The Banking and Strategy Initiative

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Thinking aloud – Will Banking survive? | Vickers Report recommends a multi ring circus |

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With Swiss regulation anointing traders as teenaged monkeys after a young Adoboli again showed the banking world how they earn their profits, the banks will have to get to the unpleasant business of convincing investors that they are solid businesses that can earn a fair return on the business after paying all the liabilities of High Risk/Leveraged profits of the last three years and the next 20 years as well.

Vickers recommends a tight ringfencing allowing retail deposits only for retail lending. Unfortunately that brings into question the default rates at retail for those who will try to begin with a clean slate. Seen in isolation, which we must, retail lending rates perforce have to be higher than a corporate risk even at a Triple A credit level. Thus, the retail banking spreads are protected and those profits , even though not cross subsidise corporate businesses its interest spreads will keep some banking models alive

The Corporate borrowers on the other hand, include the ones preferred as borrowers , i.e. banks till now will keep looking for cheaper avenues of credit including non banking sources that have traditionally been more expensive in lieu of not so tough risk management and as a business model continue to promote the possibility of a super normal profit which is heir ideal business opportunity increasing chances of a tighter whirlpool for banks with “stable” models across retail and business risk.

TheMcKinsey report and probably others on the subject discussing impact on returns are probably assuming thatt he banks will get closer to being 1005 compliant on any of the new superstructures or that the equilibrium found will be along the straight and narrow. What looks more likely is that as banks lose their capacity for a normal profit they embed such categories of “super normal ” opportunities in their operating/holding company structures with the nod to ring fences but that means inherently more volatile incomes much like the ones seen across the last 6 quarters though for very different reasons..However it is such a avst subject that we do not want to do an injustice by being too hurried with the analysis

Also, the pressure on the banks from such a tight regulation may not even save governments any costs of bail out when something happens next as “Supernormal” opportunities comes in the same staid allowed business of retail deposits and retail lending., corroborate borrowing and lending and capital for both is arranged. In the least it is a discouragement to allow any “institutions” to develop in the sector and the regulators are the same who rejected the idea of not having too Big to fail institutions any more…But all regulation is to be seen with a good heart and for good corporate citizens alone, one cannot regulate for more than that.

 

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