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I suspect that not many of us will be sorry to say goodbye to 2009. But, after watching all those reviews of the year, I’d rather look forward to 2010.
So, is 2010 going to be an easy year?
No - but it can be a year in which the UK is honest about our problems and, by addressing them can properly start the economic recovery.
2009 was the year the financial system was stabilised. Now we have a recession to deal with.
The recession is evidently partly a result of the crisis. But the recession was always going to happen. The Chancellor was honest when he said in his major economic statement in early December – the Pre budget Report – that three quarters of the deficit in the public finances is “structural” resulting from public spending. The balance of 20 to 30 per cent is a consequence of the financial crisis.
Most banks operating in this country have not had – or needed - Government or tax payer assistance. But huge numbers continue to be bandied for the support given to the banks. And, while what has actually been spent is still big, it is much less than the headlines would have people believe and primarily made up of two things: the shareholding in RBS; and in the assistance given to Lloyds to stabilise HBOS. And, don’t be under any illusion: this is not sleight of hand ‘free’ money – it is a loan which will be paid back in full and the taxpayer will make a profit. Rightly so.
The UK is not unique. All countries have had to intervene to stabilise their financial markets. And, as everyone has had difficulties, taxpayers in other countries have had to bail out many more banks than here. But in no other country has help been given in as open and public a manner so it is easy to think that others have had fewer problems. This is simply not the case.
UK banks are, however, well aware they are disliked. They know they have few - if any – friends. They understand they are held responsible for the whole problem - even when this is manifestly not the case. Which is why, regardless of the rights or wrongs of the argument, the industry addressing not just the third of the economic problem that can be laid at its door but is seeking to find ways to finance the UK recovery and doing its bit to help resolve the other, greater share of the problem.
So, what are the main issues?
I believe they can be typified by: responsible change; proportionate reform; and sustainable institutions.
Responsible change will help us meet the demand for finance - particularly from businesses – that was created when other lenders exited the market. This gap includes lending in the UK by overseas banks as well as, for example, the kind of non-bank lending so important for both small companies, when they lease equipment, or individuals ,when they buy cars.
Here, the banking industry can do much to help - and get the economy moving - provided the changes our authorities are making are wise.
And, what we need to do is: finance the economy out of recession; pay back the taxpayer; complete designing, and start implementing, the new world banking regulations; and ensure the UK’s regulatory and tax changes are in step with the rest of the world and keep the us competitive.
Responsible change will bring this about.
However we seem to be on a different road.
Banking is an international industry. For changes to be effective they have to be agreed internationally and implemented evenly around the world.
But to date the UK has done more - and moved faster - than any other country. And ahead of the G20 decisions and requirements. Now, the reason the UK has gone first is partly political, partly in response to a general view that, “something must be done and quickly” and partly because our leaders are not yet facing up publicly to the true reasons for the recession.
So let’s look at some of the things that have been done - and the consequences:
Consider that most sensitive issue - pay.
Bankers’ pay in the UK is now both regulated and subject to extra tax in the UK. This reflects both the popular mood and anger at the industry. But, while that anger is well understood, because no other country has curbed pay deals in the same way, overseas banks operating here are now very concerned and considering their long term commitment to this country.
There are literally tens, if not hundreds of thousands of British jobs directly and indirectly related to banking - bringing billions of pounds in tax income. Some of this is now at risk and, although many are well aware of it, decision makers increasingly either wish to ignore it or - even more dangerously - choose not to believe it.
Nevertheless, it is correct.
Some even seem to believe that it would be good riddance if some of this overseas business just left. This is not about the tabloid caricature of a handful of well-paid bankers catching a plane to Switzerland or some other well-heeled haven. It demonstartes an erosion of confidence in the UK as a stable environment for foreign business.
And it is deeply irresponsible. The impact would be very quickly felt on the UK economy and people’s lives should Britain cease to be the location of choice for international banking.
The coming year will tell, as a result, how much existing business shifts away and new business simply goes elsewhere.
And proportionate reform will help bring about the stability of the financial system and regulating banking better in the future
Many changes are already well underway.
Possibly the most important aspect of this is how much capital and how much cash banks have to hold as a requirement for being in business. The international regime that decides this – the Basel capital requirements- was evidently flawed and needed to change.
But to what?
Current thinking is that banks should hold twice as much capital as the rules require. UK banks have already done this.
Also in train are a lot of technical changes which will have the effect of redefining what counts as ‘capital’ - not surprisingly is will costly as a result. Business models are being re-engineered as risk is redefined and so the amount of capital to be held increases in line.
