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  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 14th Jun 12, 8:33 AM
    • 2,324Posts
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    Former MSE Helen
    MSE News: Savers' deposits to be ring-fenced from banks' investment arms
    • #1
    • 14th Jun 12, 8:33 AM
    MSE News: Savers' deposits to be ring-fenced from banks' investment arms 14th Jun 12 at 8:33 AM
    "Banks will be forced to ring-fence savers' cash from their risky casino-style investment arms to protect deposits ..."

Page 1
    • Reaper
    • By Reaper 14th Jun 12, 9:54 AM
    • 6,486 Posts
    • 4,841 Thanks
    Reaper
    • #2
    • 14th Jun 12, 9:54 AM
    • #2
    • 14th Jun 12, 9:54 AM
    The banking sector argues the plan would push up the cost of business loans and mortgages, as bondholders could demand banks pay higher interest rates to offset the greater risk they face on investments
    Of course bond holders will demand more for the extra risk - but only because the risk is artificially low at the moment.

    The market is currently biased in the banks favour because those lending to banks know the government will be forced to prop them up no matter how irresponsibly they have been run.

    I approve of the government's plan and indeed would have preferred to go a lot further. I would like to have seen them forced to split investment banking and retail banking into 2 separate independent companies which raise money and survive or fail on their own.
    • talexuser
    • By talexuser 14th Jun 12, 10:16 AM
    • 2,658 Posts
    • 2,090 Thanks
    talexuser
    • #3
    • 14th Jun 12, 10:16 AM
    • #3
    • 14th Jun 12, 10:16 AM
    I would like to have seen them forced to split investment banking and retail banking into 2 separate independent companies which raise money and survive or fail on their own.
    Originally posted by Reaper
    Exactly. Is this not effectively what Glass/Steagall Act was in the US before they stupidly got rid of it after many years of (expensive) lobbying from the banks?

    It makes me very wary of these blanket calls of deregulation since many regard getting rid of banking regulations as the direct precursor to the credit crunch and consequent taxpayer bailouts.
    • grumbler
    • By grumbler 14th Jun 12, 10:20 AM
    • 51,709 Posts
    • 21,932 Thanks
    grumbler
    • #4
    • 14th Jun 12, 10:20 AM
    • #4
    • 14th Jun 12, 10:20 AM
    risky investments will be held in a separate pot to savers' money. Risky loans and mortgages will also be held separately
    I wonder what is a 'non risky' investment nowadays? Governments bonds maybe?
    We are born naked, wet and hungry...Then things get worse.

    .withdrawal, NOT withdrawel ..bear with me, NOT bare with me
    .definitely, NOT definately ......separate, NOT seperate
    should have, NOT should of
    .....guaranteed, NOT guarenteed
    • Consumerist
    • By Consumerist 14th Jun 12, 12:08 PM
    • 5,204 Posts
    • 2,604 Thanks
    Consumerist
    • #5
    • 14th Jun 12, 12:08 PM
    • #5
    • 14th Jun 12, 12:08 PM
    "Banks say the move could drive up borrowing costs for consumers."

    Consumer borrowing costs are of little consequence to government but taxpayer-funded bailouts are. Savers already have FSCS protection up to £85,000 so this change will be of limited benefit to most of us.
    Warning: In the kingdom of the blind, the one-eyed man is king.
    • Debt_Free_Chick
    • By Debt_Free_Chick 14th Jun 12, 1:58 PM
    • 13,149 Posts
    • 9,492 Thanks
    Debt_Free_Chick
    • #6
    • 14th Jun 12, 1:58 PM
    • #6
    • 14th Jun 12, 1:58 PM
    Seems somewhat counter-intuitive to have two businesses each with its own concentrated risk.

    Must be more to it than simply "protecting depositors' savings" as that could be achieved without breaking up the bank.

