Queen Victoria in 1844, and this is the one you see there today.

Royal-exchange

Gresham died in 1579 and, in his will, stipulated that when his wife passed away their house in Bishopsgate and rents from the Royal Exchange should be vested in the Corporation of London for the purpose of instituting a college.

Gresham College was therefore established in 1597 and continues to educate to this day, as those know from my blog entries about their lectures (Andy Haldane, Chris Skinner).

It was thanks to Sir Thomas Gresham and his colleagues that the City became known for its banking.

For example, goldsmiths were prominent in London life at this time, and they created the grounding for today’s banking world.

Goldsmiths changed from passive deposit takers, offering physical security for the wealth of their clients, to offering credit on the security of the assets at this disposal. 

Marine and later life insurance was also an innovation of the period, due to improvements in mathematics from Newton, Napier and Sir William Petty (1623-87).

The culmination of these efforts was the formation of the Bank of England in 1694,  invented by the Scotsman William Patterson.  Interestingly, the Bank of Scotland was created by an Englishman, John Holland. 

More about that in the next part of How the City Developed.

Previous entries include:

 

 

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Things worth reading: 9th December 2011

Things we're reading today include ...

 

 

 

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December 08, 2011

How The City Developed, Part Three: Medieval Times

The first proper bridge in London was built in 1176 and completed in 1209.

There had been other bridges built by the Romans and Vikings, but these were always of wood and generally got burnt and pulled down.

The bridge of 1209 was built of stone, and had longevity.

In fact, it was the only bridge in London until 1750, and was believed to be a wonder.

Even before it was completed, houses were being built on the bridge up to seven storeys high.  It was 900 feet long and twenty feet wide, and had 138 shops as well as dwellings according to a survey of 1358.

The bridge stood between Southwark Cathedral on the South of the River across to where Cannon Street the Monument is today at Old Fish Street Hill.

Old london bridge

View of London Bridge from the Southwark side by Visscher, 1616

Interestingly, when another King Edward battled and lost to the Scottish at Bannockburn, the traitor William Wallace – otherwise known as Braveheart – was captured, and brought to London to face charges of treason.

Found guilty, he was hung, drawn and quartered, and then his head cut off and placed on a stake at the southern gate of the London Bridge.  It stayed there from 1305 until 1678, as the head was parboiled and tarred to stop scavenging birds from stripping the head of its features.

In this way, Wallace was joined by many other traitors’ heads with, by the 1590s, about thirty of them staked above the gate including Thomas Cromwell and Sir Thomas More.  You can see the heads above the gate entrance in Visscher's painting above.

The bridge had a few issues during its life – it was damaged by fire in 1212, 1633 and 1666 when the Great Fire burnt a third of the bridge – and was demolished in 1760 to build new bridges, as London was now a sea faring centre and larger ships needed access.

It was due to the fire damage of 1212 that the London Stocks Market was created in 1282.

The Stocks Market was established on the site of where the London Mansion House sits today.

Stocks market

The Mansion House is the home of the Lord Mayor of London, as discussed on this blog before, and can be found just by Bank tube, next to the Bank of England.

Before the Mansion House was built, the site was where the Stocks Market operated from 1282, the invention of the then Lord Mayor of London, Henry le Walleis or Waleys.

The Stocks Market was a centre for the selling of livestock and other goods from ‘trusted’ merchants – anyone selling rotten fish and fruit were driven away from the site by the market managers – and Henry le Walleis gave the lease income from the market for the funding of repairs and maintenance of the London Bridge.

The London Stocks Market was rebuilt many times and, by 1675, was a major hub for trade and life in London, particularly financial trade.

Charles II

A view of the Stocks Market, Poultry, looking from the west, City of London, 1700. In the centre is the equestrian statue of King Charles II.

The Stocks market ended in 1737 to make way for the Mansion House.

Meanwhile, during this period, the main reason why London had become such a hub of finance is largely thanks to the vision of Sir Thomas Gresham, 1519 – 1579, banker to Queen Elizabeth I.

