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.