Posts Tagged ‘banks’

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Robert Peston this morning outlined the ley points in The Conservatives’ as-yet unpublished policy document titled “Proposal for Sound Banking”.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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RBS Bonuses…

February 6, 2009

In Robert Peston’s latest blog post he discusses the dilemma facing Gordon Brown and the RBS board in deciding what bonuses should be paid, if any at all.

There is considerable anger from the general public about ‘bankers’ and the idea of any of them getting bonuses is clearly abhorrent to them, as many perceive it as tax payers’ money being used to fund lavish lifestyles for ‘bankers’.

One issue I have with many recent news stories about banks, is this word: ‘bankers’… it seems to imply that everyone working at a bank is directly involved in making the lending and risk-taking decisions which is plainly not true. From my own perspective I prefer the WordNet definition:

a financier who owns or is an executive in a bank

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Out of the 100 (at time of writing) comments, there were probably only about 10-15 comments that spoke any sense and from a rational perspective. The rest were, in my opinion, clouded by anger and ill-thought.

Some make the point that as de facto shareholders, tax payers should be desiring RBS to perform well as a commercial entity to enable the government to make a profit when returning RBS to fully-privatised ownership. In this case it is imperative for RBS to retain its best people, the ones who have the knowledge and the wherewithal to return RBS to full health.

Over on his Knowledge and Making blog (seen via his comment on Peston’s blog) Leigh Caldwell argues there is no reason for shareholders to object to bonuses, and proposes a bonus structure which:

gains value only when RBS shares recover to a certain point and the state’s stake is reduced below a certain level (maybe 30%). The number of options awarded to be based on past performance; the future value of each will be derived from RBS’s success in giving the taxpayer a return on our investment. (Leigh Caldwell, Knowledge and Making)

Should anyone at RBS get a bonus?

To answer that question you have to first consider how a bonus is determined. In its simplest form it would probably be

Excess Profits ÷ Number of Employees

But in most large organisations they will not be determined in this manner, they will most probably be based around the annual performance reviews (individual, team, departmental and divisional). So if the individual has had an outstanding year and had a bigger impact on profitability than predicted they should be rewarded, similarly if the team has performed beyond expectations they should be rewarded, and so on.

For people to declare that everyone at RBS should get nothing because of the losses incurred in a small part of the bank’s huge operations is not being realistic. Are they saying that Joe from an operations team who came up with and implemented a more efficient and cheaper method of maintaining/restocking ATMs say should get absolutely nothing, because Geoff the trader has invested too heavily in CDOs losing RBS millions?

In answer to my question… Yes, RBS should be paying a bonus for 2008, but only to those who have exceeded their predicted performance and based on their team and divisional performance too. As owners, tax payers need to understand that it is in their best interest to see RBS return to full health. We can only hope that Gordon Brown does not take the populist path and ban all bonuses, which will only lead to long-term pain.

Zopa: The future of lending?

February 4, 2009

The social-lending website, Zopa, is a marketplace where people lend and borrow money from eachother. Zopa was the world’s first social lending and borrowing marketplace website, and its success has spawned many copycats across the globe.

So how does it work?

Zopa has two methods of lending: the market or via listings. The marketplace is split into 5 distinct markets (A*, A, B, C, Y), each with loans of 36 or 60 month durations. Lenders set-up offers through the Zopa interface specifying which markets and durations they wish to lend in and the rates they want to charge. When a borrower requests a loan, they are assigned a market rating based on their credit worthiness, and Zopa matches up the loan amount with offers from lenders, and the weighted average of all the matched offers is what defines the loan’s overall interest rate. Once the offers are matched, Zopa employees conduct further checks on the borrower, and if the borrower is deemed to not be a high enough credit worthiness for that market then the loan is rejected and the lender’s money moves back to the marketplace. [See here for how the markets work]

Listings are a relatively new part of the Zopa website, “they work just like an online auction, except that the ‘price’ comes down instead of going up.” The borrower provides information about themselves and why they want the loan, they income and expenditure, and they are assigned a 5-star rating for ‘Credit Score’, ‘Affordability’ and ‘Stability’. Lenders, upon assessing the risks of the loan, set the rate at which they are prepared to lend. Once the loan has ‘bids’ in excess of the loan amount requested then only the ‘bids’ with the lowest rates are matched at the end of the listing (auction). [See here for more info]

How do Zopa make their money?

On every loan arranged through Zopa they charge a fee (currently £94.25) to cover the expenses of arranging the loan and checking the borrower’s credit worthiness. This is a one-off non-refundable fee, but there are no early repayment penalties.

Zopa also charge lenders a small fee on the amount of money lent out to borrowers. This is currently 1%, but for older lenders it is 0% or 0.5%. This is charged on a monthly basis.

Zopa’s Performance?

In the last few months Zopa have seen a massive increase in the number of borrowers and lenders, with over £2m on offer and a total of nearly 240k members at the time of writing. The constant flux in supply (lending offers) and demand (borrowers requesting loans) means that rates achieved are always changing. Current typical rates for each of the five 36month markets are as follows:

  • A* = 7.5%
  • A = 7.9%
  • B = 9.2%
  • C = 11.4%
  • Y = 11.7%

What about bad debts?

Zopa, having analysed historical data from a wide range of sources has given estimated bad debt values for each of the markets, as of writing the actual bad debt rates experienced have been much lower than the estimates. See chart for breakdown of estimated and actual bad debts across the markets.

Zopa Bad Debts - Actual and Estimated

Is Zopa the future of lending?

You can definitely argue that Zopa has come of age in the last year, down to many factors not least of which is the financial crisis and the resulting dislike of the banks. While banks have cut back their lending practices and raised interest rates on loans, they have also been cutting the interests rates they give on people’s savings, both of which drive people to seek alternatives, and Zopa has attracted borrowers and lenders for those two respective reasons. One large aspect is also the “human factor” where lenders and borrowers prefer the fact that they are both dealing with real people. Indeed some lenders offer funds at rates so low that it might imply altruistic intent.

While Zopa and any other social-lending services are never going to grow to the same scale as the current banking sector, they are providing a viable alternative to their members, both in providing competitive loan rates and the returns achieved by lenders.

There is a nagging doubt in my mind though about how Zopa will stand up in the current recession. Will the bad debts rise beyond acceptable levels? Will there be enough lenders, willing to risk their money, to satisfy demand for loans? Will Zopa be able to cope with any increases in scale?