What is wrong with the world’s banks and their regulators?

The last year has seen an enormous amount of turmoil in the world banking industry as scandal has followed scandal. It is as if they have been a completely lawless sector which has done pretty much as it wanted. This also tells us that many regulatory systems have failed completely as the list of frauds prevented is very very short and the list of frauds missed gets ever longer. If we look at the UK’s Financial Services Authority (FSA) with its 4,000 employees and annual bill of £492 million (2011/12) we see an organisation high on expense and low on effectiveness. This sadly appears to be the regulatory business model where the ”light touch” model did not apply to costs!

Unfortunately consumers end up paying for this as the UK FSA gets it’s money this way.

Our budget is met from a levy on the firms we regulate.

So the cost is in the price of the financial products we buy and use thus breaking the transparency principle it sets for others!

Mis-Selling of swaps to small businesses

This is a slightly bizarre situation where small and medium-sized companies which wanted to take out loans were forced to also take out an interest rate swap by the bank lending them the money. Supposedly these were to hedge the risk of the loan but in practice they have often led to losses for the business concerned and some of these losses have been particularly large. Some of these products did not even match the terms of the underlying loan.

As ever the regulator is like the US Cavalry units who arrived at Little Big Horn to find that the 7th Cavalry under General Custer no longer existed. But finally the UK FSA is on the case and today it has declared this.

The FSA looked at 173 sales to non sophisticated customers and found that over 90% of the sales did not comply with at least one or more regulatory requirement.  A significant proportion of these 173 cases are likely to result in redress being due to the customer.

However if you note the point below in its review you might reasonably ask where the FSA has been in the last twelve years.

During the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.

Please remember that as self-congratulatory press releases follow each other. Also the fundamental issue is that banks pursued commission for these products and hence bonuses and profits to the detriment of the consumer. Those responsible should face sackings and in some cases jail for fraudulent behaviour and by this I mean senior management not those at a more functionary level.

Italy has its own growing derivatives scandal

It was only on Monday that I discussed the worlds oldest bank thus.

Will the bank survive? Maybe but these sort of things rarely happen in isolation and I fear further revelations going forwards

Well we have not even got out of the week and and I am being proved right as there are more potential derivatives losses looming for Banca Monte dei Paschi di Siena as two other transactions join “Project Santorini” under investigation. As I leave the investigators to their task we find that yet again there are serious regulatory issues too for the Bank of Italy and its head at the time Mario Draghi. Ah yes, the same Mario Draghi who is in charge of setting up a Europe wide banking regulator in his role as President of the European Central Bank (ECB). What could go wrong?

Also where one bank leads we tend to find that others have followed.

The ECB LTRO Repayments

Last week some 137 billion Euros of the first Long-Term Refinancing Operation was repaid and if we project a similar amount for the second LTRO at the end of February perhaps some 30% to 35% of the original (just over) a trillion Euros will be repaid. A sign of strength as help in a crisis is returned? Actually I worry about the obvious consequence which is that banks appear unable to turn a profit on liquidity loaned to them at only 0.75% per annum! Indeed thoughts that Europe’s banks may not be as strong as often claimed have got support from today’s bank figures. Take a look at this from Bloomberg on Germany’s Deutsche Bank.

The loss of 2.17 billion euros, the biggest in four years, was about eight times larger than the consensus analyst forecast. It compared with a profit of 147 million euros in the year-earlier period.

With the US economic growth figures coming in at an annualised -0.1% in the fourth quarter compared to forecasts above +1% it has been a bad 24 hours for forecasts has it not? Let’s face it they were starting from a low base too. Also with Deutsche Banks central role in the German economy these numbers may provoke one or two questions about that too.

There are issues too in today’s numbers for Santander of Spain

Net income rose to 401 million euros ($544 million) from 47 million euros in the year-earlier period when it took one-time charges including 1.8 billion euros to cover real estate losses,

It would appear that “one-time charges” need to make an appearance in my financial lexicon as if we add them to last year’s numbers we would have seen net income towards 2 billion Euros. Also tucked away was a continuing problem for Spain and her economy as well as Santander.

The bad loans ratio at its Spanish branch network climbed to 9.65 percent in the fourth quarter from 9.56 percent in the third.

So the repayment of LTRO money which amounted to 24 billion by Santander does not seem to represent much of a return to strength.

