Walking around Davos, we stumble across a small enclave of bank chiefs sharing breakfast. In this case, Demon, Blankfine, Jinkens and Gilliver, the CEOs of JPM, GSachs, Barcs and HBSC respectively.
Continue reading "Change management means change management" »
Someone made the comment that I would not receive any business from the five banks named yesterday with the biggest mistakes, so I thought I would rectify that by picking on five good things that banks are doing.
It’s harder to find, because it is less reported, but there are a number of banks that do really good on-the-ground work. Here are five examples:
#5: Bank of America’s Technology Leadership
I often use the example of Bank of America when discussing innovation. The reason is that they took leadership in internet banking a decade ago by committing to the technology early. This is a case study that I’ve written up in detail, and the core of the case study shows that through analytics BoA realised that share of customer wallet increased massively the more the customer was in control. That’s what internet and then mobile banking gave the customer and that’s why BoA committed early to roll out internet and mobile banking with security guarantees to assure customers that these technologies were safe and viable. It’s also why BoA is the #1 US internet and mobile bank.
Active online banking users
Active mobile banking users
#4: Barclays Innovations
It’s true that banks are lambasted for being slow to change and adopt new ideas, but Barclays has proven to be an exception in recent times. From extensive use of social media in their card operations to being the first UK bank to launch a P2P mobile payments service, Barclays has shifted the goalposts regularly in UK banking capabilities. I blogged about this in depth in April, and it shows that banks that innovate do win more business.
#3: Citigroup’s Visions of the Future
Citigroup are regularly rolling out new technology innovations and trialling new ideas. Their branch of the future concept opened in Japan last year was particularly noteworthy, as was their partnership with Google Wallet which could have been massive, if Google had opened the Wallet on the iPhone and not restricted it to one handset (the Nexus S 4G on Sprint). The Google-Citi exclusivity has now gone but, nevertheless, Citi make a point that they have been on the innovator’s curve on a regular basis for over 200 years …
… and what this video shows is that without banking and access to trade and project finance, the world would see no progress. That’s why Citi and other banks are needed to ensure that societies and economies move forward, not backward.
#2: First Direct’s Customer Focus
First Direct appear on this blog and others so often as the UK’s #1 consumer champion bank that it’s almost boring, but the reason is that they truly understand how to deal with remote banking. Regularly voted the #1 bank by their customers, the reason that First Direct get this is that they began life as a bank without branches and now see themselves as a digital bank with a human approach. That’s why they don’t script their call centre agents or do things by the book, and it’s why they win. If you want to know more about the bank, it would do no harm to revisit my 2010 interview with Paul Say, the bank’s head of marketing.
#1: Standard Chartered’s Charitable Work
There are many banks involved in community and charitable work, but one makes a point of it and it is visible in all my dealings with them: Standard Chartered. I first noticed their work when I bumped into the then CEO Mervyn Davies at an Awards ceremony in 2006. He was wearing those tacky wrist bands and I thought it would be something about “stop bullying”. Instead it was about "Seeing is Believing", a charity that is helping to bring eyesight back to emerging market citizens who suffer from cataracts or similar eyesight issues. Mervyn explained that it was a passionate cause for both him and the bank. In fact, if you look at this charity, which aims to raise $100 million by 2020, it is actually a partnership between the bank and the International Agency for Prevention of Blindness (IAPB). In other words, the charity would not exist without the bank’s support. And it goes to the heart of the bank. For example, Standard Chartered sponsor Liverpool Football Club. The bank even replaced its sponsor logo in the Liverpool versus Chelsea match last season, to promote the charity’s work.
And it’s not just this work that places them high up in my list of banks doing good things. For example, I bumped into another senior StanChart banker in Asia six months after meeting Mervyn Davies, Mike DeNoma. Mike was championing a charitable cause to stop child pornography online. It is clear from both encounters that the bank actively encourages charitable work as part of its culture and that’s why they get my number one award for doing good things.
So there you go.
Five banks doing good things.
Note, that four out of five of these are the same five banks as yesterday (First Direct are part of HSBC), so it shows that they can just as easily do good work as messing things up.
Oh, and why did I miss out RBS?
Well, I was going to include RBS but:
Either way, they’ve got no budget for consulting with Chris.
Meanwhile, there are many other banks doing amazing things out there, including many of the names that have had reputational hits over the past year.
In particular, if you want to see a few more amazing things banks are doing that are not so big, then go check out Fidor’s Social Work and Triodos’s Sustainable Stance.
I kinda thought that some of the things that have happened in banking in the past – like the collapse of Lehmans and Barings Bank; Jerome Kerviel, Henry Blodgett and Frank Quattrone; insider trading and Ponzi schemes; and more – were pretty bad, but someone asked me to make a list of the top five most embarrassing mistakes made by banks and, as I pondered the list, they all appeared to be recent ones.
Sure, I could put in things like Chuck Prince having to apologise in person before the Japanese FSA about Citigroup’s private banking failings or Goldman Sachs calling their clients muppets, but these things are mild compared to the five here.
