Sunday, October 28, 2012

Beware more skeletons in the banks' cupboards

If there is one thing that has been learned from the financial crisis, it is that bad behavior was the norm for how bankers behaved.

The Guardian highlighted a few areas where this bad behavior occurred:

But Libor is not the only skeleton in the cupboard for this industry. 
Barclays, again, is the bank that reminded the City about the scale of the payment protection insurance mis-selling scandal, with its shock announcement earlier this month that it needed to put aside another £700m to cover the cost of claims. This takes the bill for the big banks up to nearly £10bn even before the updates due this week, when Lloyds is regarded as likely to need to stump up more on top of the £4.3bn the episode has already cost its shareholders. 
And Barclays, again, is the bank that best illustrates the new mis-selling scandal of interest rate swaps to small businesses. It will be in court tomorrow facing claims from Guardian Care Homes that it was mis-sold £70m of these swaps, which were intended to protect against rises in interest rates. The Wolverhampton care home operator claims to have lost £12m. 
Barclays is not alone in facing claims over interest rate swaps: the Financial Services Authority estimates that 44,000 businesses may have been mis-sold swaps. Every bank's third-quarter numbers this week will be scrutinised for signs of additional provisions to cover new claims. 
And then there are the new scandals just lurking in the background. 
Santander this week took a mish-mash of a provision – of £232m, no less – to cover "conduct remediation" and future regulatory changes. The bank did not spell it out, but only a small part of the £232m is likely cover interest rate swaps. Some will be the cost of helping the card insurer CPP pay out redress to bank customers sold identity-theft protection. On Friday CPP admitted it had made a £25m provision following an FSA investigation into the way the insurance was sold. Several banks used CPP to sell such insurance and may be forced to help cough up the compensation bill. 
Then there is the potential scandal brewing from the sale of interest-only mortgages taken out in the boom years and now described as a £100bn time-bomb, as customers may never be able to pay off the actual sums borrowed. 
What exactly are the likely losses associated with these mortgages?
It may not take much to tip this skeleton out of the cupboard, if customers start to complain they were not given proper advice or if the FSA decides to get heavy. 
In the runup to the crisis, up to a third of all mortgages were interest-only deals – a truly scary number if customers are unable to switch to a repayment mortgage when the moment comes; and as we report, the same claim firms that have helped drive PPI payouts to astronomical levels are now turning their attention to mortgage mis-selling. 
So much of the activity that has taken place in the banking industry is enough to spook even the hardiest soul. 
Regular readers know that the way to end spooky surprises is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Not only is the sunlight provided by this type of transparency the best disinfectant for bad bank behavior, but sunlight also reveals all the previously opaque corners of the financial system that need to be cleaned up. 

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