The Libor Scandal

This has not gone away as it looks like the Royal Bank of Scotland will be the next bank to be hit with heavy fines for its manipulation of the London Inter Bank Offered Rate or Libor in the past. As UK taxpayers are now majority shareholders there is an element of us fining ourselves although the fines from the United States represent a transfer from us to them. It remains in doubt as to whether there will be any punishment for those who were responsible for this as opposed to the UK taxpaying population who were 99.999999999% innocent.

The Financial Times in a quote hinted at a deeper type of lawlessness.

the (United States) Justice Department has the power to file criminal charges without the bank’s blessing

Good to know isn’t it? But it does beg a question……..

Payments Protection Insurance

This is an ongoing scandal in the UK which resulted from insurance being sold on loans to personal bank customers. In itself that was not an issue but the fact that such protection required you to have a salary as in being employed did not stop bank salesmen and women eager for commission ignoring that fact. So it was sold to pensioners and the self-employed too in spite of their inability to ever claim on it. As ever nobody in the banks compliance departments or the regulator seemed to spot it at the time which reminds me again of the cost of all this useless regulation.

It is easy to forget but the repayments are ongoing for this.


It has long been one of the themes of this blog that there will be no sustained financial recovery until we properly reform and remodel our banking system. I have been reminded of this by the recent economic growth figures we have received. In the last quarter of 2012 the UK economy shrank by 0.3% and the Spanish one by 0.7% and even the country the mainstream media has paraded as a success story the United States has shrunk too.

As I look at the banking sector of the world and see the ongoing scandals I fear worse to come and feel that we are being drip-fed bad news. The trouble is that such bad news is poison for our economic system and we need proper treatment rather than leeches bleeding us dry.

Back on the 27th of September 2011 I warned in detail about the dangers and gave an alternative way forwards which I continue to believe is a way out from our current malaise.




This entry was posted in Banking Reform, Banks, Euro zone Crisis, GDP, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Scams, The US Economy, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
Subscribe Find an Adviser
  • Andy Zarse

    Hi Shaun, I was only talking about the FSA’s multiple failures at breakfast this morning with some colleagues in Manchester. We agreed the FSA offers consumers appalling value for money.

    By the way, last nights game was terrific, Saints came very close to snatching a point and I speak as a Villa fan with a soft spot for saints. Certainly closer than the FSA come to providing effective regulatory regime!

    Finally I’m sat on a Virgin pendolino doing 125mph, I cannot imagine how travelling any faster than this for £37bn represents value for money. Maybe I should write to the rail regulator…. Oh wait!

  • MickC

    Yes, the banks and banking system needs urgent reform.
    But- “ain’t never gonna happen”!

  • Anonymous

    Hi Shaun

    An excellent post today. You are correct to ask for accountability for the bankers and FSA. We should also ask for criminal charges against the politicians who nationalized RBS.

    More happily I note that the Icelandic taxpayers have won a court victory that makes them not liable for Iceland based banks losses. If only the UK politicians were as honest ….

  • Anonymous

    Bank bonuses still being paid if Goldman Sachs et al are the norm?

  • Drf

    The FSA was set-up under the auspices of Gordon Brown. What else could you possibly expect from such a lame duck?

  • Rods

    Hi Shaun,

    Another excellent blog.

    The FSA meets all the requirements of modern Government. It is totally unaccountable to the industry it serves, it can set whatever fees it likes, it has the modern box ticking mentality, as long as you tick the correct boxes, everything must be alright, we know they are very good because they are always telling us so and because they are so good they well deserve their bonuses, just ask their PR department!

    This could equally be applied to the water regulation, where profits for a monopoly can be up to 25%, but they are still allowed to make increases above inflation. There is never any shortage of water in this country, just a shortage of infrastructure to deliver it where it is needed.

    The energy companies also lead a merry dance around their regulator and claim how little they make from consumers, but when you see the vast profits other divisions make, you have to ask the question: How transparent are their accounts and their overhead allocation?

    As you have quite rightly pointed out in the past the same applies to the central banks. I know you concentrate on economics, but the real crisis we have in all Western countries is a crisis of government and democracy. Big expensive Government does not work. In Victorian times to administer 25% of the globe took 40,000 civil servants!

    Coming back to the banks, why should they care? They get their bonuses, nobody gets prosecuted and if they make a complete mess of things the tax payer will bail them out. However bad they are they are not going to face increased competition, the FSA and regularity framework makes it very, very difficult and expensive for new entrants.