So, as it’s summertime and things are changing, here are the top five most embarrassing mistakes made by banks, and they all happened within the last twelve months:
#5: Bank of America’s social media gaffe
There were a number of major PR gaffes in the last year, where banks were caught short over social media usage. The biggest one was from Bank of America, who tried to introduce a charge of $5 a month to use debit cards in October 2011, in response to the Durbin amendment to the Dodd-Frank Act that limits debit card transaction charges to 12 cents per transaction. Customers didn’t like the new fee and one – Molly Katchpole, a 22-year old nanny – forced the bank to change its position purely by using Change.org to create a petition that garnered over 300,000 signatures. The fact that BoA retracted the fee was then rewarded with the award for the worst PR gaffe of 2011 and a 20 percent increase in account closures in Q4 2011.
You can have issues over reputation but the #1 reason why customers close accounts is when mistakes are made. In this case, the RBS glitch was huge, with customers at Ulster Bank closed out of their accounts for almost a month. The mistake was made by an update to CA-7, a core payments program, which corrupted the payments files. The issue has been that no matter how hard RBS try, they cannot recreate the issue to find out what caused it, or so I hear.
#3: Citibank’s mortgage mistake
When the head of mortgage Quality Control sues her employer over their mortgage processing system, you know something’s wrong. When Sherry Hunt did this, claiming that three out of five mortgage applications were missing key pieces of information including signatures and proof of salary, you know something’s really wrong. Especially when her employer told her to fudge it and stop complaining. That’s why, when the Department of Justice backed her case, she received $31 million for being the whistle-blower her blew the whistle on Citigroup and succeeded in bringing them to justice as the first test of the new Dodd-Frank whistle-blower rules.
#2: HSBC’s money laundering scheme
You would think that with global AML controls in place, a bank of HSBC’s size and breadth could handle a little tracking of terrorist cash. David Bagley, Global Head of Compliance for HSBC, has been co-chair of the Wolfsberg Group that set the rules for Anti-Money Laundering worldwide for banks since 2005, so they should know something about it. However, he and the bank got caught out as accounts in Mexico enabled drug cartels to gain monetary movements via the Cayman Islands, and terrorists were engaged in similar activities via the Saudi bank division and its counterparty Al-Rajhi Bank. The result is that he stepped down from his position in the bank, even though he wrote emails warning of the Mexican banks lack of a “recognisable compliance or money- laundering function.” The lesson learned is that when business leaders see billion dollar accounts, they ride rough-shod over their risk, audit and compliance folks. The balance has to shift the other way around so that when risk, audit and compliance folks see businesses they don’t like, they can tell the business leaders that when the going gets stuffed, the stuffed get going.
[Read the full senate hearing on AML and HSBC here]
It’s not so much that LIBOR had faults so that rates could be rigged, which we all now know, but more that the messenger got shot. Barclays were the messenger who blew the whistle on LIBOR rate rigging. That’s why they got the first massive fine, as they have been co-operating with the authorities. Meanwhile, all the other banks have now been drawn into the crossfire with HSBC, RBS, Lloyds, Deutsche, Mitsubishi and more being investigated with multimillion dollar fines. So what’s the problem here? That Barclays allowed the release of the LIBOR news to make them look like the sole bad guys. Result: Diamond, del Missier, Agius and more all go and the bank becomes a headless mess. How did it happen? Well, apparently the day the news came out about Barclays fine was the first day of a brand spanking new Head of Corporate Communications joining the bank. Not a bad day’s induction training to find yourself in the middle of the biggest comms crisis of all time and #epicfail for not dealing with it effectively.
So there you have it.
Five massively embarrassing moments for five megabanks.
Nevertheless, my award for the bank with the all-time brownest stuff dripping off its fan has to go to UBS.
Yes, UBS.
UBS – the bank that changes management more often than Shameless star Frank Gallagher changes underpants.
UBS – the bank with the multibillion dollar loser.
UBS – the bank that tells their staff how to dress and not dress.
UBS – the bank that trains their staff in how to avoid the FBI and US Customs.
UBS – the bank that has employees willing to go the extra mile, like doing illegal activities on behalf of their clients.
UBS – the bank that received one of the largest Federal Reserve fines in history in 2004 for peddling dollar bills to Saddam Hussein, something that HSBC copied this year.
Need I go on?
Oh yes, but it’s still a very good, reputable bank.
Pictures sourced from WHYDTINOGO and Flickr
The big news at the end of last week is that the Royal Bank of Scotland (RBS) had a computer crash, affecting all of the UK bank including NatWest and Ulster Bank.
It caught headlines worldwide:
… and about 1600 other headlines so far.
It even made the front page of the newspapers:
The issue was caused by an upgrade to the core payments processing engine and a file became corrupted, although it’s interesting how people blamed it on legacy systems.
It’s not legacy systems that cause bank crashes, it’s legacy upgrades.
This is why banks don’t change core systems, because it can create issues and it just goes to show how important resilience and reliability of systems are in banking.
I’ve heard many illustrations of this, but the two best comparisons is that banks are like racing cars where the business is the driver but the technology is the engine, or that banks are like aircraft and charging the engines at 40,000 feet above the ground is hard.
