November 21, 2017

DealBook: As Larger British Rivals Perk Up, a Heralded Small Bank Stumbles

A branch of the Co-operative Bank in London.Toby Melville/ReutersA branch of the Co-operative Bank in London.

LONDON — Just as larger banks in Britain are recovering from the financial crisis, a smaller one championed by lawmakers as an alternative to institutions like Barclays and Royal Bank of Scotland is floundering, complicating the government’s plan to shake up the industry and testing its new regulatory system.

Much like the past troubles of its maligned larger rivals, the Co-operative Bank now has too many risky real estate loans and a buffer against losses that is too thin. Moody’s Investors Service cut its rating last week by six levels, to junk status, and said the bank might require “external support” if loan losses increased much more. The bank’s chief executive, Barry Tootell, resigned the next day.

The developments are an embarrassment for George Osborne, the chancellor of the Exchequer, who made it one of his goals to support the growth of smaller banks to improve the stability of the banking sector and increase competition. The government frowned upon the concentration of the market – the top five banks control 85 percent of the personal checking accounts – arguing that more competition would strengthen the sector.

In a speech in February, Mr. Osborne said he wanted “upstart challengers offering new and better services that shake up the established players.” He mentioned the Co-operative Bank by name, saying Britain had started to make some headway but that he wanted to see “more banks on the high street, so customers have more choice.”

In an industry that had cost the government billions of pounds to support throughout the financial crisis and had recently shocked clients with a string of scandals, the Co-operative Bank had enjoyed a relatively unscathed reputation.

Its structure also makes it stand out. The bank is the main subsidiary of the Co-operative Group, one of the largest cooperative businesses. It is owned by seven million members, mainly its employees and customers. Apart from the bank, the Co-operative Group also owns funeral services, pharmacies, food stores and farms.

Much of the government’s hope to expand the Co-operative Bank relied on the planned purchase of 632 branches that the Lloyds Banking Group had to sell to comply with European competition rules after receiving a government bailout in 2008. The purchase would have tripled the bank’s network to about 1,000 branches.

But the Co-operative Bank pulled out of the £750 million ($1.2 billion) deal in April, almost a year after agreeing on the terms, citing the economic environment and increasing regulatory requirements. Analysts said the bank had neither the financial strength nor the technological know-how to complete the transaction. A month earlier, the Bank of England had asked banks to raise a combined £25 billion before the end of the year to plug capital shortfalls.

“There could have been closer scrutiny,” said Simon Maughan, an analyst at Olivetree Securities. But he also said “there’s an irony: the government is insisting on higher capital, then having to go and help the banks as they’re trying to achieve that.”

The Co-operative Bank’s troubles stem mainly from a portfolio of commercial real estate assets that it inherited when it combined with the Britannia Building Society in 2009. Over the years, the bank put aside money to cover losses from bad loans, but not enough. In March, the bank shocked the market when it reported a loss of £674 million for 2012. Impairment charges more than quadrupled, to £469 million.

The bank’s core Tier 1 ratio, a measure of a bank’s ability to weather financial crises, is 6.7 percent, according to new stricter accounting rules known as Basel III. That is below the 7 percent target the Bank of England ordered British banks to achieve by the end of this year, Moody’s said.

The bank’s troubles are also the first serious test for Britain’s new regulatory system. Five years after the government had to bail out the Lloyds Banking Group and the Royal Bank of Scotland and was forced to privatize the mortgage lender Northern Rock, London overhauled the way it supervised banks, shifting more powers to the Bank of England. A spokesman for the Bank of England’s Prudential Regulation Authority, one of the new financial regulators, declined to comment on the Co-operative Bank, citing its policy not to comment on specific companies.

Ian Gordon, an analyst at Investec Securities, said it was “curious that the bank was allowed to run with such weak levels of capital,” adding there was “an element of regulatory neglect” that represented a lesson for the new system.

Julia Black, a professor at the London School of Economics, said, “Supervision isn’t a transparent process, but I’m surprised it hasn’t already been required to hive off the bad loans or to set aside more capital.”

The Co-operative Bank said it would not need a government bailout and was working with the regulator to improve its capital position, mainly through selling businesses and loan portfolios. The bank’s cooperative structure means it cannot sell equity to improve its capital buffer but must rely on selling assets and pooling capital from its profitable nonbanking businesses.