More about him tomorrow.

Previous entries include:

 

 

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Things worth reading: 8th December 2011

Things we're reading today include ...

 

 

 

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December 07, 2011

How The City Developed, Part Two: The Vikings

Following on from yesterday’s post about the Romans building London, they left in 410 A.D. and the City went to rack and ruin over the following centuries as the buildings were left untended.

Then, in the ninth century, the Vikings came to rape and pillage and used Lundenwic and Lundenberg as their base, settling in 872 A.D.

By the reign of King Athelstan from 925 to 939 A.D., London had become a strong commercial centre and port, with more coiners than any other town and gold and silversmiths producing fine jewellery here.  According to accounts from around those times, the only shortcomings of London life were frequent fires and “the immoderate drinking of fools” … hasn’t changed much then.

By the time of King Edward who ruled from1042-1066, the so-called Edward the Confessor, London was thriving.  So much so that he decided to start extending beyond the City walls and over the River Fleet to Westminster, where he built a huge palace.

His remains can still be found today, buried in Westminster Abbey which was built during his reign.

King Edward had created a second separate centre for London: a royal rival to the commercial centre of the City.

This tension between the two powers of politics and economics shaped the millennia that followed and, even today, the political centre of Westminster vies with the economic centre of the City, as demonstrated by the raging battle between Parliament and regulators over bankers’ bonuses and operations.

Edward was succeeded Harold, who was killed by William the Conqueror at the Battle of Hastings and England moved from the Saxons to the Normans.

King William determined that the City should be held accountable to the ruler and built the Tower of London at its eastern edge to enforce such rule.

The Tower of London became an important focal point for London life, and still is today, with many functions inside its walls including the original Royal Mint.

Plan of London from around 1300 A.D., showing the Commercial City and the Royal Palace of Westminster (click for larger image):

Medieval london

Previous entries include:

 

 

 

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Things worth reading: 7th December 2011

Things we're reading today include ...

 
 

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December 06, 2011

UK banks pay £53.4 billion in taxes

Just got a press release that I would usually ignore ... but this one's interesting.  It's from Open Europe, a think tank, and says that the UK banking sector not only pays over £50 billion in taxes, but that the whole sector is in danger of being squashed by the EU.

Here it is for those interested:

UK Government should use EU Treaty negotiations to secure “emergency brake” on financial laws

Monday, December 05, 2011

Open Europe has today published a new briefing arguing that, at this week's EU summit and moving forward, the Government must seek to safeguard the economic benefits to Europe and the UK offered by the financial services sector. These benefits include a tax contribution to the Exchequer of £53.4bn and a £35.2bn trade surplus last year.

The briefing notes that while Britain has benefitted from EU financial regulation in the past through greater trading opportunities, over the next decade, as Europe enters a period of profound political and economic change, further benefits could be limited and previous gains are even at risk of being reversed. There are three reasons for this:

  • EU financial rules are no longer primarily geared towards trade facilitation but are now more likely to restrict financial activity. There are currently no less than 49 EU proposals in the pipeline affecting the finance sector. Some of these are justified in the wake of the crisis, but very few of them are designed to facilitate growth and greater trade in financial services.
  • As a result of the financial and eurozone crisis, the UK is increasingly losing influence over the shape and thrust of EU financial law, reinforced by EU voting rules which grossly under-represent Britain relative to the size of its finance industry.
  • The EU market is likely to offer limited new growth opportunities for UK financial sector firms, at a time when opportunities elsewhere in the world are on the rise. Between 2005 and 2050, the BRIC countries' share of global banking assets is estimated to increase from 8% to 33%, while the EU will see its corresponding share drop radically.

Open Europe argues that to counter these trends, David Cameron should use future EU Treaty changes – which he may have a veto over – to, at the very least, insert a 'single market protocol' committing the EU to growth, trade and proportional financial rules. However, the option with the most certainty of safeguarding Britain's economic interests would be to seek a UK 'emergency brake', giving London the right to block disproportionate or protectionist EU financial regulation.

