As you are probably aware, the Future of Banking Commission has released a report.
Given that the Commission was set up by Vince Cable, John McFall (former Labour chairman of the Treasury Select Committee), and David Davis, the report is considered rather important. All the more so as Vince Cable will appear on TV tonight saying that the ‘direction of travel’ favours banks breaking up and that the UK will act unilaterally if necessary.
The crazy bits
Alongside recommendations that bonuses be delayed for 10 years, fundamentally, the report is all about breaking banks into three different entities, as detailed in box six on page 28.
Why this is crazy
Already, commentators are lining up to decry the Commission’s weirdness.
They’re objecting in particular to:
1) The agency trading rule
“If ‘investment banks’ are only able to make sales on an agency basis, and can’t act as market makers, clients will be charged fees for any losses incurred during facilitation,” says one banking analyst. “If banks can’t hedge their risks properly, they’ll simply charge clients more instead.”
2) The rule that advisory banks can’t act as principals and that principals can’t act as advisors
In a possible reaction to Goldman’s Abacus issues and the whole notion of fiduciary responsibility (or not), the report is suggesting that banks providing advice can only act as agency sales brokers – ie. they can only match exact buyers up with exact sellers; they can’t act as a principal/market maker and hold the security on their balance sheet while they look around for a buyer/seller.
“This just doesn’t make sense,” says Ralph Silva, analyst at Tower Group. “There are plenty of people out there who want these guys to act as principals, and who want their advice too.”
Splitting out buy/sell advice from market making, and M&A advice from deal financing, will simply make advice a lot more expensive, says Silva. “People will try and do without it.”
3) The implication that underwriters can’t hedge their exposure, and the explicit statement that underwriters will have to use third party brokers to distribute deals
If ‘investment banks’ aren’t allowed to be involved in sales and trading on their own account, but are allowed to be involved in underwriting, it’s not clear how they’d hedge their underwriting exposure.
Equally, if they’re not allowed to sell issues they’re underwriting, it seems likely underwriting fees will increase to cover the risk that a third party over whom they have less control will fail to distribute the entire issue.
“No one will be raising any capital if this goes ahead,” moans the analyst.
The good news for jobs
It seems unlikely that the Commission’s proposals will come into being. “In the end, the people that actually implement the rules have to do a proper impact analysis,” says the analyst.
However, in the unlikely event that they do, Silva points out that it could be very, very good news for certain kinds of jobs.
“If you break up banks like this, you will have to break up back offices. You will therefore need double the number of back office staff.
This would create huge demand for people to work in operations and IT,” Silva suggests.