Then there is the proposed restriction on leverage and yet further reorganisation to meet the proposed ‘living wills’ or ‘recovery and resolution plans’. Inevitably, this means the capital banks are required to hold will increase even further – and this has serious consequences.
In crude terms, it is not possible both to hold more capital and to lend the same amount of money. It is simply not possible for banks’ running costs to rise substantially without both a knock-on increase in the cost of loans and a reduction in their availability.
These changes are so material they will affect everyone: from the person seeking a mortgage; to the business looking for working capital. We have all become accustomed to credit being readily available - and at an affordable price. But these changes have the potential to drastically reduce economic growth and restrict lending.
I believe the kind of substantial increases being proposed should only proceed after an open and honest discussion on what are the real economy consequences to us all. And then only when we have a clear understanding of the consequences to the UK as an international financial centre - and the vast sums it pays in taxes.
And we need sustainable institutions so banks can best serve both their individual and business customers as well as playing their part n the wider economy.
There are siren voices calling for the break up the banks on the grounds that they are too big, too risky, or both. And, although they may have the best slogans - such as referring to investment banks as ‘casinos - they equally have the weakest arguments.
Worldwide, big banks survived the crisis best with many more smaller, simpler banks - including the mutuals - failing.
It is worth remembering that larger, universal banks have evolved not on some management whim but because they do what their customers want. Large economies require large banks. Complex economies require complex banks. And an international trading nation, such as the UK, requires its banks to operate internationally.
Financing business - and especially big business - is much more than just a straightforward loan. Businesses that either import or export need to manage the risk of currency fluctuations by hedging against foreign exchange rates. They may need assistance with working capital overseas. Or need market-making in its shares.
All these – and more - are activities of a commercial bank.
And of an investment bank.
But they are certainly not the activities of a ‘casino’!
But the sirens keep singing, even when their calls can be heard by other financial centres - none of which have any intention of following us onto the rocks.
But they are holding their breath to see if the UK is foolish enough to act emotionally and not logically. They are waiting ready to pick up the business from he wreckage we will leave if we are stupid enough to discard a banking model which has served us well.
The UK has a record of building up great industries such as in steel, shipbuilding, engineering. It also has a history of losing them. It loses industries by: taxing them wrongly; regulating them inappropriately; not investing in them; and taking actions that prevent them from being internationally competitive. Be angry at the banks by all means but it would be the height of irresponsibility to lose this industry as we have done with others so many times before.
None of this is not a bleat of ‘no change’ from the banks.
Banks know there have to be changes and that is why important reform is already underway.
So what is it that actually needs to be done?
We need a series of careful steps right across the operation of any bank. Much of the crisis was not about something new, but simply about too much money being lent to the wrong people. Changes must reflect that. We don’t ban cars simply because a few are driven badly or get rid of the engine if the car breaks down. So, the changes to the banking industry need to fix what went wrong and build future models based on what the survivors did right.
Next steps also must address the management and risk culture within the industry.
This is vital and on its way.
Those who contributed to the problems are no longer there!
New responsibilities for the boards of banks and other large financial institutions are being put in place to keep the culture on the right track.
Credit controls are changing to manage who banks lend to, how much is lent and for how long.
Assessing risk is now a much more formalised process - with increased power for the Chief Risk Officer.
Proportionate capital changes are also underway with more capital held against higher risks.
New regulations require a sea change of what can and what cannot be done to oversee the complex products that caused so much of the financial crisis, including some of the derivatives. Simple commercial and common sense actions have already resulted in necessary adjustments having been made.
We are all more careful now. Products are simpler and more transparent with banks getting back close to all their customers.
If you want a brave, new banking world I fear I’ll disappoint you. I want 2010 to be dull and boring! We’ve had too much grandstanding and too many populist statements already.
I accept some banks got things wrong - but most did not. And everyone bears the responsibility to put things right.
Banks have a job to do in supporting individuals, businesses and the wider economy. Throughout the recent crisis we have continued to do so – although you’d not guess from the coverage.
This year we have a choice: to make careful, proportionate and considered changes to improve stability - without stifling growth and sending business elsewhere - or to continue making changes ahead - and in excess - of everyone else.
The UK is the only major international financial centre in the world that is regulated by two authorities – its own and the EU. Some European politicians have made it quite clear that they want to turn away from free markets and the international trade that has - and continues - to serve our economy well. It has never been more important that the actions the UK takes are careful, proportionate and considered.
We have a choice. We either carry on down the path of maximum change well in advance of everyone else or we are sensible and pragmatic.
I know my choice.
Let's hope our authorities think the same.