Some analysts suggest the Co-operative Group might be better off not owning a bank in the long run – and that Mr. Osborne might be better off looking elsewhere for a new banking champion.

Article source: http://dealbook.nytimes.com/2013/05/15/heralded-small-bank-in-britain-mirrors-troubles-of-larger-rivals/?partner=rss&emc=rss

Global Financial Leaders Avoid Public Rift With Japan

At the end of two days of talks among the Group of 7 finance ministers outside London, other nations appeared to accept — at least for now — Japan’s explanation that its new monetary efforts were meant to stimulate its domestic economy, rather than to drive down the yen on international currency markets.

The chancellor of the Exchequer in Britain, George Osborne, said on Saturday that ministers from the G-7, made up of the United States, Germany, Japan, Britain, Italy, France and Canada, had reaffirmed earlier commitments on exchange rates and agreed to make sure policies are “oriented towards achieving domestic objectives.” Other officials described the talks as in-depth and positive. Last week, the dollar breached the 100-yen mark for the first time in over four years.

The two-day meeting, in Buckinghamshire, also focused on efforts to stem tax avoidance and on banking reform, and Mr. Osborne said it was “important to complete swiftly our work to ensure that no banks are too big to fail.” The officials discussed efforts to create a European banking union, which have slowed in recent months.

“We agreed on the importance of ensuring banks’ balance sheets are adequately capitalized to enable them to play their role in supporting the economy,” Mr. Osborne said.

The talks took place against a background of growing austerity fatigue in Europe, and concern that the region’s focus on reducing deficits and debt risked driving some economies into a downward spiral.

One United States Treasury official, who spoke on the condition of anonymity, said there was a recognition that, because of the economic weakness in southern European nations like Greece, Portugal and Spain, it was “more important than ever” to have higher private demand in the euro zone countries that are performing better. Germany has the most room to lift demand, although the Treasury official did not identify it or other countries by name.

The official added that recent, positive suggestions that France and Spain should have more time to reduce their budget deficits would be helped by “a greater contribution of private demand” from better-performing European countries.

But a German official, who also spoke on the condition of anonymity, disputed any consensus on that point, noting that there was no official statement on the matter after the meeting. As planned, no communiqué was issued after the event. The idea of stimulating domestic demand is contentious in Germany, in part because of the risk of stoking inflation.

Nevertheless, the German finance minister, Wolfgang Schäuble, seen as one of the main architects of the euro zone’s austerity policies, has shown some signs of greater flexibility and said, before the meeting, that he supported the European Union’s move to give France and Spain more time for deficit reduction.

Slow growth in much of the developed world, and particularly in Europe, provided an uncertain backdrop to the meeting, despite efforts by several central banks to stimulate economic activity.

Article source: http://www.nytimes.com/2013/05/12/business/global/financial-leaders-avoid-public-rift-with-japan-over-yen.html?partner=rss&emc=rss

Britain to Stick With Austerity Budget

In his annual budget presentation to Parliament, George Osborne, the chancellor of the Exchequer, stuck to the austerity plan he designed three years ago but offered some additional support for the ailing economy, including concessions for home buyers. Some economists said that relying in part on the housing market to spur growth reeked of desperation and showed how little room to maneuver the government has as it pushed ahead with austerity.

Mr. Osborne blamed troubles in the euro zone for a deteriorating economic outlook at home. He cited figures from the Office for Budget Responsibility showing that the British economy would grow 0.6 percent this year, half of the 1.2 percent forecast earlier. Growth will be 1.8 percent next year, down from a previous estimate of 2 percent, the office said.

“It is taking longer than anyone hoped, but we must hold to the right track,” Mr. Osborne told Parliament. “I will be straight with the country: another bout of economic storms in the euro zone would hit Britain’s economic fortunes hard again.”

In the latest sign that the government is struggling to repair the economy, Mr. Osborne conceded that public-sector net debt as a percentage of gross domestic product would start falling only in the fiscal year ending in 2018. That is a year later than Mr. Osborne predicted in December, when he pushed the goal back to 2017 from 2016.

The Office of Budget Responsibility said public-sector net debt would peak at 85.6 percent in the 2017 fiscal year, compared with the 79.9 percent it forecast in December.