I write about this often myself http://thefinanser.co.uk/fsclub/2011/05/how-the-new-bank-will-win.html:
Wholesale replacement of core systems is difficult you see. Everyone refers to it as being like changing the engines on an aircraft whilst flying at 40,000 feet, and they’re right. This is amply demonstrated by the migration of Abbey and Alliance & Leicester to Santander’s core systems over the past few years, and by the Australian bank debacle of NAB and others who are in migration mode as we speak.
And yet, some seem to achieve these upgrades without hitting the headlines.
For example, Lloyds migrated HBOS to their core system over the summer and Nationwide Building Society has been busy migrating al their systems over to SAP for the past few years.
Yes, they have issues – for a month many business customers of HBOS were unable to use online banking – but it doesn’t get the headlines like a total blackout vis-à-vis the RBS-NatWest issue this week.
This is because the migration is typically carried out over a weekend, as was the RBS upgrade, but during a quieter period – over a bank holiday or during the deep summer holiday – something that RBS could not wait for.
Even though the bank opened branches through the weekend and late into the evenings, and publicly apologised for the mess, the reputational hit is huge and this is where it really matters.
If banks are technology firms, which they are, then they have to realise that five 9’s availability isn’t enough.
It has to be 99.999999999% fault tolerant (or 100% in the ideal world).
Although tough to achieve, any bank that lets its systems fail for even a half a day is subject to ridicule in this world of high tech reliability.
Finally, it demonstrates how banking is different to telecoms and other industries.
If you let a call fail on the mobile network, it doesn’t matter.
The customer will just redial.
If you let a payment fail on the bank network, it always matter.
It brings me back to airlines as the best example of the RBS-NatWest challenge is that if a payment fails once, the customer will stay. A little like if a plane crashes, customers will still fly … they will just be a bit more cautious.
However, if a payment fails twice, three times or on a regular basis, customers leave.
Similarly, if an airline operates planes that regularly crash, customers stop flying.
And that’s the reason why we don’t change the engines on an aircraft at 40,000 feet above ground.
A short while ago, I mentioned that the Financial Services Club were to debate: This house believes that The City is full of greed and corruption.
We had the debate last week, and it was excellent with Ian Fraser and Nick Kochan, two enigmatic investigative journalists of our time, proposing the motion.
Ian Fraser (left) is an award-winning journalist, commentator and broadcaster who writes about business, finance, politics and economics. His work has been published by among others The Sunday Times, The Economist, Financial Times, BBC News, Thomson Reuters, Dow Jones, Daily Mail, Mail on Sunday, Independent on Sunday, the Herald, Sunday Herald, The Scotsman, Accountancy, CA Magazine and CityWire.
Since 2008 he has been consulting editor and blogger on Bloomsbury Publishing’s QFINANCE and also blogs for Naked Capitalism, a leading US website for economic and financial views. Some blogs are cross-posted on other sites including The Economic Populist and Seeking Alpha.
Since March 2009 he has been making programmes about the global financial crisis for the BBC. These have included a File on 4 documentary for BBC Radio 4 about HBOS, Trust Me I’m A Banker for BBC Scotland and Carry on Banking for BBC 1 Panorama.
Nick Kochan (right) is a commentator on banking and financial services on compliance and regulation, emerging markets, political and forensic topics.
His work on banking, financial services and the economy has appeared in The Financial Times, the Economist, the Banker and Euromoney magazines. He is regularly consulted by the BBC and Sky for commentary on economy and financial services.
In particular, Nick has established his leadership in the field of compliance and regulation with the publication of his book on money laundering (The Washing Machine, 2006) and more recently on Bribery and Corruption (Corruption: The New Corporate Challenge, 2011).
These two formidable beasts were set up for opposition by two equally formidable characters: Brian Mairs and Colin Slight.
Brian Mairs leads the Strategic Communications area of the British Bankers’ Association (BBA), and writes, commission and edits articles working with colleagues in the BBA’s Communications team.
A former journalist and HM Treasury press officer, Brian's City career has included heading communications for APCIMS (the Association of Private Client Investment Managers and Stockbrokers) and for CFA Institute across Europe.
Colin Slight is Managing Partner with the Realization Group, and leads the official charity for the Financial Services Club, MAG:NET, where I will be speaking on 5th July alongside Martin Bell, the white-suited independent politician and former war reporter.
The arguments began with Ian putting forward the case that the City used to be run on the basis of people who were interested in appropriate steerage of the City.
They had ethics, morals, judgement and values.
That changed over the past two decades to allow people to now run the City who have no sense of altruism. They just want to get rich quick.
If people are purely motivated by greed with no sense of ethics, then they rapidly move to abuse, as demonstrated by the recent letter about Goldman Sachs calling their clients muppets.
Various cases were cited from BCCI to Barings, RBS to HBOS, but most of this is under the Chatham House Rule so I cannot repeat word for word what was said.
What I can do is cite Ian Fraser’s blog where he regularly uncovers stories about rogue actions in the financial system, such as:
As you can see, Ian is not a huge fan of the banks, or rather of the banks’ shenanigans, and works tirelessly to expose their misdoings and misdeeds.
It also intrigued me that he mentioned various folks, such as Rowan Bosworth-Davies. Rowan is an old mucker of mine and will be speaking at the Club in Q4, along with David Bermingham (one of the NatWest Three).
