One of the central themes of this blog has been that banks in general have never properly sorted out the issues and problems which led to the credit crunch. This has had all sorts of economic consequences as dealing with them has been replaced by a series of explicit and implicit subsidies for them. In the UK we have 0.5% base rates, a stock of £375 billion of Quantitative Easing (about which there is news today), and the Funding for Lending Scheme right now. Of course the Funding for Lending Scheme in its original form prioritised mortgage lending which not only boosted banks lending now but via its impact on house prices boosted the assets behind past lending. Along this road we have seen the theme of the gap betwen the treatment of the financial economy (banks) and the real economy where the implication is usually that taxpayer funded subsidies are a bad idea.
The latest Governor of the Bank of England Mark Carney did not take long to reinforce these theme. Here are his thoughts from last October.
By 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.
He announced a new Sterling Monetary Framework which offers banks this if they need it.
We are offering money and collateral for longer terms. The range of assets we will accept in exchange will be wider, extending to raw loans and, in fact, any asset of which we are capable of assessing the risks. And using our facilities will be cheaper. In some cases the fees are being more than halved.
In case you were in any doubt about the meaning of the words “more” and “cheaper” he added this.
Five simple words describe our approach: we are open for business.
Well banking business anyway! This came in the news again on Friday with the New York Times penning an extraordinary attack on the UK.
It boils down to this: Britain is ready to betray the United States to protect the City of London’s hold on dirty Russian money. And forget about Ukraine …The Russians also understand this. They know that London is a center of Russian corruption,
It seems that the American establishment might be a little jealous! However the point of a economy built on a banking sector which has not properly repaired the damage of the last crash goes on. Plus ca change one might say and as it was only yesterday I was reviewing the problems that shadow banks have created in China this part of the Governor’s speech has a chilling tinge.
Extending the net further, the UK is home to the third largest ‘shadow banking system’ with assets of $9 trillion.
UK banking problems
The official mantra that things are under control and improving in the UK banking sector took a blow to the solar plexus in January as Royal Bank of Scotland posted a profits warning or perhaps I should write losses warning as it was £8 billion of them which were on the horizon. As I wrote at the time the fact that an bank 82% owned by the UK taxpayer could post a profits warning was an indictment of the way our political class have managed the situation here. Actually the numbers themselves still managed to disappoint when they were released a month later. I remain of the view that the accident prone RBS has a negative value still.
The Co-op Group and Bank
This organisation has turned out to be as accident prone as that of RBS. A familar tale of over expansion in the boom years -specifically in this instance the purchase of the Britannia Building Society- has led to more and more bust in the credit crunch era. We even got an element of theatre as the Chairman seemed to disappear in a cloud of white powder. Although perhaps as extraordinary was the fact that Paul Flowers got the job with no apparent qualifications for the role and that this bothered the regulator not one jot.
The situation led to the whole Co-op group being under pressure and I note that today’s Guardian has got into the spirit of things by using that harbinger of doom “on track”.
The group, which is on track to report £2bn of losses on 26 March, declined to comment.
The latest problems come from this which was revealed in the Observer over the weekend.
Under the proposals, Sutherland will be paid a base salary of £1.5m this year, plus a £1.5m retention payment. With pension contributions and other extras, such as compensation for buying him out of his previous contract, Sutherland will receive £3.66m this year. His predecessor, Peter Marks, received just over £1.3m last year.
This poses a problem as frankly for a start this looks greedy. How about a deal which promises more money after better performance. Perhaps the worst aspect is the way he was promised a bonus which he was due at his past employer Kingfisher. A very awkward situation when one considers the plight of the Co-op and highlights the moral and often economic bankruptcy of statements like this from Co-op Chair Ursula Lidbetter.
The remuneration packages of our executives are in the middle of a range of comparable companies.
Actually Euan Sutherland was far from alone in his situation. Again from the Observer.
Richard Pennycook, the chief operating officer, will receive a £900,000 salary and a retention payment of £900,000. Six other executives will be paid salaries between £500,000 and £650,000 – and the same amount in retention. In the past, senior executives of the Co-op received between £200,000 and £400,000.
It has also emerged that Rebecca Skitt, the Co-op’s chief human resources officer, who joined in February 2013, left last month with a proposed pay-off totalling more than £2m.
Now let me contrast this with the advertising of the Co-op which the radio version of has been leaving a sour taste in my mouth each time I have heard it.
Ethical banking has always been in our DNA. Now it’s in our constitution
Actually the fact that Euan Sutherland took to Facebook to criticise those who released details of his pay package seems to challenge three of the Co-op’s principles.
Self-responsibility – we take responsibility for, and answer to our actions
Openness – nobody’s perfect, and we won’t hide it when we’re not
Honesty – we are honest about what we do and the way we do it
The situation of the Co-op is exactly the reverse of the concept of the gift which keeps on giving. Just when you think it cannot get any worse it has an ability shared with RBS to trip over its own feet. But if we move from the pay debacle to how the group and the bank in particular is being run there is plenty of food for thought in the Chief Executive describing it as “ungovernable”. After the rescue package the Co-op group only owns 30% of that bank but we now have to consider what happens to the bank if the overall group fails. The UK taxpayer may yet be required to step in.
Back on November 4th last year I questioned how long our economy would be run for the likes of RBS and the Co-op bank.
Yet I have shown examples today of a bank which has to all intents and purposes collapsed and another which remains very troubled. We would do well to remind ourselves that this has happened in an environment which is extraordinarily favourable for banks. We are left wondering how many more banking icebergs are out there for our economy to hit?
Meanwhile what about the rest of our economy? If we put only ten per cent of what we have deployed for our banks there what might we achieve?
The only thing which has changed in the meantime is that the problems have got worse.
Late last week some £8.2 billion of the Bank of England’s Gilt holdings from its Quantitative Easing program matured. In its efforts to keep helping the banking sector and the funding program of the UK government it is today buying some £1.35 billion of Gilts maturing beyond 2030 as part of its replacement plans.
As Mark Carney is being interviewed on the subject today I posted this question on twitter.
Will somebody at the #TSC please ask Mark Carney about the implications of buying £1.35 billion of ultra-long Gilts today?
We could be buying some of our longest dated Gilt (2068) which will be the longest dated part of UK economic policy and a “gift” to our children and grandchildren. Will I be the only person to raise this issue?
This article is cross-posted from the website (11th March) of Mindful Money, for which Shaun Richards is independent economist.