    In the meantime, all the countries in this situation have had virtually no growth or less for the last 5 years, while China grows by 30% and our MPs think they deserve a 30% pay rise.

  • DaveS

    Yes Brown was an idiot, but he wasn’t clever enough to create the system – he just pushed it to its limit.

    The system appeared under Thatcher with her so called big bang ( I don’t want to get party political – as far as I am concerned they are all as bad as each other). However, she didn’t create the system either – rather she was just copying Reagan style policies and these were copied all over the world.

    Clearly Reagan was the biggest idiot of the lot of them so it begs the question – how on earth did this happen ?

    I think sometimes we can get distracted. For instance trying to blame 20 odd year old, probably not very bright traders on money market desks who were doing the same as everybody before them and everybody around them. I don’t want to excuse their actions but really they were tiny cogs in a huge machine which was probably forged way back in the 70′s.

  • forbin

    How can you decry St Ronnie the Wrong and St. Maggie the Mad?

    they saved the world!

    ooops perhaps that was Bodger Brown !

    Only the history books will tell us of this “clown of clowns” debacle of his reign

    ( /humour off)


  • JW

    Since the dollar became truly ‘fiat’ in the 70s.

  • JW

    What you can’t do with transfer pricing can be written on a postage stamp.

  • JW

    Hi Shaun

    In the States, so whilst I read cannot always post ( in time).
    Here the response to the Q4 numbers is completely split along political lines. Most telling I think is that the -0.1% cost over $320bn in extra debt, some return!
    Inflation is roaring ahead , albeit not in the ‘official’ numbers. Food seems 20% higher than last year, the price of a lettuce went up 25% overnight this week.
    Great blog today.

  • Justathought

    Please you might insult more than half of the UK population…The great men Gordon Brown, Tony Bliar etc…were only the reflection of their electorate… Idiots or conditionned sheep?? loll

  • Justathought

    Hi Shaun,

    Mario Draghi who is in charge of setting up a Europe wide banking
    regulator in his role as President of the European Central Bank (ECB).
    What could go wrong?
    Rest assure that nothing could go wrong for El Senior Mario Draghi, hope this will ease a bit your concern about the man… :) (Sacarstic approach).
    Could you please in the following posts explain your views on the bonds market, it seems something is brewing and moving at fastest speed. Thanks in advance
    Kindest Regards

  • Anonymous

    Reagan had no responsibility for the competence and effectiveness of the FSA. No organization can be ahead of the curve 100% of the time, but when fraud occurs we can reasonably expect a competent regulator to prosecute those involved. The FSA is not fit for purpose and it’s for Cameron & Clegg to try to improve it.

    Blair & Brown also setup OTELO and neutered OFCOM. OFCOM worked well – OTELO is toothless and useless, expensive and delivers little value to the consumer. Their track record shows they advance the interests of the very wealthy at the expense of the masses.

  • John

    Shaun, an interesting blog and very much to the point as I fear we are in a quiet period until Germany has finished its elections. It is worrying that, over many years, all political parties have failed in the areas you have highlighted. Our democratic processes seem to be failing to ensure justice is seen to be done to those who can be proved to have done wrong. Current attitudes by those in authority may just lead to growing distrust and eventually confrontation. Turbulent times seem set to continue as those in power seem incapable of finding a way to revive our economy – they simply revive tired old excuses, and they even seem to be allowed, by the media, to get away with that.

  • DaveS

    The FSA didn’t regulate sub-prime lending in US.

    The same irresponsible explosion of bank balance sheets was happening all over the developed world. Why ? because thats what globalisation demanded – no debt, no growth – thats exactly what we are seeing now.

    The FSA did its masters bidding – no more, no less – question why the masters wanted banks effectively unregulated. Question why the central bankers not only stepped aside but ramped up massive asset bubbles with excessively low rates.

    Blair & Brown were incompetent but they were were just bit part actors on the stage in the third act of a long running play.

    Question who wrote the play,

  • DaveS

    Might as well insult the other half then – Thatcher was just as incompetent and personally responsible for the ERM debacle.

    Strangely Blair, Brown and Thatcher were all half-mad egomaniacs – suppose it does say something about the electorate then…..

  • geoffk

    The FSA were told numerous times that mortgage fraud was going on in a massive scale….Look at this from 2003.


    Housebuyers are being encouraged to break the law in order to obtain huge mortgages, the BBC has discovered.

    Brokers, and even banking staff, have been telling buyers to lie about their incomes to get bigger and bigger loans.