Austerity measures at home, the economic crisis on the Continent and higher prices for energy caused the British economy to contract in the last three months of 2012. Without growth, Mr. Osborne cannot balance the budget, but a sluggish economy and rising consumer prices have been squeezing households, and companies are struggling with weak consumer demand.

Dominic White, an economist at Absolute Strategy Research and a former adviser to the British Treasury, said Mr. Osborne was unlikely to step back from his austerity plan two years ahead of a planned general election.

“George Osborne has imposed this debt target on himself, and to abandon it now would be political suicide,” Mr. White said. “Fiscal tightening has acted as a drag on growth and probably more than what the government thought when it set out.”

The Conservative Party of Mr. Osborne and Prime Minister David Cameron has been losing some public support. A survey by Ipsos MORI this month showed that 60 percent of the public was now dissatisfied with Mr. Osborne as chancellor.

With little cash to spend to help spur growth, Mr. Osborne is now relying on the Bank of England and the housing market to help create the economic upturn he needs to meet his debt targets.

In the new budget, he diverted some of the proceeds of a concerted public spending squeeze to extend the scope of a program that lends home buyers a portion of the money needed to put down a deposit on newly built houses.

The government will also set up a separate three-year program, operating along similar lines, to assist anyone wanting to buy a home worth up to £600,000, or $906,000. The program will be backed by up to £12 billion in government guarantees.

The housing market has traditionally been an engine of economic growth in Britain, but because of the country’s history of real estate booms and busts, even supporters of the plan acknowledged that it carried risks.

“It’s a bold move, perhaps a desperate one, but one that will be undeniably welcome by the beleaguered construction industry,” said Richard Threlfall, head of infrastructure, building and construction for the advisory firm KPMG. “The government has finally recognized that housing might offer the fastest-acting pain relief for our economic woes.”

The Royal Institution of Chartered Surveyors, the trade group for the real estate and construction industries, warned in a statement that even though the move “will help prevent prolonged market stagnation” it is also risky. The “government needs to be careful this doesn’t create another housing bubble,” it said.

If the plan stokes inflation, a new remit for the Bank of England, also announced Wednesday, would allow the central bank more flexibility in keeping its benchmark interest rates at their record low of 0.5 percent. Under its new remit, the Bank of England is supposed to focus more on helping economic growth than bringing inflation down to its 2 percent target.

Other efforts to generate growth include a reduction in corporate tax to 20 percent from 21 percent in 2015, a reduction in payroll taxes to help small and midsize businesses, and higher tax-free allowances for earners. A planned increase in the tax on fuel was scrapped and a duty on beer was reduced.

Mr. Osborne also announced tax concessions designed to spur the exploitation of shale gas reserves in Britain.

But his plan was criticized by the Labour Party, in the opposition, which argued that the relatively small shifts in tax and spending policy would not be enough to help the economy return to growth.

Ed Miliband, the Labour leader, said Wednesday in Parliament that Mr. Osborne was “the wrong man in the wrong place at the worst possible time for this country.”

“All he offers is more of the same,” Mr. Miliband said. “Britain deserves better than this.”

The Labour Party has argued that the government should increase spending to help the economy, even if it means borrowing more in the short term. But Mr. Osborne and Mr. Cameron have argued that this would unnerve investors in British debt.

Article source: http://www.nytimes.com/2013/03/21/business/global/britain-to-stick-with-austerity-budget.html?partner=rss&emc=rss

As Government Stands Firm, Analysts See Risk of New Recession in Britain

LONDON — As George Osborne, the chancellor of the Exchequer, prepares this week to update Parliament on his plans for the economy, the prospect of stagflation is back to haunt Britain.

Recent disappointing economic data coupled with rising consumer prices have heightened fears among some economists that Britain is once again edging closer to a recession, leaving Mr. Osborne and his austerity plan increasingly isolated.

Calls for Mr. Osborne to take a break from his relentless efforts to balance the budget and instead find ways to get economic growth back on track intensified in advance of the annual budget, which he is to present to Parliament on Wednesday. Even within his own Conservative Party and among members of the government’s junior coalition partner, the Liberal Democrats, lawmakers have started to suggest that it time for a new approach.

