EACH new bit of evidence suggests that banks’ underlying confidence is on the rise. Scars of public criticism remain for the sector from the 2008 financial crisis but – stripping out the likes of regulatory fines for mis-selling and the rundown of toxic assets – the banking body looks far fitter than it did.
In parts, even slightly vigorous. Today’s latest financial services survey from the CBI and PwC shows activity and sentiment in the industry continued its robust rebound in the three months to March, following an even stronger previous quarter. Business volumes and profits are up, and expected to continue to climb.
Headcount is on the rise again. Just as significantly, a wave of new investment is underway in IT – always a barometer of banks’ medium‑term confidence given how many households and small businesses now use the telephone and internet to do transactions.
Riskier investment banking divisions have been pruned, sometimes severely, reflecting a mix of lower expectations due to macro-economic conditions, and sometimes political pressure.
Banking bad debt provisions have fallen sharply from the peak, even if the likes of Lloyds Banking Group and Royal Bank of Scotland face the headwinds of continued exposure to commercial property in general, and Ireland, in particular.
Perhaps, crucially, the CBI/PwC survey shows that the proportion of banking respondents who are worried about future demand, from their core high street business to more esoteric activities, fell to 52 per cent in March.
This compared with a vertiginous 96 per cent in December, and is the lowest “worry-guts” dial level for three years.
Of course, the diminishing band of banking Jeremiahs may point to factors that could derail the improvement in sentiment and activity, such as the Cyprus financial crisis and its capability for new contagion in the eurozone.
Or possible grandstanding by the three new regulators for the financial services industry that replaced the old Financial Services Authority yesterday.
Or the directive last week by the Bank of England financial policy committee (FPC), one of these regulators, that Britain’s banks need to shore up their collective balance sheet by an extra £25 billion by the end of the year to meet possible new regulatory fines, unacknowledged bad debts and continued pressures from the eurozone.
But, while these are genuine concerns, the odds are quite long on them reversing banks’ fortunes again and taking the steam out of a recovery that is moving beyond the nascent.
Cyprus was a public-relations disaster and showed that the ability for cack-handedness among the eurozone’s policymakers is far from gone.
But it currently looks as if small customers with deposits under €100,000 (£84,000) in Cyprus will now be protected, and bigger depositors will take a much bigger hit, not least some dodgy Russian money that needed laundering offshore. Sad.
The issue rocked the single currency boat afresh, yes. But British banks have neither been blindsided nor battered by events in the Mediterranean.
Similarly, the threat posed by the £25bn they have been ordered to find by the FPC to make themselves financially more robust can be overstated.
It is not small change, and no doubt irritating to the sector, but it is estimated that more than half this figure has already been found by the banks through a mosaic of restructuring, leaving £12.5bn to find. It does not change the underlying trading prospects for them. And unease about the new regulatory framework? Again, the threat looks more illusory, than real. Banks complain for a living.
If they are not doing anything ethically or criminally wrong in terms of their conduct or their financial strength, then they are not going to be bothered by the new Financial Conduct Authority or the Prudential Regulation Authority.
If they are, then they deserve to be bothered as Libor-fixing, PPI-mis-selling and all the rest showed. In short, the underlying prospects for the sector, with most of the heavy-lifting on restructuring and asset sales already done, is as positive as you could hope for given the general economic conditions. And any negative counter-vailing forces do not look strong enough to reverse that current.
Lower capital buffers for entrants is sensible idea
Still with the banks, it looks like Scoban, the private bank being set up by former Adam & Co chairman Ray Entwistle, will be one of the first beneficiaries of one of the valedictory acts of the old Financial Services Authority (FSA).
In their joint review published last week, the FSA and Bank of England made a substantial move towards promoting greater UK banking competition by allowing start-ups to hold lower reserves of capital.
Entwistle is a happy Easter bunny, having told our sister paper Scotland on Sunday at the weekend that he will now need to raise only a further £30m to get his bank off the ground, rather than a significantly larger sum.
After the financial crash and its recessionary outcome, few dispute the importance of our banks having strong capital buffers.
But the regulators’ move was on the money in more than one sense. Financial stability has to be tempered with the need to get more banks out there lending to get a recovery moving at competitive prices for consumers.
And these new, smaller banks are nowhere near big enough to cause systemic risk if they do go belly-up (hopefully that will not be a risk for Entwistle and his colleagues).
As such, it is sensible that the regulatory capital ratios governing the big high street banks should not apply to the minnows.
The FSA and BoE have had the good sense to see that a one-rule-fits-all policy is not what Britain needs.
Instead, it is a case of us being able to have our competition cake and eat it; easier, lower hurdles for new entrants to get up and running, with the backstop of ongoing scrutiny of the new boys, to make sure their capital buffers are adequate.