Ian’s thrust of dialogue is that banks were allowed to get away with a lot of greed, through the failure of regulators and government and the lack of appropriate auditing controls.
In fact, he is pretty darned livid that an auditor is now the top regulator, and believes this is where we have the major issue.
I quote this, as Ian blogged about the debate, stating that William K Black, associate professor of economics and law at the University of Missouri, Kansas City, gave testimony to the Federal Crisis Inquiry Commission in September 2010 saying as much:
By the time this crisis began economists (Akerlof & Romer 1993), regulators (Black 1993); and criminologists (Calavita, Pontell & Tillman 1997; Black 2003; Black 2005) had developed effective theories explaining why combining financial non-regulation and modern executive and professional compensation produced criminogenic environments that led to epidemics of accounting control fraud.
We also explained why these were near perfect frauds and explained how control frauds used their compensation and hiring and firing powers to create a “Gresham’s” dynamic that allowed them to suborn the “independent” professionals that were supposed to serve as “controls” and transform them into allies. (This is similar to HIV’s ability to infect the immune system.)
So there you have it. Extrapolating from Black, the ‘Big Four’ accountancy firms Deloitte, Ernst & Young, KPMG and PWC, whose duties as auditors are supposed to be to the shareholders not to the management of a company, have been behind the creation of a “Gresham’s” dynamic.
By this, I mean they have provided a cover for ‘white collar’ crime, in exchange for inflated audit fees (or what are increasingly being termed by the accountancy professor Prem Sikka and others as “bungs for silence”).
If true this makes them dangerous institutions, whose imprimatur should increasingly be seen as a negative rather than a positive by investment management firms with a genuine interest in safeguarding their investors money.
Hmmmmm ….
Ian’s seconder Nick was equally diligent in delivering his powerful mantra about City greed and corruption, opening with a video clip that was particularly amusing and engaging:
The video is from some years ago, and shows Saudi Prince Bandar bin Sultan talking about corruption charges.
Prince Bandar is son of the late Crown Prince Sultan bin Abdulaziz Al Saud.
Prince Bandar was ambassador to Washington between 1983 and 2005, and is Secretary General of the Saudi National Security Council.
He is thought to have fallen out of favour with other princes due to overzealous diplomatic efforts in recent years although, looking at a transcript of the video above, I am not sure he is that diplomatic, just honest:
The way I answer the corruption charges is this. In the last 30 years, we have implemented a development program that was approximately ... close to $400 billion worth, OK? Now, look at the whole country, where it was, where it is now. And I am confident after you look at it, you could not have done all of that for less than, let's say, $350 billion.
If you tell me that building this whole country, and spending $350 billion out of $400 billion, that we misused or got corrupted with $50 billion, I'll tell you, "Yes." But I'll take that any time. There are so many countries in the Third World that have oil that are still 30 years behind. But, more important, more important -- who are you to tell me this? ... What I'm trying to tell you is, so what? We did not invent corruption, nor did those dissidents, who are so genius, discover it. This happened since Adam and Eve. ... I mean, this is human nature. But we are not as bad as you think. ...
Nick then went through a litany of bank failures, corroborating Ian’s view that the City is rife with corruption and greed .
Answering such accusations is hard, but Brian and Colin proved to be more than up for the job.
Brian went through a long list of reasons why it is not pandemic to banks, but hard wired into the way in which humanity works.
From the ancient Greek and Roman times through to today, corruption and greed exists anywhere and everywhere it is allowed, and the banking system positively supports the regulation and governance of greed and corruption by being one of the only places where it can be traced, tracked and found.
In fact, the City is an excellent place to stop corruption and greed as this is where it ends up. That is why the laws around tracing Politically Exposed Persons (PEPs), Money Laundering and more are so integral to the banking system and this is where the governments can find those activities.
So greed and corruption is not rife in the City, but in life, and the City is a machine that can temper, trace, track and eradicate these activities, rather than being the place where it ends up.
Colin was even more offended by the notion that corruption and greed even go together in the same line, as they are totally unrelated.
Greed is programmed within all of us, which is why it is one of the seven deadly sins, but corruption is completely separate and if anyone thinks all of the thousands of people who work in banking are corrupt, then they are wrong.
Sure, there are a few bad apples to spoil the barrel, but that’s true of any industry – politics, religion, business, you name it. There will always be some rogues and scallywags, but the majority are good, honest, decent hard working people, and so calling all those people corrupt is inherently wrong.
Arguments well upt and well placed, but they did not wash with the audience who voted overwhelmingly in favour of the motion.
My take on it was that the motion was carried more on the emotion of the topic than the facts however, and personally see greed and corruption as being part of the makeup of humanity – along with lust, gluttony, wrath, pride, sloth and envy.
The Seven Deadly Sins have nothing to do with ‘The City’ as they exist within all of us, as part of humanity.
The only issue being that if the governance, regulation and politics allow excess in such sins then that is the issue and, yes, that has been the issue of the last decade.
In summing up, it was the allowance of greed through corruption that has been the concern shared by all and, for that motion – This House believes that the control system has allowed the City to over-indulge in greed and corruption – I, along with many others, would probably concur.
