Archive for the ‘Finance’ Category

The Conservatives’ Proposal for Sound Banking

July 20, 2009

Robert Peston this morning outlined the ley points in The Conservatives’ as-yet unpublished policy document titled “Proposal for Sound Banking”. [Update: document now available from here]

The plan boils down to:

  • Effectively scrapping the FSA. Moving the supervision of financial institutions (banks, building societies and insurers) to a new division at the Bank of England. And rename the consumer protection aspects of the FSA’s remit to the rather grand “Consumer Protection Agency”.
  • Force banks and credit providers “to provide much more information directly to individual consumers” about charges and other aspects of their products. Also get these institutions to provide this info in a form able to be utilised by comparison websites.
  • Get the Office of Fair Trading and Competition Commission to investigate whether consumer choice and market competition has been affected by the consolidation seen over the last two years.
  • Finally, they set out plans for macro-prudential regulation. With the creation of a “Financial Policy Committee” to control the leverage (ratio of lending to capital) of banks and building societies.

What does Richard think about this?

It is all very well shifting, merging and renaming parts of different regulatory bodies but will that really make a difference to how well regulations are enforced. It is highly likely that the same teams at the FSA in charge of monitoring the banks will just move over to the Bank of England. So what is the point? As Peston notes – “the FSA now faces a nightmare few months: given the high probability that its days are numbered, retaining and recruiting staff will not be easy.” Will it do more harm than good?

On the increased information on products to consumers. What more detail can they give? Financial institutions are required to detail everything in the terms and conditions etc. Is it really that hard to work out at the moment? If it is go somewhere else.

The idea that price comparison websites will help consumers is rather worrying. They exist to make money – through commission and referral bonuses – and nothing else. I believe promoting them may cause more harm to the consumer finance industry (savings, credit cards, mortgages etc.) through an inevitable drive to the bottom in headline price. Surely one of the problems in the lending binge was the downward pressure on lending rates from the likes of Northern Rock forcing others to lower their rates (too far) or miss out on customers.

I don’t know nearly enough to comment on the macro-prudential regulation side of things so I won’t.

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Check out Leigh Caldwell’s thoughts on the policy document, and why he believes the behaviour of financial consumers needs to hold greater consideration by regulators.

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The ‘Wimbledonisation’ of Britain

February 2, 2009

Robert Peston, the BBC’s Business Editor, has written a thoughtful piece on his blog about Britain’s economy and the wildcat strikes currently taking place.

As [Sir John] Rose [CEO, Rolls-Royce] said, it is human nature for a business with operations all over the world to favour its home country when making decisions about where to expand – or, as in the current horrible economic climate, where to cut.

So it should be no surprise that an Italian company IREM, hired by Total of France on a construction project in Lincolnshire, should itself be employing Italian workers. In a way it would have been more surprising, at a time when money is tight all over the world, if IREM had shunned its own people and had hired new British workers.

In the current economic climate I believe that governments should be extremely careful about their policies, it will be a very sad day when governments from the world’s leading countries start enacting protectionist policies into law. It is a retrograde step, and one which will impact on every economy, especially those in developing countries.

America, despite their constant talk of free trade, has always had protectionist policies (see Protectionism), as do many countries in Europe. One exception seems to be the UK, which is probably the most open to free movement of investment and jobs. Protectionism within a struggling global economy is a sure fire way to speed the process up and end up with a deeper and longer-lasting recession as Peston argues.

History does indeed tell us that protectionism in a worldwide downturn is the shortest route to slump and depression.

So, is the UK’s economy better off for being open and free and allowing foreign companies to buy up its major businesses? I would argue that on the whole it has been better off, in the good times at least, but personally I would prefer the country to have greater control over infrastructure businesses (energy, water, transport etc.) this is because if there is a truly global and major crisis it would be reassuring to know that the businesses running our infrastructure will have the UK’s interests at heart. On the jobs front, should businesses operating in the UK be forced to employ only or mostly British workers? Of course not, if a business believes that it can employ workers from outside the UK to do a better job and cheaper then I see nothing wrong with that, if anything complain about the government’s immigration policies the businesses are only maximising their shareholder value.

But Wimbledonisation – the notion that Britain is the winner even if none of the economic players are actually British – became official dogma.

We can carry on with a Wimbledonised economy, but I would like to see British companies improving their competitiveness on the world stage and expanding into other markets, only then will the free market economy which the UK operates be completely beneficial to the UK populace.

Why policy makers should focus on reducing uncertainty

February 1, 2009

The Economist has a very interesting piece this week ( 31/01/09) by Olivier Blanchard, IMF Chief Economist, in it he argues that by removing uncertainties the current financial crisis would largely go away.

”]CBOE Volatility Index (Vix) [The Economist / Chicago Board Options Exchange]Blanchard talks about how there are many indicators of uncertainty at the moment, from the Vix index of stockmarket volatility (See Chart), the dispersion of growth forecasts, to the use of the word ‘uncertainty’ by journalists. But not just objective factors, there are the “unknown unknowns”, the subjective uncertainty, and they are currently dominating making the economy appear incomprehensible due to its complexity. This has resulted in extreme prudence, or even paralysis, from investors, firms and consumers, thus feeding the crisis further.

As a result of this paralysis, investors have shifted from risky assets to perceived risk-free ones, almost wholly because they realised that they had underestimated the complexity and hence riskiness of many of the newer assets (CDOs etc), in effect many of the world’s investors have adopted a ‘better safe than sorry’ motto, “while making sense for individual investors, it is having catastrophic macroeconomic consequences for the world.

Blanchard’s solutions:

  • Reduce uncertainty […] by removing tail risks and the perception of tail risks. Establish a price, or at least a floor on the price of the troubled assets. Ricg-fence them or take them off bank balance sheets.
  • Adopt clear policies and act decisively […] do too much rather than too little.
  • Undo the effects of uncertainty on portfolios [… by] returning the private financial sector to health through recapitalisation
  • Undo the effects of the wait-and-see attitudes of consumers and firms on the demand side. Get them (and the state) to spend more, offer incentives to buy now rather than later.

What does Richard think about this?

One of the problems in the present financial crisis is most definitely a fear of the unknown, with everyone (individuals and companies) not entirely sure what is safe for their situation, and as such have broadly decided that it is better to hold onto any spare cash just in case their situation changes dramatically (redundancy etc.), but there is also an element of ‘lets wait and see a bit longer if we can get a good deal on a new TV we have been talking about’ from those with cash to spare. Companies are really feeling it at the moment because of this contraction in spending, but in some ways it is a good thing… It is forcing companies to review their finances, strategy, and organisational structure; those that are able to innovate and evolve will be the ones to survive and lead our economies out of the crisis. But even these companies will be looking to governments to act in a decisive way, and show that governments have confidence in what they are doing (something I think is lacking at the moment).

Reduce uncertainty by acting decisively and everything will eventually turn out ok. We hope….