The UK Government has announced plans to ringfence retail banks from their investment banking arms. The obvious first ones that come to mind and which would severely be impacted would be HSBC, Barclays and RBS. We should wait and see how the banks respond to these plans, however these do not have to be fully implemented by 2019. Long way to go!
Proposed by the independent commission on banks set by the UK treasury some of the salient features as I understand are as follows:
- all retail operations to be ring-fenced into a separate unit and quite possibly within separate subsidiaries
- the ring fencing would have the option to include big corporates
- trading in high risk products and financial instruments would be outside the ring fenced operations (that was going to be obvious!)
- the ring fenced operations of the retail side will have their own Boards and will have to maintain a minimum 10pc capital
- lending to the investment banking division would only be in a similar manner as to any other banks on an arms length basis and such that the capital resources do not fall below the 10pc level
- loss absorbing capacity for all big banks between 17 to 20pc of risk weighted assets (this could be a significant one!)
In my view whilst all banks would achieve the requird implementation level by 2019 the costs of achieving so would rise significantly impacting the profitability of these banks. Secondly the investment banking divisions would have less cash for their own operations and would therefore have to rely more on borrowed funding pushing the funding costs higher and thus impacting profitability.
More updates to follow!
Showing posts with label Barclays. Show all posts
Showing posts with label Barclays. Show all posts
Monday, 12 September 2011
Sunday, 4 September 2011
US Government suing British and other banks
The news was out late on Friday 2nd September 2011 that US Government (through its Federal Housing Agency) is to sue 17 banks which includes at least 3 British banks. No points for guessing which three banks those would be but nonetheless HSBC, Barclays and RBS are those 'lucky' ones!
The three British Banks are collectively being sued for a grand US$ 41.5bn.
Besides these banks, there are other European Banks such as Deutsche, Credit Suisse, SocGen and the remaining are mostly US Banks.
What are they being sued for
The Government Agency alleges that at the time when the housing market was at its peak and everyone was making money, these banks misrepresented to the US mortgage giants of that time mainly Freddie Mac and Fannie Mae for the mortgages that were sold to them. Effectively, the practice in those days was to package a bunch of mortgages which were used to issue notes and then effectively sell those notes on to the investors. These notes were picked up by the two 'FM' and hence they incurred huge losses when the housing market came to a collapse. The Agency view is that the Banks packaging these mortgages and selling them onwards failed to do appropriate due diligence and hence misrepresented the quality of the assets being sold.
Immediate impact
The immediate impact would be a severe market downfall as one would expect given the market may anticipate the compensation included within these lawsuits to impact the individual bank's profitability. The amounts being huge the impact is going to be material and therefore a huge risk that each of the banks will miss their profitability and return targets that they have so promised to their shareholders.
Medium/ Long term impact
In my view, the analysts would wait and see how the law suit and the outcomes turns out to be. It may be a big impact to these banks severely impacting some of them to an extent that potentially we may see another banking crisis looming up! Although I hope it doesn't happen again as those of you who would remember the previous crisis (that hasn't fully gone yet) had severe impacts on jobs, markets and the general economic indicators.
The other potential impact could also be on the rating agencies as these packaged mortgages went through the process of being rated and mostly being rated AAA were then sold on to the market. The banks may argue their point on this basis and again a possibility that the lawsuit may fall on these rating agencies.
Whatever the outcome may be, I do not think it is going to help the world revive from their economic woes in the short term. I think it may also result in senior Government level negotiations potentially to save yet another bigger crisis that may just be around the corner!
The three British Banks are collectively being sued for a grand US$ 41.5bn.
Besides these banks, there are other European Banks such as Deutsche, Credit Suisse, SocGen and the remaining are mostly US Banks.
What are they being sued for
The Government Agency alleges that at the time when the housing market was at its peak and everyone was making money, these banks misrepresented to the US mortgage giants of that time mainly Freddie Mac and Fannie Mae for the mortgages that were sold to them. Effectively, the practice in those days was to package a bunch of mortgages which were used to issue notes and then effectively sell those notes on to the investors. These notes were picked up by the two 'FM' and hence they incurred huge losses when the housing market came to a collapse. The Agency view is that the Banks packaging these mortgages and selling them onwards failed to do appropriate due diligence and hence misrepresented the quality of the assets being sold.
Immediate impact
The immediate impact would be a severe market downfall as one would expect given the market may anticipate the compensation included within these lawsuits to impact the individual bank's profitability. The amounts being huge the impact is going to be material and therefore a huge risk that each of the banks will miss their profitability and return targets that they have so promised to their shareholders.
Medium/ Long term impact
In my view, the analysts would wait and see how the law suit and the outcomes turns out to be. It may be a big impact to these banks severely impacting some of them to an extent that potentially we may see another banking crisis looming up! Although I hope it doesn't happen again as those of you who would remember the previous crisis (that hasn't fully gone yet) had severe impacts on jobs, markets and the general economic indicators.
The other potential impact could also be on the rating agencies as these packaged mortgages went through the process of being rated and mostly being rated AAA were then sold on to the market. The banks may argue their point on this basis and again a possibility that the lawsuit may fall on these rating agencies.
Whatever the outcome may be, I do not think it is going to help the world revive from their economic woes in the short term. I think it may also result in senior Government level negotiations potentially to save yet another bigger crisis that may just be around the corner!
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