A strange crop of utilities — the banks
Banks in the U.S. and Europe are feeling the hand of government upon them, says this U.S. advisory. Are they turning into public utilities?
You’re pouring over the utility bills. Heating, water ... whoa, look at our banking bill this month!
Everybody grumbles about bank charges (except the banks), but aren’t they becoming more and more like the electricity or gas bill?
What if the banks became regulated utilities? Don’t laugh, says one American advisory. They may be headed that way.
If this is true, Canada’s banks appear to be ahead of the curve. They’ve been playing by a rather gentlemanly set of rules for years now. (And some tougher ones may be coming down, if Mr. Flaherty’s new credit card code of conduct is any indication.)
But the rest of the world may be catching up, however reluctantly, says Review & Outlook.
This advisory, published by a Boston money management firm, can be counted on for a penetrating view of the economy and the markets.
In this case, the advisory discusses just how much regulation banks in America and Europe can expect. And it looks at two possible outcomes for the banks — one not so good and one even worse.
A gruesome list
No need to go over the gruesome list of flops and failures that have afflicted the banking and lending institutions of the United States.
Suffice it to say that some of the biggest companies in the field are no more. Others are being towed around in a lifeboat while the market, or the government, decides what to do with them.
The shares of U.S. bank stocks have risen sharply from their March lows, but that’s something of an illusion, say the authors of this report.
We know that much of that recovery has been fuelled by the vast sums of public money poured into the financial system to keep credit markets alive, buy up bad assets and prop up staggering institutions.
What we don’t know, the authors reckon, are the “immense and still-unknown (and unknowable!) costs to taxpayers.”
The upshot is that governments in the U.S. and elsewhere are either the full custodians or the guarantors of a great many banks.
Level of fury
The first clue as to how the public interest will weigh on private affairs is the clamour over compensation. While banker pay has been a topic of debate for years, “today’s level of fury may well be unprecedented.”
The authors even suggest that readers watch the movie Capitalism: A Love Story by notorious gadfly Michael Moore if they wish to measure the degree of outrage percolating in American society.
Officials and the electorate are enraged at financial institutions, and the public is now in the driver’s seat — “and governments are increasingly and understandably willing to exercise their authority.”
In the United Kingdom, the 822 billion pounds sunk into the banks make the government the de facto owners of the financial sector.
Governor of the Bank of England Mervyn King has declared that banks are “too important to fail,” which means that their size must be limited and their activities restricted and compartmentalized in order to prevent recent events from repeating themselves in the future.
In short, they can’t be trusted to look after themselves.
Chancellor of the Exchequer Alistair Darling has promised specific action, namely the break-up of big banks RBS, Lloyd’s and HBOS into their component parts. The idea is to have smaller independent banks.
Mr. King has even proposed that no bank should be allowed to take deposits and act as an investment banker. One or the other.
Treated like utilities
In the United States, Mr. Paul Volcker has said much the same thing. Famous for dealing forcefully with “stagflation” as Federal Reserve chairman in the 1980s, Mr. Volcker is, at 82, back in the fray as head of President Obama’s Economic Recovery Advisory Board.
Mr. Volcker’s opinion is quite simply that the banks serve as “public utilities” and should be treated as such.
In the spirit of the Glass-Steagall act (passed in the Great Depression and repealed in 1999), banks should not have their fingers in all pies. A bank should do one of three things — commercial and retail banking; investment banking; or capital markets investing and proprietary trading.
Public money, Mr. Volcker has stated forcefully, “should not be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization.”
If this came to pass, giants such as JP Morgan and Goldman Sachs would have to spin off units and liquidate assets in order to meet new federal standards. Quite a comedown for the lords of Wall Street.
Dramatically altered landscape
U.S. banks have expanded over the past 18 months as they swallowed up failed rivals, but this trend will come to an end, say the authors. “The coming months will surely bring new rules and guidelines for the financial industry as a whole, and thus dramatically alter the landscape.”
For shareholders, banks will represent either very appetizing or very frightening investments. One noted analyst thinks this is a great time to make a valuation call on the banks.
These authors respectfully disagree. The political risks, they say, loom much larger than any fundamental analysis. “Our intuition is that the current round of legislation will have significant ramifications.”
Under new regulatory proposals, “a dream scenario” could unfold for the banks. The economy could suddenly perk up, commercial leases could improve, young couples could start buying homes, short-term rates could stay low ... and yet a bank’s value could still suffer under the new laws.
Or, if a weak economy does not firm up soon, “the outlook for the financial sector would be bleak indeed.”
Already cocooned by legislation, the Canadian banks may not be in line for the same fate. But they’re not operating in a vacuum.
As long as the prevailing wind is for regulation, who knows what will happen. Put it this way — how upset would you be if a bank had to apply to a regulatory board to kick up the charges on your bankcard?
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