To read the full report, click here.

Key points:

The financial services industry is vital to the UK economy. In the 2009/10 tax year, the UK financial services sector as a whole made a total tax contribution of £53.4bn, 11.2% of the Government's total tax receipts for that year. Financial services accounted for a £35.2bn trade surplus in 2010 - the only industry sector in Britain that generated a substantial surplus apart from 'other business services', many of which are closely linked to financial services.

In the 1990s and 2000s, the benefits to the UK of EU financial regulation rested on two premises. Firstly, while EU-wide financial rules have often increased compliance costs for firms in Britain, they generally allowed the Government to influence regulation across Europe in line with UK thinking, serving to reduce barriers to trade and creating opportunities for UK-based firms.

Secondly, London was and is seen as an entry point to the EU's single market in financial services - a market which experienced significant growth in the 2000s as financial services developed rapidly. For example, between 2000 and 2008, France and Italy's financial sectors grew substantially and in the process contributed additional GDP growth in both countries of around half a per cent.

However, as a result of institutional changes in the EU, the financial crash and the continuing eurozone crisis, the economic and political weather has changed. The premises from which the benefits of EU financial regulation to the UK have traditionally derived could alter fundamentally in the 2010s and onwards:

Firstly, the UK's level of influence on new European financial rules has decreased; regulation is now less geared to financial services growth but more towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals potentially affecting the City either in the pipeline or being discussed at the EU-level – while some are justified, very few of these are aimed at promoting financial services trade.

Not entirely without reason, the perception in many Continental capitals and in the European Parliament is that 'Anglo-Saxon' light-touch capitalism needs to be reined in. Therefore, whereas in the 1990s and early 2000s, EU politicians and policymakers generally (but not always) felt constrained from imposing financial regulation on the UK this has now ceased to be the case.

In the wake of the regulatory failures that led up to the crisis, more effective supervision of financial markets is needed. But while UK regulation has also shifted away from the "light-touch" concept to some extent, its new focus on regulatory 'judgement' looks set to clash with the prevailing ‘rules-based’ culture at the EU level. Similarly, the apparent conflict between the Vickers Commission's recommendations to impose higher capital requirements on banks and the European Commission’s proposed approach of imposing maximum EU-wide standards is another example of differing approaches.

In addition, the eurozone crisis is increasingly likely to create exceptional needs and political incentives for the euro countries to act in the interests of the eurozone 17 rather than the EU-27, with UK concerns seen as peripheral at best. This new dynamic has already been expressed in a series of new proposals, including an EU-wide financial transaction tax, possible short-selling bans and the European Central Bank's insistence that transactions in euro-denominated financial products are cleared by central counterparties within the eurozone rather than in London. These proposals not only represent a challenge to UK concepts of financial regulation but also the UK's access to the single market.

These political pressures are reinforced by the structural bias in the EU's voting system against the UK's financial industry, which was more or less acceptable so long as UK influence over financial services regulation was sufficiently high and rules were broadly pro-competition. The UK accounts for 36% of the EU's wholesale finance industry and a 61% share of the EU's net exports of international transactions in financial services. However, under new voting rules coming into force in 2014, it will only possess 12% of the votes in the Council of Ministers and 10% of the votes in the European Parliament. In contrast, France accounts for 20% of the EU's market in agriculture, but enjoys a veto over the EU's long-term budget and therefore retains substantial control over the sizeable EU subsidises received by its farmers.

Equally important, over the next decade, growth opportunities for financial services within the EU are likely to be more limited than elsewhere in the world. Many European countries are likely to undergo economic stagnation and deleveraging. In 2005, the five largest EU economies accounted for 27% of global banking assets. In 2050, that will have decreased to 12.5%. Meanwhile, the BRIC countries' share of these assets will have increased from 7.9% in 2005 to 32.9% in 2050. Therefore, the benefits to London of acting as the gateway to Europe are becoming less convincing and the need to keep the door open to emerging markets elsewhere across the globe far more important.

