Tuesday, 1 May 2018

Updates from the Banking Sector

Owing to the dynamics of the academic year, there has been somewhat of a lull recently here in Financial Regulation Matters, so to get up to speed a round-up of developments within the banking sector seems like a good place to start. There have been a number of developments since the last post, so today we will work our way through them as efficiently as possible; the underlying sentiment is that the developments portray a sector that is consistently changing since the Crisis, with a number of aspects of that said Crisis continuing to play out (rather unsurprisingly).

We start with our old friends RBS, who have taken up a large amount of space in Financial Regulation Matters, mostly on account of their remarkable development since the Crisis. Past posts have focused on the unique relationship that continues between the bank and the government (on account of its ownership of the bank), its terrible performance (alongside the FCA) in relation to its treatment of SMEs, and also its plans to restructure its business in light of its troubles. Late last week it was announced that the bank had recorded nearly £800 million in profits (£1.2 billion in operating profit), which was pushed in the business media as an extremely positive sign for the bank in its quest to return to private ownership. However, whilst embattled CEO Ross McEwan was quick to talk up the impact of these results, the reality is that the results mask the impending penalties that lurk just over the horizon; RBS is facing penalties for its performance in relation to Payment Protection Insurance mis-selling (a continuing case that may come to a conclusion soon – more later), the actions of the ‘Global Restructuring Unit’, and its performance in the Financial Crisis, particularly with regards to the selling of U.S.-based securities. On that point, in March it was being touted that, perhaps, ‘within weeks’, the case could be concluded by the US DoJ (with some political assistance from the British Government) which has not been the case – the bank is potentially facing upwards of $10 billion in fines which would have a massive effect upon this perceived upward trajectory. Yet, with the British Government essentially lobbying on the bank’s behalf, news today that the bank is closing 162 branches with a potential loss of 800 jobs is testament to the dynamic where the assistance of the British taxpayer is considered secondary to the health of the bank. There is a strong argument to say that this is correct, in that the bank’s health will see it return to private ownership and contribute to a healthier banking sector in the long term. However, in the short-term, workers are being laid off during difficult economic times, which is clearly a negative aspect. It is clearly a difficult dynamic to judge, but the clear availability of a public safety-net obviously does not factor into the industry’s thinking, which as a sentiment raises more questions about the role of these too-big-to-fail institutions within wider society.

Meanwhile, Barclays is experiencing similarly changeable times, although of a different nature to that of RBS. We spoke previously about Barclays’ boss Jes Staley and the investigation into his conduct with regards to the treatment of a whistleblower, and recently Staley received a number of pieces of good news. Staley escaped that FCA investigation with only a modest fine (rather predictably) and then presided over financial results that show the bank’s investment arm is outperforming the performance of its rivals, something which he has been championing in response to the entrance of an activist investor who, to all intents and purposes, would like to reduce the focus upon investment banking. Yet, all is not well in Barclays, with news today that protesters have interrupted the bank’s AGM to protest against the bank’s continuing investment of fossil fuel-related projects. The bank has sought to react to the protests by stating that they are ‘considering our position to deal with these kinds of matters’, although that is unlikely to stem the protests. The bank’s investment within fracking projects close to home will likely result in more pressure, as recent calls for the bank to commit to its pledges to divest from such projects have so far resulted in very little action.

However, one aspect that Barclays avoided was the I.T.-related disaster that has seen TSB brought sharply into the limelight. The bank is currently in its second week of being affected by I.T. issues that had been warned about for over a year, with the height of the crisis culminating in almost 2 million TSB customers being locked out of their online accounts. Despite the bank attempting to stem the bleeding by drafting in I.T. experts, the leaders of TSB are continuing to come under pressure for the performance of the bank, with CEO Paul Pester being summoned by MPs to explain the fiasco. The bank’s compensation bill is rumoured to potentially run into the tens of millions of pounds, and there are questions currently being raised regarding whether Pester will receive his bonuses. Consequently, the bank is facing a real crisis, because the competition within this specific marketplace continues to increase, those facing crises of this magnitude find themselves in real danger moving forward.

Finally, there has been developments recently for Lloyds, specifically as they now own HBoS. The criminal investigation into the conduct of a so-called ‘rogue’ unit that seemingly culminated in the imprisonment of a number of associated people is potentially being re-launched by the National Crime Agency – the NCA is currently deciding whether a new ‘full-blown criminal investigation’ is warranted in relation to fraud undertaken by the bank, specifically for instances that fell outside of the original police investigation. The proposed investigation comes after a number of allegations were brought forward regarding fraud, but it is also interesting to see how the NCA operates in this particular scenario because of the political battles taking place regarding the superiority of the NCA and the Serious Fraud Office – it will be interesting to examine, but this may be the opportunity the NCA needs to establish itself as the eminent department in the fight against fraud.

Keywords – banking, financial regulation, Barclays, Lloyds, TSB, RBS, I.T., Fraud, @finregmatters

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