    End of so-called free banking I imagine ....
    Warning ..... I'm a peri-menopausal axe-wielding maniac
    • oldvicar
    • By oldvicar 14th Jun 12, 10:21 PM
    • 1,068 Posts
    • 944 Thanks
    oldvicar
    • #7
    • 14th Jun 12, 10:21 PM
    • #7
    • 14th Jun 12, 10:21 PM
    Banks will be forced to ring-fence savers' cash from their risky casino-style investment arms to protect deposits and avoid a run like that which brought down Northern Rock in 2007
    I fail to see how the splitting of bank's business in this way avoids a run on the bank like Northern Rock. First whiff of problems and depositors will be queueing round the block to take their mony out.
    • Milarky
    • By Milarky 15th Jun 12, 9:19 AM
    • 6,290 Posts
    • 2,209 Thanks
    Milarky
    • #8
    • 15th Jun 12, 9:19 AM
    • #8
    • 15th Jun 12, 9:19 AM
    There's the headline, and then there's that 'nothing's-really-going-to-happen-yet-and-the-world-will-have-probably-ended-anyway-if-it-did' sort of detail I fully expect from this bunch

    Osborne is giving an important concession to banks angered by the proposals*, as smaller institutions will be exempt, as will overseas operations that are not considered a threat.

    The legislation will not come into force until 2015, if it is approved by Parliament, though the proposals are still open for consultation. Banks must only comply with the rules by 2019.
    *Why do they get a veto?
    Last edited by Milarky; 15-06-2012 at 9:23 AM.
    .....under construction....
  • GeorgeHowell
    • #9
    • 15th Jun 12, 4:50 PM
    • #9
    • 15th Jun 12, 4:50 PM
    The fact that the banks have lobbied so strongly against this measure strengthens my belief that it is the right thing to do.
    • talexuser
    • By talexuser 15th Jun 12, 5:14 PM
    • 2,658 Posts
    • 2,090 Thanks
    talexuser
    The fact that the banks have lobbied so strongly against this measure strengthens my belief that it is the right thing to do.
    Originally posted by GeorgeHowell
    Precisely. The litany of mis-selling scandals over the years leading to the crunch should absolve them from any input into the reforms. Since the taxpayer has bailed out the entire system it is unbelievable that the banks should still have input into what regulations they want, and the population (taxpayers) should just accept whatever they say. The argument that the business will go abroad does not fly with me. Whatever we lose will be as nothing compared to the loss of GDP, savings, pensions and various recessions caused by bailing out failed banks and keeping their directors in bonuses.
    • Gentoo365
    • By Gentoo365 16th Jun 12, 12:49 PM
    • 407 Posts
    • 223 Thanks
    Gentoo365
    I think that it is absolutely the right thing to gather opinions from bankers. The banks will outline the possible impacts of this move and explain the negatives for both the British economy and their customers.

    Then it is up to the government (on behalf of the voters) to decide if the price is worth paying to have a more sustainable banking sector.

    I agree with some of the suggestions, and disagree with some others. I also have strong opinions on other solutions.

    Briefly,

    1) Financial services regulations and compensation schemes will mean that the impact of a bank failure will not be felt by savings customers. Whilst this is a good thing it introduces moral hazard. Savings customers will no longer care if their bank is risk averse, nor will they worry too much about the customer service standards. This is because all banks will have to act in the exact same way. Timescales will be mandated, account terms will be equivalent and risk to consumers will be low.

    2) If customers only care about rate, the banks that collect the most deposits will be those that can obtain a highest rates. If you assume that returns on investment depend on risk taken then the result is that the banks that take the highest risk will be the most successful at obtaining deposits.

    3) Banks that are risk averse, or manage risk well, will be in the opposite situation. They will lose customers. They will be unable to obtain the required return on investment to pay the rates that customers demand. They will therefore either have to change their business model, or fail.

    4) Without access to investment banks, insurance companies and wholesale markets the retail banks will have to make a larger percentage of their income from mortgages.