“The pressure is mounting on Mr. Osborne,” said Simon Wells, an economist at HSBC. “He’s been in the job almost three years, and over this period the economy has grown by a measly 1 percent.” That compares with 4.9 percent growth in the United States during that span, 3.7 percent in Germany and 1.7 percent in France, according to Mr. Wells.

“With an election looming in 2015, he needs growth if he is to stabilize the public finances, and he needs it soon,” Mr. Wells said.

Some lawmakers and economists suggested that Mr. Osborne should use the budget update to announce a slight increase in borrowing to invest in infrastructure, education and other projects that would help revive growth. But the government is widely expected to stick with its plan of balancing the books within five years, even as a deteriorating economy makes achieving that goal more difficult.

“This month’s budget will be about sticking to the course, because there’s no alternative,” Prime Minister David Cameron said in a speech last week.

In January, Britain’s industrial production surprisingly fell to its lowest level in 20 years, reviving concerns that the country could fall back into a recession for the third time in little more than four years. A dismal economic outlook had pushed the pound to the lowest level against the dollar in nearly three years; that makes imports more expensive and threatens to increase inflation that is already above the E.U. average. Higher consumer prices in turn would further cut spending power.

Irfan Aslam, the founder of Global Components, a British supplier of bolts, textiles and other components to the local furniture industry, said the weak pound had already hurt his business by making parts he buys in the United States and Europe more expensive.

“It’s having a real detrimental effect on the business,” said Mr. Aslam, 37. “It forces us right to the edge.”

Mr. Aslam had to postpone plans to expand his warehouses and hire staff members and said he might be forced to pass price increases to his customers. “Demand is weak anyway, and we should be thinking about offering promotions to create demand, but we can’t. We’re actually thinking about increasing prices,” he said.

The government and the Bank of England had welcomed a weaker pound, arguing it would help the economy by making British exports cheaper. But the recent slump of the currency against the dollar, as well as the euro, prompted Mervyn King, governor of the Bank of England, to change his tone. In an interview with the television channel ITV on Thursday he said the pound was now “properly valued,” indicating a further decline was not desirable.

Ha-Joon Chang, an economist at the University of Cambridge, said Britain had failed to generate a trade surplus despite the relatively weak pound because the country was unable to produce enough valuable goods that could be exported. Britain’s economy shrank 0.3 percent in the final quarter of last year and is expected to grow 1 percent this year, according to the International Monetary Fund.

The opposition Labour Party has been pointing to the weak economic growth as evidence that Mr. Osborne’s austerity plan — which has included some tax increases, the elimination of tens of thousands of public sector jobs and cutting social benefits — was not working. Austerity is choking the economic recovery, opposition lawmakers have argued; they say the government needs to increase spending to fuel growth.

Article source: http://www.nytimes.com/2013/03/18/business/global/as-government-stands-firm-analysts-see-risk-of-new-recession-in-britain.html?partner=rss&emc=rss

DealBook: Britain Backs Banking Overhaul

George Osborne, Britain's Chancellor of the Exchequer, displayed the 2011 budget.Rupert Hartley/Bloomberg NewsGeorge Osborne, Britain’s chancellor of the Exchequer, with the 2011 budget.

LONDON — The British government plans stricter banking regulation that would force banks to separate their investment banking operations from those businesses that take deposits.

The chancellor of the Exchequer, George Osborne, said on Monday that the government would seek to pass laws by 2015 to strengthen financial regulation as proposed by an independent commission led by John Vickers, a former Bank of England chief economist. The new laws would then apply by 2019 the latest.

“These are the most far-reaching reforms of British banking in modern history,” Mr. Osborne said in a speech to Parliament. The reforms are intended to allow Britain to stay “home to one of the world’s leading financial centers without exposing British taxpayers to the massive costs of those banks failing.”

The new rules represent a bigger change for the banking industry here than the Dodd-Frank overhaul has meant for banks in the United States, some analysts have argued. Under the British regulation, investment banking and retail banking operations would be different legal entities and financed separately. The rules would also require banks to set aside a slightly bigger capital cushion than required by the Basel III regulations. Only Switzerland has asked its banks to hold more capital to absorb future potential losses so far.

British banks would have to shield deposits of individuals and small and medium-size companies in their consumer bank from investment banking activities, like trading. This means banks would no longer be able to use deposits to finance investment banking units. Investment banking businesses would also be allowed to fail without affecting the rest of the bank. The new rules would not apply to subsidiaries of non-British banks in Britain.