In conclusion, a video Ian presented sums up the case, and is worth half an hour of your time if you have the interest:
I was just alerted to a new game app for the iPad and iPhone on the iTunes store.
It’s called “Toxic Debt or Credit Crunch”.
I downloaded the app and started playing it just to make sure it’s real.
The game opened with the story detail:
Planet Shred was once the finance capital of the galactic empire Holyrood until the banking mogul Sir Derf stripped it of all resources. With banks riddles with toxic debt, Derf ignored all signs fo the CREDIT CRUNCH.
Bailey has just beamed onto Shred from off world as he wants to find Derf’s secret vault containing the security codes that will stop Derf’s disastrous expansions into B.N.ORMA.
If Bailey is successful he will stop the spread of toxic debt, dethrone Derf and prevent inter galactic financial ruin.
There is then a choice of three game types.
In ‘Stop Derf’ you must save planet Shred and the finance capital Holyrood from Toxic Debt by defeating Sir Derf Goodwin.
Fighting your way past the Hornby Lizard guards you must find Derf’s hidden vault and get to his plans for expansion into B.N.ORMA. Success will prevent a disastrous Credit Crunch.
If you win, Derf will be stripped of his knighthood.
In other game types you can practice your shooting in target practice mode or fight off the hordes of Hornby Lizards and rack up points as you battle your way to the various flag objectives.
The only shame of the matter is that the game is a bit too challenging as, on the iPhone, it is pretty hard to follow so I'd recommend getting the iPad version.
But feel free to download it if you enjoy donating $1.99 (£1.49) towards feeling some sense of beating up Fred Goodwin (no longer Sir Fred) over his disastrous RBS expansion into ABN AMRO, whilst fighting off Andy Hornby (former CEO of HBOS).
I was asked to talk about the role of social media in banking this week, and was a little irritated by the question.
Why?
Because social media has a very strong role in some banks.
Take any large American bank and they’re blogging, twittering, facebooking and more (Wells Fargo, Citi and Bank of America being good examples).
Take many of the Asian banks, and they’re doing the same (Siam Commercial Bank, Standard Chartered and Commonwealth Bank of Australia being good examples).
And in our own hemisphere, banks from Russia to Spain are doing interesting social stuff.
Then we come to the UK.
Bah, humbug!
Who needs to be social.
The reason I mention it is that sure, First Direct and Barclaycard have done some interesting online social services, but the core mainstream UK banks are seriously deficient in a major way.
Not one of them has an official company blog or, if they have, they’ve hidden it.
This is because I researched a little bit for my presentation by seeing if any of them had one.
And they haven’t.
Now I was reminded of this because, five years ago, I introduced a leading UK bank to Wells Fargo’s Head of Experiential Marketing, Tim Collins, to discuss social media.
Tim was already well into blogs and virtual worlds, and was expanding the bank’s footprint into facebook at the time.
They asked him why he bothered?
His answer was simple: “if you’re not part of the social world of conversation amongst your customers, then they will talk about you negatively and you have no voice to respond. If you engage in the online conversation, then it becomes far more civilised, interactive and interesting.”
There were lots of things discussed.
For example, the UK bank said they tried an internal blog for three months but got so much negativity they shut it down.
Tim responded by saying that Wells Fargo had the same thing from customers at first but, by having a team monitor their social media 24 by 7, they always responded to any negativity straight away with a response explaining why it happened that way.
Customers were far more polite and calm when they saw their rude postings garnered a civil reply; hence it led to being engaged in a conversation. Through conversation, the bank learned a lot more about what frustrated customers. The result is better products and services.
However, it is quite clear that the bank cannot engage in such activity half-heartedly, as you need to be responsive and therefore have people dedicated to social media interaction.
Like a call centre, it’s a response team to online questions and issues.
He also said that now other customers often reply to rude postings, and that their best service agents are their own advocates.
I hear this from many other banks now too.
Finally, Tim talked about the reasons why they first got into social media and it was in part related to one customer who had created a website called wellsfargosucks.com.
Unfortunately, that website came up as the first result in any google search.
Therefore, in order to ensure the right image of the bank was presented, the bank sees social media as a key method of moving the right message to the top of the search results rather than leaving it to negativity from media or anti-bank activists.
So now I come back to my UK bank social media research.
Here’s what I found.
Lloyds Bank – no blog, and mainly investor discussions.
HSBC – no blog, one negative headline in top five search headings.
Santander – no blog, a few negative headlines but at least they put an advert against their name.
Barclays Bank – no blog but great search results!
NatWest – oh dear, dear, dear.
At least Lloyds and HSBC have some blogs related to graduate recruitment. Still a poor show, but better than nothing.
I’ve recently been thinking about headcount cuts.
It’s always hard …
And it's getting harder.
For example, I wrote in August that thousands of bank jobs were being cut, adding up to an expectation of 15,000 City jobs this year.
Each job loss represents a significant loss to the economy, especially those in the City:
“Based upon an average salary of £150,000 and income tax of 50 percent, employer national insurance of 2 percent and employee national insurance of 2 percent, this works out at an average lost tax income per lost City job of £81,000 per year, or a total loss of about £1.3 billion in tax revenue. To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15 percent of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7 percent.”
