UK News

from Breakingviews:

RBS has tough fight to put value in wholesale arm

By Margaret Doyle

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Royal Bank of Scotland, the state-owned UK lender, is cutting its investment bank, again, and is merging it with its international payments unit. The new division aims to make more than the 12 percent groupwide cost of capital. It must do at least that to have any value. But it is a big ask given regulatory and political headwinds.

The cash equities business was never a strength for RBS - not even after the purchase of Hoare Govett which came with the disastrous ABN Amro acquisition of 2007. The fixed income business is stronger. Indeed Greenwich Capital Markets, acquired with NatWest, is something of a jewel in what is otherwise a pretty tarnished crown. Helped by Greenwich, America contributes the largest share of RBS’ investment bank revenues, almost one-third of the total. It also earned a healthy 24 percent return on equity in 2010.

Sadly, the strengths are shrinking. Greenwich was a big player in now-diminished U.S. mortgage trading and returns will come under further pressure because Basel regulations require RBS to assign more capital to fixed income. Moreover, new UK rules that will ring-fence retail banks from riskier wholesale arms raises the latter’s cost of funding. Analysts at Credit Suisse forecast that, without restructuring, return on equity at the investment bank would have shrunk to 6 percent.

The restructuring outlined on Jan. 12 might be enough to boost returns above the 12 percent. But for the time being, potential buyers are likely to bid only at a sharp discount to the 15 billion pound book value of the investment bank. If RBS can show it can jump the 12 percent cost of capital hurdle, it might find buyers ready to pay a more acceptable price. But there is still plenty that could go wrong. UK politicians’ propensity to want to bash bankers could throw a spanner in the works, though commercial imperatives - for the time being at least - appear to have the upper hand.

Soldiering on with the investment bank may be RBS’ best option, but that doesn’t mean it’s an attractive one.

from Breakingviews:

UK banks need government to solve funding squeeze

By George Hay The author is a Reuters Breakingviews columnist. The opinions expressed are his own.The Bank of England is tooling itself up. The UK central bank announced on Dec. 6 a new facility to help domestic lenders if the euro zone crisis causes a fully-fledged freeze in short-term funding markets. But banks may still need more help.

The BoE already has two ways to combat liquidity squeezes. It allows banks to borrow against liquid collateral for three or six months through its Indexed Long-Term Repo (ILTR) auctions. And it allows desperate banks to swap illiquid collateral for gilts for up to a year via its Discount Window Facility (DWF) – in return for a fat fee and big haircuts.

In some senses, the new Extended Collateral Term Repo facility (ECTR) is a halfway house. It uses a similar auction structure to the ILTR but allows banks to pledge DWF-style collateral for a minimum fee of 125 basis points over the BoE’s base rate. As such it goes some way to filling the gap left by the now-defunct Special Liquidity Scheme (SLS), the crisis facility which allowed UK banks to swap illiquid mortgage-backed securities for liquid Treasury Bills for a period of up to three years.

However, the ECTR will only last for thirty days at a time. That may help avoid a collapse, but won’t provide much long-term reassurance. Contrast the BoE’s approach with the European Central Bank, which is currently being pressured to offer facilities that last for two or even three years. Even though the UK is not in the euro zone, its banks are suffering from the same long-term funding drought as their rivals on the continent. That’s worrying because, according to the BoE’s own figures, UK lenders have to roll over 140 billion pounds of term funding next year.

But the central bank has rightly judged that providing long-term bank funding is not its job. That is a task for the UK government, which could re-open its Credit Guarantee Scheme, a 250 billion pound programme that allowed banks to weather the 2008 crisis by issuing new long-term debt insured by the state.

Unlike many European countries, a UK sovereign guarantee still carries credibility – 10-year gilts are currently yielding just 2.3 percent. Now that the BoE has donned its fire-fighting kit, HM Treasury should tool up as well.

from Breakingviews:

Bank capital debate obscures more urgent reform

By Peter Thal Larsen The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON -- Before the crisis, financial regulators were often accused of being in thrall to bankers. Today, they are in greater danger of being captured by academics. British boffins have recently got bogged down debating whether banks should hold significantly higher levels of equity. Even if the idea is right, it is not remotely realistic. Policymakers should concentrate on more modest but practical reforms.

The latest debate was started by David Miles, a finance professor and member of the Bank of England's interest rate-setting committee. Miles applied the Miller-Modigliani theory of capital structure to banks, and concluded that the economy would be better served if they held capital equivalent to 16 percent to 19 percent of their risk-weighted assets. Basel bank regulators have agreed a 7 percent ratio.

Miles's theory has been endorsed by both Mervyn King, the BoE's governor, as well as Adair Turner, chairman of the UK's Financial Services Authority. But in practical terms, it is a non-starter. For many banks, complying with the latest Basel edicts is already a stretch. If their ratios were whacked up to the levels that Miles proposes, equity investors would go on strike. That would force banks to raise capital from governments, or rapidly shrink their balance sheets, triggering another credit crunch. Turner acknowledges this, arguing that today's regulators have inherited "a half-century long policy error" which cannot be quickly reversed.

The debate risks overshadowing a more modest, but more pressing reform: making big, systemic banks hold an extra capital buffer. The G20 group of leading nations has approved the plan, and Basel recently agreed how it would work. But Germany and France are resisting; the United States appears to be wavering.

