Monthly Archives: June 2013

Banking, Britain, Economic, Finance, Government

Parliamentary Commission on Banking Standards…

The Parliamentary Commission on Banking Standards has said that bosses of failed banks should face jail or lose the right to claim bonuses for up to ten years for ‘reckless misconduct’.

The new criminal offence would make sure that top executives paid for their ‘shocking and widespread malpractice’, according to a report by the commission which makes a number of recommendations on banking standards to the government.

Not a single British banker has been sent to prison since the financial crash began in 2007, but the proposed legislation seeks tougher disciplinary measures against errant bankers.

As well as prison terms, bankers could face heavy fines and bans from the financial services industry, as well as curbs on bonuses and the threat of pensions being cancelled.

Commission chairman Andrew Tyrie MP said:

… Under our recommendations, senior bankers who seriously damage their banks or put taxpayers’ money at risk can expect to be fined, banned from the industry, or, in the worst cases, go to jail. That has not been the case up to now.

In its 527-page report, the commission found that ‘deep lapses in standards have been commonplace’. Mr Tyrie highlights that it is not just bankers that need to change. The actions of regulators and governments have contributed to the decline in standards, too, he says.

The commission of MPs and peers calls for a sweeping overhaul of top pay, with city regulators given new powers to cancel pension rights and payoffs for the bosses of bailed-out banks.

It also wants watchdogs to be able to force banks to defer bonus payments for up to a decade, in order to prevent bosses reaping large rewards for risky, short-term strategies that subsequently lead to losses.

According to Mr Tyrie the rewards for fleeting, often illusory success have been huge, while the penalties for failure have been much smaller, or non-existent.

However, the director general of the CBI, John Cridland, said:

… There are tough criminal sanctions in the UK for those who engage in fraudulent behaviour. Enforcing those must come before the introduction of new sanctions.

The findings of the parliamentary commission, set up last summer in the wake of the LIBOR scandal, are not binding, but the Government is being urged to implement its recommendations ‘in full’. The proposals have been handed to ministers.

The reforms will aim to prevent a repeat of the bailouts and scandals such as the LIBOR rate-rigging, where some bankers have walked away with large payoffs and pensions.

But bankers will not be targeted retrospectively. The disgraced banker, Fred Goodwin, who left the Royal Bank of Scotland in ruins but is still receiving a pension of £342,000 a year for life, will be unaffected.

Nor will any legislation ensnare former HBOS chief James Crosby, who will collect £406,000 of his £580,000-a-year retirement deal.

Under current rules, senior bankers have been able to evade punishment by claiming they were not responsible for collapses and that they had not committed deliberate fraud, with the onus on financial authorities to prove wrongdoing.

In the proposed regime, though, senior managers could be held individually accountable and would have to show they took ‘all reasonable steps’ to avoid a failure.

Mr Tyrie said that a lack of personal responsibility has been commonplace throughout the industry, and added:

… Senior figures have continued to shelter behind an accountability firewall.

The commission also wants a new licensing system to stop traders involved in setting LIBOR rates and prevent area managers who oversee the sale of financial products from slipping through the net.

The report also recommends that City watchdogs should be able to force badly-behaved banks to sign a formal agreement to improve their culture and standards.

The commission – whose members include the Archbishop of Canterbury Justin Welby and former Chancellor Lord Lawson – also demands the dismantling of UK Financial Investments (UKFI), the body that is supposed to manage taxpayers’ holdings in RBS and Lloyds at arms’ length from ministers.

It said the Government, which denies forcing the recent resignation of RBS boss Stephen Hester, has interfered in the running of the two banks and that UKFI is seen as a ‘fig leaf’ for ‘the reality of direct government control’.

Ministers must also make an immediate commitment to analyse whether RBS should be split up into a ‘good bank’, that could lend more to small firms and personal customers, and a ‘bad bank’ to dump its toxic assets, the commission said.

A study of high street lenders by competition watchdogs and an independent panel of experts to look at measures to help bank customers were also part of the recommendations.

Lord Oakeshott, a former LibDem Treasury spokesman, said:

… We must stop the subterfuge of UKFI and put the Treasury on the spot to make the banks we own, lend. RBS, our biggest business bank, has failed the nation that rescued it at £1,500 for every taxpayer. It must be broken up with new management and tough net lending targets for the good bank so small business can grow again.

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Arts

I don’t know…

Dig1

Smith and Mr Browning, Under an independent Scotland the Paymaster General will continue to honour your pension payments. There’s talk at the moment whether the Baby Boom generation are taking too much from society.

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Banking, Britain, Economic, Finance, Government

Meddling and mismanagement at the Co-operative Bank…

The Co-operative Bank has unveiled a rescue plan to plug a £1.5 billion black hole that will see the mutually-owned lender trade shares on the stock exchange for the first time in its 169-year history.

The group needs to repair a balance sheet ravaged by bad loans taken on when it merged with Britannia Building Society in 2009.

