Making banks safer – UK style

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

In Britain, an independent Commission on Banking, set up to determine how to make the banks safer, has recommended that retail banking be ring-fenced within a bank from its investment banking operations by having the latter in a subsidiary.  Some people had called for a break up of the two sides of such banks – a sort of latter day Glass-Steagal.  The thinking being that investment banking subsidiaries would be allowed to fail while retail banking would be well capitalized and benefit from implicit (or explicit) government support.  However, the commission did not go this far.  There had been a certain amount of scaremongering by banks and others that some banks might move their head offices out of Britain and with them thousands of jobs. 

Quite apart from unaddressed issues such as where to draw the line between the two businesses as there are many possible grey areas, or when can capital flow down to the investment bank or be required to flow up to the retail bank, is this a useful approach in principal?  What was seen as the trigger for the global financial crisis was the demise of Bear Sterns and this was a pure investment bank.  If a similar circumstance arose again, would such an operation be allowed to fail?  (Actually the true cause of the crisis was bad lending decisions facilitated by an environment of great liquidity enhanced by factors such as opaque derivative structures, weak regulatory oversight, etc.)  The problems of British banks were caused largely by straightforward bad lending decisions, without much help from investment banking operations and opaque derivatives.  How would such ring fencing helped? 

How did markets react to the ring-fencing recommendation?  Shares in the two biggest banks with major investment banking operation rose significantly on the news.  Wisely, banks said they do not like the recommendation.  Wisely, because there is a negative mood against banks by public and politicians.  With that background, it would not be politically astute to gloat when you may suffer a slight inconvenience but have most of what you want.

 

Politicians Are Risk Managers

by Stephen McPhie CA

Partner RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

Tuesday and Wednesday of last week saw budgets delivered by the finance ministers of both Canada and the United Kingdom.  To be more accurate, the budget was delivered in Britain by the Chancellor of the Exchequer.  As an aside, the British Prime Minister also has another title which is First Lord of the Treasury.

Both finance ministers had different agendas.  In Canada, the trick was not to get blamed if the budget was defeated resulting in an election call (which is indeed what happened but on a different matter).  In Britain, it was an imperative not to force the Liberal Democrats to abandon the coalition government, thus causing an election.  In both cases political timing is all-important.

Actually, in the latter case, the hard work was already done late last year and this budget only really consisted of some tweaking.  However, in both cases, a major consideration was essentially hedging against external factors that could not be directly controlled but which could result in major adverse consequences, at least for the finance ministers concerned and their political parties.  Politicians are masters of this type of risk management - pursuing sub-optimal agendas and policies to manage a political outcome.  In other words, taxpayers and the country as a whole pay an option premium on behalf of politicians.

There are often a lot of things not to admire about politicians and their methods, but sometimes you can admire some of their risk management abilities.  Can many company executives say the same about how people would see their companies’ risk management capabilities?