That doesn’t include all the job losses at Lloyds Banking Group (43,000 or more job losses) and Royal Bank of Scotland (28,000 generally plus a further 5,000 just announced in the investment bank).
Nor does it even look at the USA figures, where Bank of America recently announced 30,000 job cuts, a similar number to those recently announced by HSBC.
In fact, every bank is cutting … how far could it go?
According to one leading light in the City, Mary Caroline Tillman – shortlisted for Woman of the Year, Head of the Global Financial Practice with headhunter firm Egon Zehnder, and formerly Managing Director and Chief Operating Officer of JP Morgan's European Advisory Business – the losses will rise to around 40% of all City jobs.
In an interview over the weekend with the Independent, Mary said the following:
“The Masters of the Universe are facing a really tough time. The shake-out is only just beginning after the crash. There is a big consolidation still to come, which means there will be far fewer banks; a 40 per cent cut in jobs will be the 'new normal'. This is because of the tougher regulatory environment.”
A 40% job loss in the City would spell disaster.
For example, the article reckons that there are about 360,000 people working in the City and some 670,000 in New York's securities industry (this does not take into account all the ancillary and related services from accountants and lawyers to bar staff and restaurants).
If 40% disappeared in London, based upon my earlier calculations, which would be 150,000+ job losses. A loss of around £13-£15 billion a year in tax revenue … or more.
I wonder whether the government really wants this scenario therefore, and the Occupy Wall Street brethren.
Meanwhile, as the industry does go through its transformation from reckless risk to wrestled risk, it was interesting to see the change Mary sees happening in the core investment community of London.
“The restructuring means a different kind of leader is emerging. They are coming from the more functional areas. You can see that, with risk officers such as Robert Le Blanc at Barclays and Marc Moses at HSBC, who are now at the top … Boards want the finance guys, accountants, risk specialists, those with knowledge of IT and compliance. These are the future Masters of the Universe … and these new bankers are determined to show that banking can be a decent and good business.”
Good.
So the Vickers Report has finally crept out into the wilderness.
All 358 pages of it.
Half of it talks about how to increase the competitiveness of banking and the other half about what to do if a bank fails in another crisis.
The latter has garnered all the news headlines, whist the former has been generally overlooked.
More copy has been written about this report than anything else in banking over the past week or so, with a selection of headlines that makes the mind reel. Here’s just a few:
If you want the truth, you can read the full Vickers report, which I’ve been reading this morning and so far have found nothing too surprising, as most has already been leaked.
Here’s a summary of the key points on ring-fencing:
And on creating new competition:
For the most part, I’m disappointed with this report. It’s not that I’m against bank reform, but what is the right sort of bank reform?
What this report appears to do is tread a fine line between bank anger, government need and public input, and comes out on the side of muddle.
It’s already had plenty of flak for this, but let’s pick on a couple of things.
First, account portability. Why hasn’t the ICB included this, as it makes eminent sense as discussed back in December at the ICB meeting I attended.
What the report actually says about this is as follows:
“The Commission recommends the early introduction of a redirection service for personal and SME current accounts (to make account switching easier) which, among other things, transfers accounts within seven working days, provides seamless redirection for more than a year, and is free of risk and cost to customers. This should boost confidence in the ease of switching and enhance the competitive pressure exerted on banks through customer choice. The Commission has considered recommending account number portability. For now, it appears that its costs and incremental benefits are uncertain relative to redirection, but that may change in the future.”
In other words, the cost of using different account numbers between banks allowing portability is too great. For example, if might from RBS to Lloyds with account number 75280025, there may already be someone at Lloyds with that account number. Therefore, to introduce account portability of account numbers, you would probably need to renumber all the bank accounts in Britain with unique ID’s. That’s why it’s been dropped.
But then the report adds more details to this idea (page 218) and shows it is feasible:
“Under account number portability, a customer’s sort code and account number would not change when the customer changed banks, thereby avoiding the need to change any payment or credit instructions. Evidence to the Commission suggested that the effect of account number portability could be achieved through the creation of an ‘alias database’. This proposal is for a new database to be created with a new code for each account that would be assigned to each sort code and account number: a customer would give the direct debit originators (and creditors) they deal with the new code, which would never change; when the customer moved banks, the sort code and account number assigned to the customer’s code would change and nothing else.”
Later on (page 222), it expands on the risks and opportunities of account portability:
“One significant benefit of account number portability (whether done through making existing account numbers effectively portable, or through the creation of an alias database) is that it would remove the cost of switching to direct debit originators, as well as those who make automatic payments into customers’ accounts. However, given the importance of the payments system, it would be critical to ensure that the migration to account number portability did not disrupt the flow of payments or introduce greater operational risks into the payments system.”
In light of a need for bank reform, this would have been a worthwhile aspect to develop now, and it is something left in the report for further evaluation so you never know.
Nevertheless, the big question is whether this would improve competition anyway?
Competition is more about the barriers to entry – governance, licensing, capital, technology etc – and hence, these are more mighty areas … that the report also fails to address.
The report mentions competition 414 times, and yet the main recommendations of the interim report:
... have all been watered down.
Then we move onto ring-fencing, which purely addresses the aspects of what to do if a bank fails.