    But what many don’t realise is that they could end up in jail.

    And these underhand tactics could also be the reason why house prices have gone on rising for so long.

    On Monday, the mortgage lender Birmingham Midshires suspended three
    mortgage advisers while it investigates allegations that customers had
    been encouraged to exaggerate their salaries on application forms.

    The company, owned by Britain’s biggest lender HBOS, has also suspended
    sales of so-called “self-certification” mortgages, where borrowers
    certify their own incomes without the need to supply payslips.

    The allegations have been made by the BBC’s Money Programme, which will be screened on Wednesday evening.


  • economymad

    Hi Shaun, again, good article. Do you think that you could do a post sometime about derivatives as I know that a lot of people really don’t understand them (including me) and the likely impact this could have on current and future economic situations.

    Keep up the good work


  • Anonymous

    Hi Andy
    From the highlights on Match of the Day it looked like a game where Southampton gave it a good go and even Fergie spoke nicely about them. As to regulators the Office for Fair Trading has also covered itself in shame with its enquiry into fuel prices.

  • pavlaki

    I know this is not the current topic but thought you mind find this article relevant to your earlier comments about Spain


  • Anonymous

    Hi DaveS
    I still remember Cecil Parkinson introducing the Big Bang inbetween going in and out of government. For younger readers he was as scandal prone as Peter Mandelson became more recently.
    At the time I was a bit more than a graduate trainee although with the crash of 87 etc I learned fast I think! My point is that we ruined some good quality British firms which was a shame but it did not in itself lead to today as for example the repeal of Glass-Steagal under President Clinton has turned out to be a major error….
    So a collection of mistakes made across the political spectrum and here we are.

  • Anonymous

    Hi Expat
    Thank you. The whole RBS issue is a can of worms from the rights issue so close to collapse to us nationalising it at a fiar bit above the market price. Even a believer in innocence until proven guilt like me is willing to suggest that in a proper trial more than a few would go behind bars.
    Problems remain for Iceland but they are starting to get some successes aren’t they?

  • Anonymous

    Hi Chris
    Yes but some are being cut back. in fact I have been contacted today about a back which has cut back heavily and I will find out some more detail tomorrow on this.

  • Anonymous

    Hi JW
    Thanks. I watched it live and saw the surprise the numbers created. To my mind then there was an effort to explain it away and return to the consensus view that the US is okay. However as we have discussed many times the evidence is much more patchy for the US than many claim.
    Personal income shot up (Partly due to dividend payments) to which some wag pointed out yes it did that in early 2008 what happened next?

  • Anonymous

    Hi Justathought
    I will bear that in mind for future posts and to explain briefly my view I think we are on a razors edge in a few areas right now and am waiting for the next chess piece to move!

  • Anonymous

    Hi economymad
    Thanks and I will bear your suggestion in mind. I was going to add a bit on them to todays update but there wasnt really space without doing an enormous post.

  • Cookie Monster

    Hi Shaun,

    Would Sir Fergie have been so nice had they lost?

  • HarryA

    Hi Shaun,

    If you look at Q3+Q4 together we get roughly 1.5% growth annualised, which seems about right for the market conditions and economic data in the summer. Off course there was election to be won midway through, so the Government spending figures are telling.

    As a cynic I love that the Fed has blamed Sandy for the poor show; the confidence indicators and production numbers were so much more positive at the time. They were “massaged” then and are being called “transitory” now; anything to prevent the market realising…

    Debt per capita is increasing, income per capita is not keeping up with inflation and jobs are not coming back en masse. Most people here can sense what that will mean for the real economy, irrespective of the non-tax paying corporates report and how the speculators react.


  • Drf

    Hi DaveS,

    You seem to have gone off on a mystery tour here? The original comment concerned only the FSA. That did not “appear under Thatcher” with the Big Bang, not that I have any admiration for Thatcher – quite the reverse! Nor did Regan have anything to do with the setting up of the FSA.

    The FSA was created directly under the auspices of Brown. Until then it did not exist; in fact I think you will find that he took some previous responsibilities and powers away from the BoE and moved them to the FSA; they are shortly going to be moved back to the BoE it seems. We shall see whether that improves the regulatory situation – I doubt it will.

  • Anonymous

    Hi CM
    I have to confess that I had been wondering that myself!

  • Anonymous

    Hi Harry
    Ah “transitory”! That means inconvenient and likely to last for a long time in my financial lexicon….