Here’s a brilliant report from Bruce Packard at Seymour Pierce on Thursday, which expands in great detail on the rather hypocritical trend of banks scorning unsecured lending while simultaneously fighting over customer deposits — the cheapest form of unsecured borrowing for them.
What’s worrying for the UK, in particular, says Packard, is that it’s the government supported banks like RBS and Lloyds which are clearly most guilty of the practice.
As he notes:
By guaranteeing UK deposits, the Government is effectively subsidising the unsustainable levels of leverage in universal banks’ balance sheets.
And he goes on (our emphasis):
Our other concern is that banks are recouping investment
banking losses by expanding margins to retail and small business customers. Aside from the “fairness” of UK customers paying for losses in an alphabet soup of ABS, CDO, CDS and CPDOs, we think that this could create an opportunity for new entrants (supermarkets? Metro bank? Virgin? peer to peer lending networks such as zopa or funding circle?). In essence, investment bankers are sucking the blood from UK Retail Bank franchises.
HSBC is the universal banking exception, though, says Packard. The bulk of its crisis losses occurred in its North American Personal Finance Services division, and the bank seems stable enough to absorb them without buckling on its highly competitive mortgage deals.
However, when it comes to the government-supported institutions:
This appears not to be the case at the UK government owned banks, LLOY and RBS, where Net Interest Income grew 24% and 16% respectively as the banks widened margins to UK customers to make up for losses in the investment bank.
That said, Packard believes shareholders won’t ultimately be the beneficiaries of these mercenary tactics. As he puts it, continued reliance on government support will probably force the banks to return profits to customers eventually.
But there is a useful hunter/gatherer analogy to be made, says Packard.
He draws on anthropological studies as far apart as the Ache tribe in Paraguay and the !Kung San tribe of the Kalahari Desert, to make the point that the universal banking system is simply not sustainable.
And that’s because one division is a hunter and the other is gatherer.
First, it’s a fallacy that investment bankers can or should employ an “eat what you kill” mentality in their operations. As he states:
Hunter gatherers do not have an “eat what you kill” culture, but instead share meat among members of the tribe. This is not out of indiscriminate largesse or commitment to socialist principles. Citing data from anthropological studies as far apart as the Ache tribe in Paraguay and the !Kung San tribe of the Kalahari Desert, Steven Pinker shows that people share when the variance of success is high.
Some weeks a tribesman may be lucky and have more food than he can eat, but in other weeks be unlucky and in danger of starvation. How can a tribesman store food when there are no fridges? Better to share meat than for it to rot. In effect, the successful hunter stores food in the bodies and mind of other people, in the form of a memory of generosity the tribesman feels obliged to repay when fortunes reverse. Later, if someone else in the tribe managed to kill an antelope, they would benefit from the reciprocal altruism.
We see a parallel with this behaviour, and the old paternalistic investment banking partnership structure, which did not have an “eat what you kill” ethos.
A gathering culture, meanwhile, is far less willing to share since an empty-handed gatherer is more likely to be lazy rather than unlucky.
Hence his conclusion:
For this reason we think investment banking, where there are wide swings in income from year to year, and successful deal making is often a case of “being in the right place at the right time”, does not sit well within commercial banking (more like the “gathering/hoarding/empire building”).
Full note available in the usual place.
Related links:
Scenes from an asset liability mismatch - FT Alphaville
Euribor has been vaporised – FT Alphaville
Zen and the art of flogging banks - FT Alphaville