"Structural separation should make it easier and less costly to resolve banks that get into trouble. By ‘resolution’ is meant an orderly process to determine which activities of a failing bank are to be continued and how. Depending on the circumstances, different solutions may be appropriate for different activities. For example, some activities might be wound down, some sold to other market participants, and others formed into a ‘bridge bank’ under new management, their shareholders and creditors having been wiped out in whole and/or part. Orderliness involves averting contagion, avoiding taxpayer liability, and ensuring the continuous provision of necessary retail banking services – as distinct from entire banks – for which customers have no ready alternatives. Separation would allow better-targeted policies towards banks in difficulty, and would minimise the need for support from the taxpayer. One of the key benefits of separation is that it would make it easier for the authorities to require creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to bear losses, instead of the taxpayer."
Living wills and all that aside, the proposal to leave banks as integrated universal operators – good for Barclays – by purely creating a delineation between their domestic commercial and retail banking operations versus their global links is a duck out.
Why?
Because it does not address the issue of why banks fail, but just what to do when they fail. This is a positive thing according to some and yes, sure, it's a good thing to know what to do when a bank fails ... but why not try to deal with the core of failure as, even if we know what to do, a bank failure in its investment arm will still destroy value in its overall operations.
Northern Rock illustrates this well where, as a pure retail bank, it failed due to securitising its loans and mortgages in the wholesale markets. Surely these aspects of potential liquidity failure should have been in the report, and how a bank builds an illiquid position that leads to failure, rather than just what to do post the event.
And no, I'm not forgetting that through a ring-fence recommendation increased capitalisation of both the retail and investment operations will help, but an illiquid position is still on the cards and that is surely a point that should have been the core of the reforms, not the post-failure fall out?
Equally as Sir John Vickers has been saying in today's press calls: “the too big to fail problem must not be recast as a too delicate to reform problem”, but is he reforming or just adding insult to injury?
As the action of ring fencing is a unilateral action not being followed by any other major nation right now, it may be the latter.
Renowned former Federal Reserve Chairman Paul Volcker gets to the heart of the matter when he says that he “completely doesn’t understand the British approach, where they can leave all these questions unanswered. They said they wanted a retail bank in the same holding company as everything else. I don’t know what ‘everything else’ means. Is that not a bank too? It’s just a wholesale bank. Who makes the payment system work – the retail bank or the wholesale bank … the philosophy is you are a group of banks that serve the consumers, the retail customer, and that hold their deposits with the central bank and so forth, does not solve the problem with all the other parts of the financial system. I also don’t believe in a firewall or Chinese wall between them, as you need a very high ring fence to stop the deer jumping over.”
Sir John may claim the fence is high, but it cannot be high enough.
When a Barclays investment bank fails, it will still bring down Barclays Bank as Barclays investment banking operations represents 42% of the bank's total revenues (Royal Bank of Scotland generates a third of all revenues from investment operations; HSBC 27%; and Lloyds Banking Group is unceratin as it has no official investment banking arm).
Meanwhile, the costs are at least £4 billion to implement these reforms and the overall programme has really hammered the value of the UK banking sector in the world's financial markets:
With much of the loss of value this year due to Sir John's committee's actions combined with the Eurozone crisis.
So my key question is that we are living in a world where Basel III, G20 reform, European Union Directives along with American restructuring is creating so much imbalance in the global financial system that adding to such imbalance though unilateral action is questionable.
This is corroborated by the views polled by City AM and Politics Home.
“Among just those working in the banking sector, however, support for the idea has collapsed - and while a small majority of bankers still back a ring-fence, net support have fallen from +46% to +15%. This is surely a reflection of recent rumbling in the press on the dangers of such a scheme to the sector.
Those working in the banking sector, however, thought the idea would make no difference in preventing a repeat of 2008, while thinking it would be actively damaging to promoting UK economic recovery, getting banks lending, as well as keeping HQs in the UK.
All in all, the whole area is a cauldron of trouble and messiness that this report has done little to resolve and, if anything, has fuelled more debate about the UK’s sole stance in the face of global regulatory drives.
So what should we do?
We should ensure that we work in harmony with Wall Street on the capital market reforms whilst implementing domestic policies to lower the barriers to entry for new entrants in banking.
The former may be seen as being difficult, but the #1 objective of the UK should be to maintain UK’s attractiveness as a centre for financial services.
That’s the piece that has been most badly damaged by these proposed reforms.
Luckily, it won’t be implemented until 2019 in order to ensure consistency with the developments of Basel III, so delay was inevitable after all.
A few further comments:
Andrew Gray, UK banking leader, PwC, said: “The report from the ICB today sets out a clear statement of the direction it believes should be followed in order to reduce the risks of banking in the UK, increase competition and ensure globally competitive banking based in the UK. The measures recommended will have a far-reaching impact on the way in which banks operate in the UK in future. A key question for government to consider will be the trade-off between improved financial stability and facilitating economic growth. The core proposals revolve around the use of ring fencing of retail banking activities to ensure both the financial stability of the banking sector, but also to ensure the government is not called on to rescue the banking sector in the future. Ring-fencing on its own does not change the risks inherent in banking (except when it comes to resolving failed firms) and the ICB recommends higher capital levels than those proposed by the Basel Committee. The importance of a strong banking sector as an integral part of the UK economy is clearly recognised, as is the need to ensure the UK remains a globally significant centre for financial services. Overall, these proposals, while not unexpected, will represent a significant change to the UK banking landscape. These are detailed proposals which will take time to digest and, in doing so, more questions will emerge. It is too early to assess the real impact on the UK banks and the wider economy. The real consequences will only become clear once the Government decides what is to be passed into law.”