“The face and structure of banking has changed for good, and we’ve reached a point of no return,” Jon Pain, head of financial services risk consulting in Britain at KPMG, said. “Business models need to be fundamentally overhauled.” Major banks should not be “fooled” by the timetable as they “will need to make some serious decisions before June,” he added.

Angela Knight, head of the British Bankers’ Association, played down the impact of the changes, saying that the government’s decision was just “the next stage of a program of reform” and that “banks have already made significant changes to how they operate.”

Some banking executives have argued that the new rules would be expensive for the banks at a time when the industry is already struggling with sluggish growth and volatile markets.

The government, however, has said that banking regulation would have to change after Britain’s securities regulator, the Financial Services Authority, acknowledged that it made mistakes leading up to the financial crisis, when the government had to inject billions of pounds into the banking system.

Mr. Osborne said the reforms were expected to cost the banking industry as much as £8 billion, or $12 billion, as banks would no longer benefit from the perceived guarantee that the government would bail them out. The costs to gross domestic product could amount to as much as £1.8 billion but would be “far outweighed by the benefits,” Mr. Osborne said.

The government asked the Vickers commission last year to come up with proposals of how best to protect taxpayers from having to bail out financial institutions during any future banking crises. Britain’s government spent more than $1 trillion in bailing out ailing financial institutions during the recent financial crisis and still owns stakes in two of the country’s largest banks, Royal Bank of Scotland and the Lloyds Banking Group.

The government said Monday it accepted all the commission’s proposals, which also includes ways to increase competition among local banks and make it easier for customers to switch banks.

Barclays’ chief executive, Robert E. Diamond Jr., has criticized the regulation overhaul, saying the proposals were not the best way to protect depositors and would just burden the banking sector with additional costs. Stephen Hester, the chief executive of Royal Bank of Scotland, has said the new rules would put British banks at a disadvantage to global competitors.

Some banks, including HSBC, have previously said they would consider moving their headquarters abroad if the new regulation was too punishing. Mr. Osborne denied Monday that the rules would make London less attractive as a financial center.

The new banking laws come in addition to changes to the structure of the financial supervisors. David Cameron’s government decided in 2009 to abolish the Financial Services Authority and move most of its supervisory responsibilities to the Bank of England next year.

Article source: http://feeds.nytimes.com/click.phdo?i=9f05499d377f5c3a715a70ecb7d348d7

Britons Strike as Government Extends Austerity Measures

Courts, schools, hospitals, airports and government offices could all be hit by the strike, which has come to be seen as an emblem of resistance to government plans to squeeze public-sector pensions and cut government spending to reduce debt.

Education authorities across Britain said thousands of schools had closed because teachers were on strike, and many parents had taken a day off from work to look after children.

The stoppage was billed as the most extensive in decades, mirroring the turmoil in the debt-plagued euro zone across the English Channel and offering a reminder of the potential social and political impact of the financial crisis seizing much of Europe. While Britain is not part of the single European currency, it is a member of the European Union and relies on the continent for much of its trade.

The chancellor of the Exchequer, George Osborne, said on Tuesday that because of the slowdown in the euro zone, British economic growth this year and next would be slower than forecast in March and “debt will not fall as fast as we’d hoped.”

He added that Britain could avoid a recession next year only if the euro zone found a solution to its crisis.

“We’ll do whatever we can to protect Britain from this debt storm,” Mr. Osborne told a packed Parliament. “If the rest of Europe heads into a recession, it may be hard to avoid one here in the U.K.”

News reports on Wednesday spoke of picket lines being set up outside public buildings while workers planned rallies and demonstrations across Britain. Some of the first workers to strike were in Liverpool, where tunnels under the River Mersey were closed. But the overall level of participation remained unclear.

Some routes into London, normally clogged with commuter traffic and cars ferrying children to school, were virtually deserted as the strike began.

Medical officials said up to 60,000 nonurgent hospital procedures — from surgery to outpatient visits — were postponed because of the strike. But airport operators said that two Britain’s two biggest airports — Heathrow and Gatwick near London — were functioning with relatively little delay because many border service personnel had not joined the strike and were being assisted by other government officials to inspect the passports of arriving passengers.