The UK has two broad strategies it can pursue in response to its decreasing influence over the direction of EU regulation and the need to keep the City open for business in the global marketplace:

1) Work with likeminded countries to seek assurances that Britain's influence over EU financial services law will be safeguarded. This could be codified in a new 'single market protocol', inserted via the first available EU Treaty change. Such a protocol could commit the EU to a pro-growth, outward looking and proportionate regulatory regime while safeguarding the UK from decisions taken solely by the eurozone for all 27 member states.

2) Seek UK-specific, legally watertight safeguards that will ensure that the UK is not overruled on a vital financial measure and cement London's ability to do business and compete in global markets. Though it will be resisted by EU partner, met with resistance from EU partners, this could include a 'double lock', acknowledging Britain's prominence in this sector and giving the Government the right to refer any disproportionate or discriminatory laws to the European Council, where it has an effective veto over regulatory proposals.

In the list of priorities in the on-going EU negotiations that are inevitable in the wake of the eurozone crisis, safeguarding financial services should be at the very top. While the EU policies governing fishing and agriculture, for example, are in need of fundamental reform, these two industries together only account for 0.7% of UK GDP. In contrast, financial services account for at least 10% of UK GDP. It is therefore clear where the UK should concentrate its political capital.

 

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How The City Developed, Part One: The Romans

I’m just reading a few books about London in the olden days, with one particularly good read: City of London Past, by Richard Tames (1995).

For some reason, in these uncertain future times, it’s interesting to look back to the past.

Here’s a few excerpts that give you an idea as to how our modern City developed:

In Roman Times, the centre of London was at Cornhill, where the Bank of England is based, and Leadenhall market, where Lloyd’s of London is based.

At Leadenhall, the Romans built a Basilica, a combination of a town hall and law court, whilst the governor’s palace was erected at Cannon Street stations’ location.

When the walls of the City of London were built in 200 A.D., the fourth corner was near the Barbican and St Paul’s, where the Museum of London sits today (and you can find a lot more about Roman London in there), to create a 330 acre fortress.

The fort included a major amphitheatre, where today’s Guildhall Yard is found.

London’s City walls were three metres thick and six metres high, and stood for over 1,000 years, with some of the original Roman wall still to be found today.

It was the City wall from these times that gave us the term, "The Square Mile", as this defines the space of the City footprint even today.

A major temple to the Goddess Mithras existed, where Bucklersbury House is today.  It was moved when the building was erected in 1954 to Queen Victoria Street, but is being moved back to its original location as a new office development for Bloomberg is being built at Walbrook Square.

Original Roman London (click for larger image)

Roman-london

The Roman London you can see today (click for larger image)

Roman London

I’ll post more on this in the future as we move to the Vikings.

Previous entries include:

 

 

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Things worth reading: 6th December 2011

Things we're reading today include ...

 

 

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December 05, 2011

The London Protest #OccupyLSX is useless

I’ve been down to the #OccupyLSX, or #OLSX for short, site several times. 

Occupy-london1

That’s the Occupy London Stock Exchange site for those not following them on twitter.

They were inspired by the #OccupyWallStreet, or #OWS folks, who began protesting back in September.

Our group is a similar rag, tag and bobtail amalgamation of disparate folks, from happy-clappy hippies …

7840

… to anticapitalist activists …

_56112486_occupy

… with a healthy dose of travellers, vagabonds and vagrants …

ROGER_CHOULE_650

… thrown in.

They do have a point, but their point is lost with so many disparate views and groups. 

Some want environmental change; some want legalised drugs; some want a more eqaual society; and some just want to play their didgeridoo and hope for peace in the world.

It’s amusing rather than concerning.