    5) Due to combinations of the above facts the banks that survive will be those that take the greatest risk with lending. This is under the assumption that higher net income (after provisions and defaults) will only come from mis-pricing the risk. Again the 'winners curse' results in the bank that charges the lowest mortgage rate in relation to the customers risk profile being the one that wins the business.

    6) Some banks will decide to be risk averse when lending. In the hope that the income lost from higher rates will be gained from lower defaults. However in the long run these banks will lose market share from lenders that are willing to reduce rates further. To the point that the mortgages are loss making.

    7) The result will therefore be a banking system where the winners are those that take the most risk and the losers are those that price risk correctly.

    8) This is not significantly different to what happened prior to 2008. It just changes the investments from wholesale to retail.

    9) Therefore a further solution is needed. One that ensures that the moral hazard is removed. As we are unwilling to pass risk to consumers the solution must therefore be to limit the possibility of a more risky bank out competing a risk averse bank.

    10) I believe the solution is therefore to limit the rate at which banks can offer to customers who have insured deposits. One possible limit is the BoE rate. One is a new rate set by the regulator.

    11) This, I believe would result in risk averse banks being able to take deposits without having to offer unsustainable rates. There will still be banks that take undue risks with lending and investments in order to increase profit, however this impact of those failures will not be spread to the sustainable banks. As risky banks will not be able to 'steal' the customers by offering higher rates to tempt them away.

    12) In addition, some banks will offer higher rate accounts, but those will not be insured. Hence the government will not have to bail them out, nor will they have to intervene. Regulation will ensure that (as with investment ISAs) customers are aware that these accounts have a different risk profile.

    By the way, I have no idea why I numbered these points. Also I agree about the seniority of insured depositors over bondholders, but that is a whole other post.
    Last edited by Gentoo365; 16-06-2012 at 12:58 PM. Reason: attempt at clarity
    • CLAPTON
    • By CLAPTON 16th Jun 12, 2:04 PM
    • 41,650 Posts
    • 30,691 Thanks
    CLAPTON
    I think that it is absolutely the right thing to gather opinions from bankers. The banks will outline the possible impacts of this move and explain the negatives for both the British economy and their customers.

    Then it is up to the government (on behalf of the voters) to decide if the price is worth paying to have a more sustainable banking sector.

    I agree with some of the suggestions, and disagree with some others. I also have strong opinions on other solutions.

    Briefly,

    1) Financial services regulations and compensation schemes will mean that the impact of a bank failure will not be felt by savings customers. Whilst this is a good thing it introduces moral hazard. Savings customers will no longer care if their bank is risk averse, nor will they worry too much about the customer service standards. This is because all banks will have to act in the exact same way. Timescales will be mandated, account terms will be equivalent and risk to consumers will be low.

    2) If customers only care about rate, the banks that collect the most deposits will be those that can obtain a highest rates. If you assume that returns on investment depend on risk taken then the result is that the banks that take the highest risk will be the most successful at obtaining deposits.

    3) Banks that are risk averse, or manage risk well, will be in the opposite situation. They will lose customers. They will be unable to obtain the required return on investment to pay the rates that customers demand. They will therefore either have to change their business model, or fail.

    4) Without access to investment banks, insurance companies and wholesale markets the retail banks will have to make a larger percentage of their income from mortgages.

    5) Due to combinations of the above facts the banks that survive will be those that take the greatest risk with lending. This is under the assumption that higher net income (after provisions and defaults) will only come from mis-pricing the risk. Again the 'winners curse' results in the bank that charges the lowest mortgage rate in relation to the customers risk profile being the one that wins the business.

    6) Some banks will decide to be risk averse when lending. In the hope that the income lost from higher rates will be gained from lower defaults. However in the long run these banks will lose market share from lenders that are willing to reduce rates further. To the point that the mortgages are loss making.

    7) The result will therefore be a banking system where the winners are those that take the most risk and the losers are those that price risk correctly.

    8) This is not significantly different to what happened prior to 2008. It just changes the investments from wholesale to retail.