Some countries have decided to move ahead. Switzerland plans to hold its two largest banks to higher capital standards, while Ireland, Spain and Sweden have introduced higher ratios across the board. Britain's Independent Commission on Banking may take a similar approach when it reports in April. But in the absence of a global agreement, banks will try to arbitrage the rules. Policymakers should concentrate on securing a global deal, and leave the theoretical debate to the academics.

from Funds Hub:

Utilities vs banks: The evidence

Alpesh Patel caused quite a stir on Britain's Radio 4 this morning. The CEO of boutique investment house Praefinium Partners argued that Bob Diamond was on "a suicide mission to bring down capitalism". No word yet from the Barclays CEO on that one.

Maybe that was just the line his PRs had promised to the BBC producers to get him on air, though, and there is more logic to Patel's more substantial point about value creation in the banking sector in relation to bonuses and pay.

"What concerns me is higher salaries for what? In 14 years they have managed to add absolutely zero to the share price of Barclays... you’d think someone in banking would know which direction a share price is supposed to go in."

Perhaps Patel's most enticing comment was to suggest that utilities CEOs would make better banking executives, saying that Diamond should call on BG Group's boss Frank Chapman to step in "to run [the] business properly and help those share prices go in the right direction because it helps pensioners and it helps consumers who might be shareholders."

So just how well are those utilities chiefs doing against the.. err... morally-complex banking execs? One of our graphics gurus has knocked up the below to show how total returns match up in a few sectors. Draw your own conclusions.

Satisfied bank customer?

We’re wondering who is.

We see bailed-out banks returning to profit at the same time as headlines about others still refusing to lend. The personal finance pages are bristling with stories about mortgage famine . Big businesses may have been overcharged for banks’ services in raising new equity capital;  lending to smaller businesses is down, and the interest offered on savings is so derisory, would-be savers are being pushed into taking more risk to try to preserve their capital.

What are we missing? What is the magic ingredient that makes you as a customer happy with your bank? Or are we right in thinking “customer satisfaction” is a figment of executive imagination? Tell us your stories.

from The Great Debate UK:

Not much stress, not much test

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:

“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”

Imagine the effect of this question on the poor guy sitting there eating his meat and two veg. It must often have been enough to make him choke on his roast potato there and then – maybe even die on the spot.

Not being in the business of selling life insurance, the European bank regulators were unwilling to take any chances with the client’s cardio-vascular system, so they have restricted themselves to asking the question:

“What would happen if the client had the flu and needed a couple of weeks off work?”

from The Great Debate UK:

Banks, borrowing, bonds and Britain’s budget

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.

There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.

First, if anyone thought the electoral cycle was dead, the run-up to the last election should have disabused them.

The old wisdom is still valid: get the pain in early, keep the goodies for later, when the next election is in sight. In the present case, it is reinforced by the more Macchiavellian consideration that the more blood is spilt on Tuesday, the less attractive will be the prospect of an early election and hence the stronger the bonds holding the coalition government together.

The more important reason for cutting the deficit drastically at the outset is the message it sends to the markets that we are not going to exploit our position outside the Eurozone to inflate away the debt.

Send in questions for city minister Paul Myners

City Minister Paul Myners is among a handful of people with first-hand experience managing the financial crisis over the past year.

On Dec. 16, at 9 a.m. British time, Myners will deliver a speech at an exclusive Thomson Reuters event in London on a proposal the government says will strengthen the City’s role as a global investment banking hub. He will also announce a series of policy measures designed to enable an effective resolution for failing firms.

Join a debate with Myners at 8:30 a.m.

Myners was appointed Treasury financial services secretary in October 2008, and worked on the bank rescue package. Since then, Myners has played a leading role in the debate over bank bonuses.

What questions do you have for Paul Myners?

What do you think of the bank charges ruling?

Banks have won a two-year court battle, dealing a major blow to hundreds of thousands of customers seeking to claim back billions of pounds of what they say are unfair overdraft charges.

The new Supreme Court found that the Office of Fair Trading cannot use customer protection rules to investigate whether the fees were levied unfairly.

The landmark ruling in favour of seven banks and one building society overturns two previous rulings that said the OFT had the power to investigate the unauthorised overdraft fees because the charges fell under the scope of consumer contract law.

The Supreme Court, however, said the charges form part of the fees for current account services and could not be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations.

Consumers now face the choice of giving up their claims or taking on the might of the banks through individual claims, which could prove costly. To read more on how the decision affects you, read this guide from moneysavingexpert.com

What do you think of the ruling? Have the banks behaved unfairly and therefore have been made to pay the money back, or is it right that consumers should pay the price for breaking the terms and conditions of their current account?

Too big to fail? Guerrilla central banking and the last resort

Deciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.

Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.

The Bank said “this was a dire emergency” and Downing Street called the secret lending of taxpayers’ money in the Autumn of 2008 “a powerful reminder of how close the banking system came to near collapse.”

In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.

“It is astonishing that this was kept secret for over a year,” said Vince Cable, finance spokesman for the Liberal Democrats. “The government has treated taxpayers like children while expecting them to foot the bill.”

John McFall, Treasury Committe chairman, said the sum caused “a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this.”

“It’s Enought to Make Anyone Feel Queasy,” was Ian King’s headline in The Times. “Any More £62 bn Loans You Haven’t mentioned, Merv?” asked the Daily Mirror, addressing itself to Bank of England Governor Mervyn King.