Tuesday, October 2, 2012

Despite taxpayer ownership, RBS still 'poster child for what went wrong in banking' and not example of how banks should operate

Stephen Hester, the CEO of RBS, acknowledges that RBS is still the "poster child for what went wrong in banking."

What UK taxpayers should find distressing about that statement is the simple fact that he then did not say RBS has become the model for what a 21st century bank should be.

Specifically, a 21st century bank understands that if customers are going to trust it, it must go above and beyond to show that it is trustworthy.

Regular readers know that this involves providing ultra transparency and disclosing on an ongoing basis its current global asset, liability and off-balance sheet exposure details.  It is only with level of disclosure that sunlight acts as a disinfectant for bad behavior.

With this level of disclosure comes a different culture.  A culture where all the useful, relevant information in an appropriate, timely manner is disclosed to customers.

I have always wondered why RBS is not the first global bank to provide ultra transparency.  What do they have to hide?  What are they afraid of?  A bank run?  The government already owns 82% of them.

In a speech to students and staff at the London School of Economics, Mr Hester said: “The banking industry in the decade preceding the crisis was focused on income, it expanded too fast, prioritised sales over service and failed to properly balance the interests of its customers and shareholders with those of its managers.” 
To this list I might add the Yves Smith observation, nobody was rewarded in the banking industry for creating transparent, low margin products.  Instead they were rewarded for creating opaque, high margin products where the high margins were available only because opacity prevented the customer from having all the useful, relevant information in an appropriate, timely manner to properly assess the risk of the product.
The banking veteran said RBS was resting on a “wafer thin capital base” before its collapse and had “effectively run out of money to fund itself and its customers”. 
In a speech that promised to speak “candidly” about his task of saving a failed bank and the transformation of the banking sector more generally, Mr Hester said the industry needed to make a “new compact” with society, where customer service comes first. 
Mr Hester said RBS, which is 82pc owned by the British taxpayer, had already made progress towards this goal, including reforming staff pay such as paying bonuses in shares instead of cash. 
But he said that pay reform “has to go further” to take account of customer service as well as sales.
The banking industry needs a renewal of the "old compact" with society where it is there to support society's needs for credit and payment services.
The 51 year-old said RBS had about 15 months of “heavy lifting” to complete in order to stand by its five-year recovery plan, although he warned the bank was not “out of the woods” as the bank still depended on the health of the economy.
My question is just how much more in the way of 'bad' assets is hidden on the RBS balance sheet?
Referring to the wider reform of the banking industry, Mr Hester said change was necessary but called current levels of public hostility towards bankers “particularly unhealthy”. 
He said the “many scandals” that have hit banking in recent years, such as the Libor-fixing scandal, were not unique problems. “I think it’s more accurate to say that most of them are related to one big scandal: banks have simply not been good enough servants of their customers in the recent past,” he said.
Actually, all of the scandals are related to the same big scandal.  Banks, with the regulators' blessing, have been able to create opacity in wide swaths of the global financial system.  Behind the veil of opacity bankers have been able to engage in bad behavior.

Libor is a classic example.  It was designed on day one to allow banks to manipulate the rate without market participants being able to see what was happening or regulators taking any action to stop it.

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