  • some are more activist, e.g. some took over buildings this week as protests and were being police kettled away;
  • some  are more sharp, e.g. they caught an undercover policeman in their midst during the protests; and
  • some are just dumb, e.g. the policeman who got so drunk that he fell asleep in the protestors’ tents.

In between, there is a serious point here.

From the Occupy London website:

“The words ‘corporate greed’ ring through the speeches and banners of protests across the globe. After huge bail-outs and in the face of unemployment, privatisation and austerity we still see profits for the rich on the increase. But we are the 99%, and on October 15th our voice unites across gender and race, across borders and continents as we call for equality and justice for all.

“In London we have occupied the forecourt of St Paul’s Cathedral, next to the London Stock Exchange. Reclaiming space in the face of the financial system and using it to voice ideas for how we can work towards a better future. A future free from austerity, growing inequality, unemployment, tax injustice and a political elite who ignores its citizens, and work towards concrete demands to be met.”

Now many sympathise with the point that the divide between rich and poor is too great, and that fat cat company bosses are getting away with daylight robbery.

For example, in this ‘age of austerity’ where most folks are losing their jobs, the latest survey of boardroom pay finds that the average compensation for a FTSE100 company director went up by 49% last year to £2.7 million per CxO; the richest 400 people in America have more wealth than the 155 million poorest combined; and it’s getting worse.

According to CBS News, “the top-earning 20% of Americans received 49.4% of all income generated in America compared with the 3.4% earned by those below the poverty line.  That’s a ratio of 14.5-to-1 gap between the richest and poorest; an increase from 13.6 in 2008 and nearly double the low of 7.69 in 1968.

“The poorest poor are at record highs. The share of Americans below half the poverty line - $10,977 for a family of four - rose from 5.7 percent in 2008 to 6.3 percent. It was the highest level since the government began tracking that group in 1975.

“The poverty gap between young and old has doubled since 2000, due partly to the strength of Social Security in helping buoy Americans 65 and over. Child poverty is now 21 percent compared with 9 percent for older Americans. In 2000, when child poverty was at 16 percent, elderly poverty stood at 10 percent.”

Also see Mission Silver for more.

Now most people agree with these core views.

Even bankers agree.

In a study by St Paul’s, that was released just after the protest started, they found that most financial professionals believe that bankers, stock brokers, FTSE 100 chief executives, lawyers and city bond traders are paid too much.

They say that of the 515 financial professionals surveyed, 75% agree that there is too great a gap between rich and poor.

So where is the disparity of opinion here?

There isn’t one.

But the issue lies more in expression.

If the 99%, as they call themselves as well – that’s the 99% of people not feeding at the trough of capitalism – want the 1% of those who are feeding to change, they need to make their point clearer.

And they need to make it more pertinent.

In fact, in London, they’ve really messed up by occupying a Church rather than the London Stock Exchange.

Tents_2052168c

Who are they protesting against?

God???

Attacking a Church for Christ’s sake – sorry, for Cameron’s sake – is not going to change anything.

Meantime, no-one in the City cares about them.

In fact, no-one in the City is affected by them as their occupation doesn’t affect the banks, who are all now based in Canary Wharf and around Liverpool Street.

What a waste of time.

And if they want to make their point more pertinent they really need to hit people where it hurts, not just banks, but corporate greed and the divide between the rich and poor.

So how do you hit where it hurts?

In the wallet.

That’s what they really need to focus upon.

And to achieve that it needs political change, which is happening anyway.

Take note, the Bank of England are considering a crackdown on bankers’ bonuses through regulatory reform.  From the Sunday Telegraph this weekend:

Robert Jenkins, an external member, said earlier this month: "Return on equity is the wrong target. Over the last 10 to 15 years it has helped to make many bankers rich and loyal shareholders poor."

Return on equity, or RoE, rewards bankers for taking risk that in the recent crisis was ultimately borne by taxpayers.