Michael McKee, Head of Financial Services Regulation at DLA Piper, commenting on the Independent Commission on Banking - Final Report, said: "The ICB Final Report has stuck to the line set out in the Interim Report. Most interesting is the detail of how the ring fence will operate. It will focus on deposits of individuals and small businesses - but this is likely to catch a lot of private banking business too. The ring fence looks like it will be quite a "hard" ring fence - a retail bank will have to deal at arms length with other parts of the group and apply large exposure rules. Moreover the ICB sticks to its guns about a minimum level of 10% capital for retail banks and also wants a lower leverage limit than international proposals. Overall, therefore, the ICB has withstood political pressure from the Liberals but has taken a tough line on the content of its ring fence."
Edward Sankey, Chairman of the Institute of Operational Risk (IOR), said: “We are concerned that the Vickers Commission are proposing economic solutions to what they believe are economic problems. However the IOR believes that the root causes of the financial crisis were failures in people, processes and systems, which are the targets of operational risk management. The proposals will not on their own do anything much to reduce the possibility that failures by people, processes and systems will not again threaten banks and their clients. Time and again we have seen that more sophisticated regulation and restriction leads to more sophisticated efforts to find ways through them, or even plain evasion. We have a great opportunity to make lasting reforms that will not only help to ensure a sustainable and profitable UK banking sector, but also strengthen UK economic growth. Unfortunately the Vickers Commission is focusing on the wrong solutions – solutions that will do little to correct the failures in people, processes and systems that preceded the crisis.”
Andrew Wingfield from SJ Berwin’s Financial Institutions Group commented: “The ICB’s proposals totally focus on retail protection and would impose a cost ahead of any bank failure. The costs of restructuring and higher equity capital levels will place returns under further pressure and the ICB’s proposal will likely be a Herculean task given that people and IT systems are intertwined within banks. The key recommendation (in our view) is around a clear message to UK banks to ring-fence their operations with the tone of the political debate already showing signs of an irreversible process and the Government committing to immediate steps towards implementation. Over the next few weeks, it will be interesting to see whether support for the recommendations wanes as the party conference season approaches. However, the message is softened by a long final implementation deadline of 2019, which is intended to synchronise the timeline with the implementation of new international standards under Basel III. In our view, all Banking reform measures adopted by the UK authorities need to be carefully analysed in order to ensure that the full consequences on the economy and the recovery of banks’ ability to support customers is understood.”
There’s been quite a lot of coverage recently of the British Bankers Association’s (BBA) report about bank branch closures in the UK.
Based upon the stats, UK banks are closing three branches a week. That still leaves over 9,000 branches out there, but they are shrinking.
The reasons are many – cost efficiency, movement away from remote locations, operational overheads, etc – but the clear trend is away from branch and towards automation.
That being said, there are still branches out there and, as folks who read this blog regularly will know, a debate about their value always ends up saying that banks will need branches, just not so many.
But the reason for posting this is two-fold.
One is to repeat the BBA’s stats.
The big names – Santander, Barclays, HBOS, Northern Rock, Royal Bank of Scotland and NatWest – had 9,496 high-street outlets between them in 2009 but 187 closed last year, cutting the total to 9,309.
HSBC closed the most, with 58 of its 1,369 branches disappearing last year; the trend has continued this year bringing this down by a further 79 to 1,290 branches today.
Part of the reason for this is that there are 44 million internet banking users registered in the UK, according to the BBA’s stats. As more and more people are engaged in self-serving online, less and less use branches and hence they are not needed.
That does not quite stack up with the Office for National Statistics (ONS) figures however, which show that around one in four households still does not have internet access:
"In 2010, 30.1 million adults in the UK (60 per cent) accessed the Internet every day or almost every day. This is nearly double the estimate in 2006 of 16.5 million. The number of adults who had never accessed the Internet in 2010 decreased to 9.2 million, from 10.2 million in 2009. There were 38.3 million adults who were Internet users."
Even worse are the demographics, which imply it’s the young and wealthy that the banks now reach whilst ignoring the old and infirm.
For example, among the over-65s, just one in three use internet banking compared with two thirds of those aged 25 to 44.
This stacks up with my recent analysis of the ING Direct acquisition by Capital One, which shows that ING Direct’s demographics are skewed heavily to the young and wealthy, whilst traditional banks are directed more towards financial inclusion and the elderly.
What this means long-term is that some banks will want the old and wealthy, the young and the poor; whilst other banks will want the young and wealthy, the old and the digital.
These aren’t simple demographics however.
Banks will appeal to different audiences based upon their channel mix, service offer, customer engagement in person and remote. Some will be heavily branch oriented whilst others remotely focused, but they will each find a niche.
The only change will be that there will be far more niche players, rather than the homogeneous branch based grouping we have today.
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