    9) Therefore a further solution is needed. One that ensures that the moral hazard is removed. As we are unwilling to pass risk to consumers the solution must therefore be to limit the possibility of a more risky bank out competing a risk averse bank.

    10) I believe the solution is therefore to limit the rate at which banks can offer to customers who have insured deposits. One possible limit is the BoE rate. One is a new rate set by the regulator.

    11) This, I believe would result in risk averse banks being able to take deposits without having to offer unsustainable rates. There will still be banks that take undue risks with lending and investments in order to increase profit, however this impact of those failures will not be spread to the sustainable banks. As risky banks will not be able to 'steal' the customers by offering higher rates to tempt them away.

    12) In addition, some banks will offer higher rate accounts, but those will not be insured. Hence the government will not have to bail them out, nor will they have to intervene. Regulation will ensure that (as with investment ISAs) customers are aware that these accounts have a different risk profile.

    By the way, I have no idea why I numbered these points. Also I agree about the seniority of insured depositors over bondholders, but that is a whole other post.
    Originally posted by Gentoo365

    I assume you are talking about 'ordinary' people's savings here and not business savings.

    If the banks can't compete then there really is no point, from a savers perspective, of having more than one.

    So maybe just have a government bank.. we could call it National Saving and Investments in which all saving are guarenteed and the rest have no guarentee.

    Obviously the rest would have no retail savings in them and so would only compete in the non retail market.
    • Gentoo365
    • By Gentoo365 16th Jun 12, 3:27 PM
    • 407 Posts
    • 223 Thanks
    Gentoo365
    I mean specifically the savings that are covered by the Financial Services Compensation Scheme (or whatever equivalent exists in the future).

    This currently includes consumer deposits and the deposits of some small businesses.

    The banks will be able to compete. The spread between savings rates and mortgage rates will still exist. So there will be profit to be made. The fixing of the cash deposit rate will make savings accounts more reliable as a source of funding. Leaving the bank to compete on mortgage rates, efficiency, customer services and other products.

    The difference is that there will be less risk of the 'Icelandic Bank' situation, where a competitor offers unsustainable rates which then results in other (safer) banks losing deposits and having to use other, less stable. sources of funding.

    Basically, the idea is that a risk averse bank is less affected by the events leading up to the failure of a risky bank.

    I base this idea on the fact that the UK side of the banking crisis was initially a 'funding crisis' rather than a 'credit crisis'. The two are related of course. However it seems to me that UK mortgages are not the main issue. The issue that the banks face is a run on deposits. This will be mitigated by limiting the savings rate.

    There are a few issues I can see. One being that a rational consumer will switch to the insured products as soon as they see risk increasing. So there is scope for complicated products that 'auto-switch' from uninsured to insured on certain triggers.

    Also there is the 'free market' debate, where a rate set centrally will be used as a political tool and be a part of policy. Which puts banks in an awkward position, as they may end up paying more than they can afford.

    But these are details that can be overcome I am sure.
    • Chomeur
    • By Chomeur 16th Jun 12, 4:27 PM
    • 1,758 Posts
    • 400 Thanks
    Chomeur
    Amazing the reams and reams of regulation that banks are subject to and yet this common sense measure is not in place. Plus we're told it will take seven years to put in place. Anyone know if it used to be the case in the UK, or was there just Glass Steagall in the US?
    • talexuser
    • By talexuser 16th Jun 12, 5:21 PM
    • 2,658 Posts
    • 2,090 Thanks
    talexuser
    Anyone know if it used to be the case in the UK, or was there just Glass Steagall in the US?
    Originally posted by Chomeur
    We had the "big bang" under the Thatcher government which de-regulated the City, and some argue started the "debt-fuelled" growth which followed for the next 20 years and led to so much of GDP being concentrated in the financial sector instead of manufacturing which declined over the same period? Banks were allowed to buy stockbrokers and start gambling so maybe it is kind of analogous? However it did lead to many city firms being bought out by foreign and US banks and importing their culture.
    • bigadaj
    • By bigadaj 17th Jun 12, 10:30 AM
    • 10,827 Posts
    • 7,161 Thanks
    bigadaj
    LOL this is meaningless, it was mortgage lending which destroyed the economy, the housing bubble, that lending will continue as before, so basically it is no change.



