Monday, February 16, 2009


Long before the credit crunch, most customers hated most banks. They had not always done so. It is a phenomenon of the past quarter century of computerising customer relations. It is something everyone knows that computers have no feelings and limited ability to emulate empathy to "put the customer first". The automation of banking delivered conveniences like credit cards, ATMs and internet banking (for a few) but otherwise took negotiable human judgement out of banking relationships at the same time as banks covered their shop-fronts with the rhetoric of customer service mission statements. What was less apparent was how this did the same in financial markets. This technological revolution in retail finance was also accompanied by computerisation of financial markets pricing and trading i.e. the mathematical miscellany of credit-scoring, crude ratio-driven ratings models and poorly-tested algorithms ruled, but are now so discredited the only reason they survive is it is too early to have designed replacements. The derivative and stock markets too will have to change to do more, but more for quality and less for volume, more about regulation and less for commercial profit. Now that all can see just how hypocritical banks risk management has been, the fact and fiction of banks, the 'emperor's clothes', and all the other derision heaped upon them of hubris and imagining the only way is up and so on, essentially that of all the risk factors banks should have been assessing the biggest single risk factor was themselves; they could risk assess anything except their own business! Banking appears to be the single biggest risk factor in our economies when, except for Governments, it should have been the least risky. There is no bottom to how angry the general public is about such enormous hypocrisy, and if they are not careful to be seen to be on the side of the general public the next for the guillotine will be the politicians! Those bankers who ask themselves why politicians are giving them such a hard time over taxpayer bailouts need to consider this carefully and look hard in the mirror. Even when the smoke has cleared how and when will banks be able to restore customer trust and loyalty? There are exceptions, but not many. Most banks follow a bovine herding instinct, which has its good but also its bad aspects. Among the world's biggest banks apparently HSBC stands out from the crowd, hopefully more will follow suit and hopefully too HSBC won't lose its present state of grace.
Mutuals and trustee savings banks, any that make a virtue of ethical values such as the Co-op Bank (where I was proud to be Head of Credit Risk) or those who stuck to traditional values in banking and mortgage business such as Nationwide or the many regional and local banks in the USA and savings banks in Europe that did not let themselves get caught up in structured finance - though the truth is that hardly any were totally free of this. In Ireland, Belgium, '68 style riots in France, street protests in Greece, Iceland, where next will public anger break-out demanding not only the heads of the bankers, but also the central bank regulators and even Government ministers? Governments are being unseated and even a country potentially sundered such as Belgium. In Ireland, a new law is brought in today to allow the parliamentary finance committee to subpoena bankers who if accused of wrong-doing will be arrested by the police. But the general public appear to want to hang some of them from the giant spike in O'Connel Street, that high-minded heavenward symbol of progress and success, now popularly known as the "binge syringe". In France, as to some extent in all countries the governments are being targeted for some if not all of the blame. In the USA, the FBI have made over 200 arrests of senior managers of financial firms and there are countless lawsuits and official inquiries that will undoubtedly lead to more. At the weekend in the UK the media reported that legal actions by shareholders of the banks are being considered. But it will be some time yet before European authorities see the advantage of arresting bankers as a necessary step to restoring confidence. When the time comes for governments to return bailed out banks and those that were part- or wholly- nationalised to the private sector, there will not be a single exec or non-exec Director left on the boards who was there before the credit crunch! And, for extra good measure to evidence just how cleaned up the banks are not a few of these directors will be doing jail time. If the Americans can do this so too will the Europeans. There will be no choice in the matter! Regulatory supervision has been weak when it came to enforcement of the laws and rules - that latitude given to banks to take a hint and fix their own mess will end. Other dramatic changes will include the following:
1. banks prohibited from trading their own books in the financial markets for profit
2. restrictions to ensure clearing banks stick to traditional 'transition-mechanism' banking
3. ratings agencies gone and replaced with econometrics-based financial risk modeling
4. money, bond and credit markets operating in regulated markets only, maybe FX trading too
5. stricter training and licensing of bankers and more regulatory enforcement
6. structured financial products, securitisations, will continue but in basic 'plain vanilla' mode 7. funding gaps between loans and deposits will continue subject to capital reserves (regulatory tax on shareholders capital and on cost of loans)
8. banks expanding their assets will have simultaneously to expand their capital
9. Tier 1 reserves for the banking book, Tier 2 for the trading book and economic capital for the the total of economic and systemic risk = probably 8% ratio to gross assets!
10. 'Shadow-banking' will be dragged into the light and investment banking separately licensed 11. Bancassurance will be similarly split
12. Laws and rules pertaining to shareholder voting rights will become more 'democratic' and ballots become 'secret ballots' and all subject to tighter legal and regulatory scrutiny
13. Working capital statements and liquidity risk (funding accounts and liabilities breakdown) will become more rigorous and more transparent
14. Auditors via IFRS7 will also audit risk statements and capital reserves and economic capital models will become as central as balance sheet summary statements
15. New risk accounting systems will replace legacy general ledgers
16. Economists will have seats on bank boards and top executives will lose the power to choose non-execs, this going to regulators and shareholders
17. customer-service will be 'rediscovered' in new ways that smack of 'old style' banking and less like filling stations 18. much of wealth management and business banking will be restored to branch banking and banks will look less like shops, hotel receptions, or clinics and more like art galleries or grand chapels again, anything to restore some sense of moral and ethical superiority that was so needlessly and foolishly squandered in the last quarter century.
19. Intermediation for up-front fees like up-front bonuses and customer bribes will all be severely cut back. Mickey mouse investment products will have to go.
20. It won't be quite like an imposition of Sharia law to western banking or abolition of usury, but for many of today's big money movers and shakers it will feel like that.
21. My days of signing off a $2.5bn securitisation deal or a £100m political loan without a second signature and a committee approval are gone!

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