The airports had been an early focus of worries that travelers could be delayed by up to 12 hours.

Immigration queues are currently at normal levels,” BAA, the leading airport operator, said. In addition to drafting in support staff, the operator had also asked airlines to restrict the number of passengers booked on flights.

“However, there still remains a possibility for delays for arriving passengers later in the day,” BAA said.

The company operating Eurostar, the high-speed train using the Channel tunnel, had urged passengers to be prepared for delays. But, by midmorning, a Eurostar spokeswoman said, “everything is fine, with no delays or cancellations.”

At the weekly parliamentary session devoted to questions to the prime minister, the strike provoked fierce exchanges between Prime Minister David Cameron and the Labour opposition leader, Ed Miliband, who accused the government of secretly welcoming the walkout.

“I don’t want to see any strikes,” Mr. Cameron said. “I don’t want to see our schools closed. I don’t want to see problems on our borders.”

He called the strike “something of a damp squib,” but acknowledged that it had forced the closure of 60 percent of British schools. He also said that “less than a third” of civil service employees were on strike.

Article source: http://feeds.nytimes.com/click.phdo?i=6b45846e58d39f5d7b29fbaae1cdace2

DealBook: Moody’s Downgrades 12 British Banks

Scott Eells/Bloomberg NewsMoody’s Investors Service headquarters in Manhattan.

PARIS — Moody’s Investors Service on Friday downgraded its ratings on 12 British financial institutions, including Lloyds TSB Bank and Royal Bank of Scotland, saying it believed Prime Minister David Cameron’s government was less likely to provide support for the institutions in the event of failure.

It cut the senior debt and deposit ratings on the 12 lenders, citing its “reassessment of the support environment in the U.K., which has resulted in the removal of systemic support for 7 smaller institutions and the reduction of systemic support by one to three notches for 5 larger, more systemically important financial institutions.”

Both Lloyds TSB Bank and Royal Bank of Scotland fell into the arms of the state during the 2008 crisis and likely would have collapsed without that support.

Mr. Cameron’s chancellor of the Exchequer, George Osborne, said the downgrades were expected because the government was pursuing the right policy.

“As I understand it,” Mr. Osborne told BBC radio, “one of the reasons they’re doing this is that they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain, in other words trying to deal with the too-big-to-fail problem.”

Shares of Royal Bank of Scotland fell 2.8 percent in London, while Lloyds TSB Banking fell 3.8 percent.

He said the Vickers Commission report, which called in September for the separation of retail and investment banking activities, demonstrated that the government was serious about overhauling the banking industry.

“In other words,” he told the BBC, “people ask me, how are you going to avoid Britain and the British taxpayer bailing out the banks in the future? This government is taking steps to do that, and therefore credit ratings agencies and others will say, well actually, these banks have got show that they can pay their way in the world.”

Mr. Cameron added that he was “confident that British banks are well-capitalized, they’re liquid, they’re not experiencing the problems that some of the banks in the euro zone are experiencing at the moment.”

Moody’s said British banks’ ratings continued to receive “up to three notches of uplift” from expectations of support, but “it is more likely now to allow smaller institutions to fail if they become financially troubled.” It noted that the Bank of England, the Financial Services Authority and the Treasury had all made it clear that in the future the government would be more likely “to make greater use of its resolution tools to allow burden sharing with senior bondholders.”

It stressed that the ratings cuts “do not reflect a deterioration in the financial strength of the banking system or that of the government.”

Moody’s cut Lloyds TSB Bank and Santander U.K. to A1 from Aa3; Co-Operative Bank to A3 from A2, R.B.S. and Nationwide Building Society to A2 from Aa3; and cut seven smaller institutions, as well.

Shares of Royal Bank of Scotland fell 2.8 percent in London, while Lloyds TSB Banking fell 3.8 percent.

R.B.S. is now facing the need for another capital injection from the government, the Financial Times reported Friday. R.B.S. in a statement called that report “speculation.”

Moody’s said four British banks continued to benefit from “a very high likelihood of support” from the government, including Barclays and HSBC Holdings, as well as Lloyds TSB and Royal Bank of Scotland. It did not change its ratings of Barclays and HSBC.

Article source: http://feeds.nytimes.com/click.phdo?i=6b9088182b9a15bf9c6938d4caecb379