    So had these measure been in place previously we would still have had the housing boom and bust which destroyed the economy.
    Originally posted by crankers
    I think you need to give telex users info more credence, it's wasn't just mortgages in the uk, unlike Ireland or Spain.

    Different banks lent for different reasons, rbs went bust because they overpaid for expansion ie laid too much for accruing other banks, lloyds primary problem came from bos lending money commercially recklessly to busineses wand private equity, northern oak was a housing bubble.

    None of the banks came through unscathed, hsbc lost billions on household in the us but were big enough to swallow it, barclays dido a deal with middle east investors at punitive rates to avoid getting rescued.

    As other such as gadget mind have pointed out previously, we have created moral hazard within the. Big banks. the truly shocking statistic is that over the past decade nine out of ten pounds generated by barclays has gone on remuneration, ie the shareholders have received a tenth of the return, a patently bankrupt system that needs reform.
    • sabretoothtigger
    • By sabretoothtigger 17th Jun 12, 10:55 AM
    • 10,024 Posts
    • 6,604 Thanks
    sabretoothtigger
    BOS was not part of Lloyds at that point or they'd not have been allowed most likely.
    For a decade Lloyds was criticised for 'falling behind' young guns like Goodwin and then they go put their foot right in the middle at the end

    There is an alternative to regulation and its very obvious. You let banks opt out of the system and invest money but give zero guarantee to savers with those banks.

    That might be what they are doing, hedge funds will still take depositors money and gamble with it. However any bank on a high street wont be allowed. Like Bradford & Bingley put up a lady in a bowler hat for savers but never mentioned she would take that money and put it into USA sub prime debt.

    Its going to force Barclays who do the friendly adverts also to cut loose their risky dealers into another entity and they will only get money from rich people and money markets

    In USA I think anyone who puts in more then 100k signs a form to say they are a professional and you then allowed to go ahead.

    The ironic thing is all that worry about Santander, I think they already do close to this. Each unit they run is unlinked to the others.
    Its such a giant bank they must have some sort high finance trading unit somewhere but I dont believe its using UK high street funds
    Last edited by sabretoothtigger; 17-06-2012 at 10:58 AM.
    Tokyo residential prices have gone from 4x London in 1990 to ľ London in 2014
    Maybe this is one of those cases where you canít go home again,
    by Ben S. Bernanke, former Fed chairman
  • GeorgeHowell
    Lloyds TSB was leaned on by Gordon Brown to save HBOS in order to save his bacon in a Scottish by-election the loss of which might have resulted in his political demise (or in hindshight accelerated it). It didn't take much leaning because the lust for corporate power and kudos on the part of the Lloyds senior management apparently made them bite his hand off when waiving of the usual competition concerns was offered. It is difficult to believe that the due diligence was diligent in any meaningful sense of the word. the Chairman and CEO of Lloyds HBOS were subsequently apparently and rightly fired. The public cost of saving Lloyds HBOS was in effect another example of the Brown regime trying to buy votes (esp in Scotland) with taxpayers' money.
    • sabretoothtigger
    • By sabretoothtigger 17th Jun 12, 11:23 AM
    • 10,024 Posts
    • 6,604 Thanks
    sabretoothtigger
    They'll turn a profit on that eventually so long as everyone pays off their mortgage its a good return for them. It just was far more then they could actually afford at the time due to lack of lending all of a sudden post lehman

    Lloyds was blocked from a merger previously by the FSA, I think they had talked to Halifax before
    Tokyo residential prices have gone from 4x London in 1990 to ľ London in 2014
    Maybe this is one of those cases where you canít go home again,
    by Ben S. Bernanke, former Fed chairman
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