Instead, both Andy Haldane, the Bank's executive director of financial stability and a member of the FPC, and Mr Jenkins believe that bonuses should be measured against return on assets, or RoA, which adjusts for risk.

"While the risks have typically been borne by wider society, the returns have been harvested by bank shareholders and managers," Mr Haldane has said.

According to his analysis, the effect on bonuses from switching targets would potentially be huge. Between 1989 and 2007, in which time there was "increasing focus on RoE as a performance target", the average pay of the top seven US investment bank bosses rose from $2.8m to $26m. If their performance had been linked to RoA, it would have increased to just $3.4m.

"Rather than rising [from 100 times] to 500 times median US household income, it would have fallen to around 68 times," Mr Haldane said.

The difference can be illustrated using a mortgage. If a house price rises in value from £100,000 to £110,000, the RoA is just £10,000, or 10pc. But if it was bought with a £10,000 deposit and £90,000 debt, the RoE on the £10,000 of equity is 100pc.

However, where homeowners bear the risk of a fall in house prices, bankers do not. According to Mr Haldane: "In effect, RoE is skill multiplied by luck."

The changes are therefore happening, but not as a result of the Occupy protest, but down to good old common sense.

And if the protestors want to push the regulatory changes through faster,  I would recommend our hippies, anarchists, travellers and homeless to go Occupy the Bank of England and Parliament until they get their regulations right and make the disparity between rich and poor, particularly where it’s based upon pure luck and no skill, a little bit better.

Meanwhile, their protest is pretty useless anyway.

By comparison with the States, where they have real passion, our lot are a damp squib.

Portestor

In fact, there are many rumours that the protestors don’t even occupy the site in the evenings as it’s too cold.

So we went down there on Friday.

I stood by the tents and said: “I’m in favour of bankers’ bonuses, would anyone like to argue about that?”

No-one responded.

St Paul's Protest, 2nd December 2011, Part One from Chris Skinner on Vimeo.

I walked round the camp for about five minutes saying that I’d like to argue about why bankers’ bonuses are a good thing.

No-one came out of a tent.

St Paul's Protest, 2nd December 2011, Part Two from Chris Skinner on Vimeo.

It was 6:30 on Friday night, 2nd December.

So much for an effective protest.

 

 

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Things worth reading: 5th December 2011

Things we're reading today include ...

 

 

 

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December 04, 2011

The Finanser's Week: 28th November - 4th December 2011

Our biggest stories of the week are ...

As my SEPA gently weeps ...

I hosted a dinner last night with a focus upon developments with SEPA and innovation. What innovations has SEPA introduced? Long silence. To be honest, there are some – the ability to cash concentrate direct debits into the most efficient...

Four dimensions of innovation

Another aspect of innovation discussed this week was slightly out of the negative SEPA box and more on the positive future box. We were talking about all the things that were innovative – NFC, mobile, anything Chinese, Google, etc –...

Taking a wallet onto a mobile doesn't work

I discovered a fascinating report from Mobey Forum this morning. It was released this week, and says that “providing consumers with the convenience and functionality of mobile wallet technology will not be sufficient to drive mass-market adoption”. Mobey Forum –...

Product or solution: a breed apart

Just had an interesting chat with a couple of guys who provide sales development and account planning services to IT firms. The gist of their business is turning product sellers into solution sellers, a core stomping ground of mine and...

Banking is a land of extremes

There are evangelists and dogmatics across the banking spectrum. On the one hand, I have regular debates with mobile extremists who believe cash is dead; on the other, there are those who are still fighting to keep the cheque in...


The major general news stories of the week include ... 

Extraordinarily serious and threathening...perilous - these are not the sort of words a central banker normally uses, yet every time the Governor of the Bank of England, Sir Mervyn King, appears in public these days, he ramps up the language of crisis still further.

Fed saves Europe's banks as ECB stands pat - The Telegraph
Stripped to essentials, America is once again having to rescue Europe from itself.