The bank said £1 billion of the cash will come from the bank’s junior bondholders, who will see much of their debt turned into equity in the ailing bank, which serves some 4.7 million customers.

The deal, to be completed in October, is expected to see around 25 per cent of the bank traded on the London Stock Exchange.

Euan Sutherland, the Co-op Group’s Chief Executive, said that this rescue plan is a comprehensive solution which seeks to be fair to all parties. Mr Sutherland says this will not mean the core values the Co-op have held as a mutual will change when the bank is traded.

Around 7,000 small investors in the £1.3 billion junior Co-op bond will be affected by the debt-for-equity swap. The bank will pay for their financial advice as they plan on what to do next.

The plan is known as a ‘bail-in’ process, which draws funds from bondholders as opposed to the bank bail-outs of 2007-08, which saw billions of taxpayers cash pumped into lenders such as the Royal Bank of Scotland and Northern Rock. The Co-op will find the other £500 million it needs to fill its funding gap by selling a range of financial services firms to rivals.

Earlier this month the Royal London mutual agreed to buy the Co-op’s life assurance and asset management unit for £219 million.

It is believed the bank will shrink its balance sheet by focussing on activities it perceived as being good before the Britannia acquisition. This will include the firm concentrating on lending to individual customers and small businesses. The bank will also boost IT spending in an effort to build its online banking unit, Smile.

The bank believes the deal will give the firm a core tier 1 capital ratio – a key measure of balance sheet strength and liquidity – of 9 per cent by the end of the year. Banking regulator the Prudential Regulatory Authority, which backs the deal, says that all UK banks must have a minimum tier 1 capital ratio of 7 per cent by the end of 2013. The troubles at the Co-op stem from its 2009 purchase of Britannia, which has amassed £14.5 billion of bad mortgage and corporate loans.

In March the bank revealed large losses with an announcement a few weeks later of scrapping a plan to buy 632 Lloyds branches. Since then the bank has made sweeping management changes.

COMMENT & ANALYSIS

The implosion at the Co-operative Bank which will wipe out the savings of thousands of smaller investors and trusts is the result of hubris and mismanagement on a mammoth scale.

Instead of the ultimate owners of the bank – the wealthy Co-operative movement – digging into its own treasure chest, it is the bondholders who are being asked to carry the can.

The debacle at the Co-operative Bank is the closest Britain has come to a Cyprus-style rescue in which ordinary investors are made to pay for errors of management and government.

The crisis at the so-called ‘ethical bank’ is the result of political interference in decision-making and inadequate banking disciplines.

This interference and poor decision-making has left a £1.5 billion black hole in the bank’s balance sheet, placed the whole Co-operative movement at risk and created huge uncertainty for the bank’s 4.7 million customers.

Undoubtedly, successive governments have contributed to the crisis. It was Gordon Brown’s administration that sought to back a new ‘super-mutual’ bank as a challenger on the high street.

The Labour Party’s favourite bank, the Co-operative, was chosen as its preferred vehicle and the Government backed a 2009 merger with the much larger Britannia Building Society. Dozens of Labour MPs, including Shadow Chancellor Ed Balls, are sponsored by the Co-op movement.

The Britannia deal turned out to be a disaster. Large numbers of mortgages on the Britannia’s books were rotten and the building society had become embroiled in commercial property deals that went wrong during the recession. Much of this was hidden from public view until George Osborne gave the nod to the Co-operative Bank bid for 632 Lloyd’s branches.

The former Financial Services Authority should have stepped in and made it clear that the Co-op lacked the management and balance sheet resources to enter the big league.

Not surprisingly the deal fell apart when the Co-op revealed heavy property losses and acknowledged it lacked systems to manage the operations of the bank.

It was then that credit ratings agency Moody’s downgraded the bank’s debt to ‘junk’ status. That meant traditional customers, such as local authorities and non-governmental organisations, could no longer safely hold deposits with the bank.

Under the complex rescue package just unveiled by the Co-op after extensive talks with the Bank of England’s Prudential Regulatory Authority watchdog, it is bondholders rather than the Co-op movement who will bear most of the pain.

That has left investors holding bonds angry, disappointed and disillusioned with both the Co-op and the government that allowed this series of catastrophic errors to happen.

As part of its grand plan, the Co-op will no longer pay income to its bondholders, most of whom are retired. Some were being paid as much as 13 per cent in annual interest – or £1,300 for a £10,000 investment.

Instead, in exchange for their bonds, investors will be offered either a cash payoff, shares in the new bank, or new bonds. But they face losing 35p for each £1 of Co-op bonds they hold.

These bonds are a type of investment, and not to be confused with the fixed-rate savings-account bonds offered in branches. Known more specifically as ‘retail bonds’, they are simply an IOU written to investors to raise funds for business growth. But the price of many bonds has halved over the past couple of months, leaving thousands out of pocket. Some £60 million worth of bonds are held by individual investors that have paid an annual rate of interest of 5.5 to 13 per cent.

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