Europe’s Single Currency May Unravel Before Action, UBS Says - Business Week
Europe’s monetary union may unravel sooner than the region’s leaders can mobilize to ensure the sovereign-debt crisis doesn’t overwhelm the currency, a UBS AG foreign exchange strategist wrote.

Can Britain cope if the eurozone collapses? - The Telegraph
As the unthinkable looms, ministers are starting to prepare for the worst, reveals Iain Martin.

Free banking is a 'myth', says UK's top bank regulator - The Telegraph
Free banking in the UK is a myth and customers should be charged higher fees for basic bank services, according to Britain's top banking regulator.

S&P reduces bank credit ratings - BBC
Ratings agency Standard & Poor's downgrades the long-term credit grades of a string of major banks including Barclays and HSBC.

Autumn Statement 2011: HSBC and Standard Chartered hit hardest by bank levy increase - The Telegraph
HSBC and Standard Chartered are likely to be hardest hit by the Government's decision to increase the bank levy for the third time in less than a year.

UK watchdog suggests PwC fine of up to £34m - Financial Times
Regulator says the penalty for the auditing failures should not be 'vastly disproportionate' to the £33.3m fine imposed on JPMorgan last year

Quinn ordered to repay €1.7bn to Anglo Irish Bank - Financial Times
Largest judgment made against an individual by an Irish court

Middle-Aged Bankers Face Heart Disease Risk - Business Week
About half the middle-aged staff tested at Banco Santander show signs of early-stage disease of the arteries that could cause heart attacks or strokes

 

If you like the Finanser, check out the books of the blog: the new Complete Banker Series

 

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December 02, 2011

Four dimensions of innovation

Another aspect of innovation discussed this week was slightly out of the negative SEPA box and more on the positive future box.

We were talking bout all the things that were innovative – NFC, mobile, anything Chinese, Google, etc – and it soon became clear that most of the organisations around the table were being driven by one of four factors when we talk about innovation.

First, most were addressing regulation.

This is something I’ve blogged about a lot before, and the industry usually agrees that any regulatory change will create innovation.  This is because regulation forces banks to change, and if they are investing in change they automatically grasp the opportunity to innovate as part of the process.

The second big innovation driver is the leadership.

If the top person or top team have an appetite to innovate and are willing to invest, then innovation will be freely created.  That’s why we see many organisations that innovate being associated with a strong leader: Wal*Mart (Sam Walton), Apple (Steve Jobs), Virgin (Richard Branson), ING Direct USA (Arkadi Kuhlmann), Commerzbank (Vernon Hill), Citibank (John Reed and Sandy Weill), etc.

Therefore, the leadership is a key.

Third, risk came up regularly as an area of discussion.  The riskier the climate, the less innovative firms tend to be.  The less risk, the more innovative.  For me, you could just as easily substitute risk with growth.  If markets are contracting, innovation lessens; if markets are expanding, innovation grows.

So risk and growth are key factors, although I feel these are confused as the less growth and more risk there is in the world, the more innovative you need to be, not less.  If there’s a high risk of your company going bust due to markets contracting, innovate your way out of it.

Finally, and most importantly, are customers and customer needs.   All innovation should be driven by customer focus and need although, in the words of the deity Steve Jobs: “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.” 

That was in an interview Inc. Magazine in April 1989.  He also followed this with the statement in 1997 that “you‘ve got to start with the customer experience and work back toward the technology - not the other way around.”

In other words, start with the customer and build innovation from there.

Innovation

So I would actually layer this approach and say that if you want to innovate, start with an internal assessment to ensure there’s an appetite and leadership there to make it happen.

If that appetite is subsumed by regulation constraints, risk, compliance and cost cutting, be cautious as it will inhibit the capability of the management to make it happen (not in Steve Jobs case though).

And if the management is clearly on board and the environmental factors are conducive to innovatory change, then make it happen.

Be interesting to see what thoughts folks have, as this is by no means an exhaustive view.

Just mine.

 

 

 

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