FT.com / Companies / Banks - UK banks ‘may need to shut third of branches’.
No, the title is not quite what this FT article says. It actually starts with:
UK retail banks may have to consider actions such as closing a third of their branches to restore profitability, says a new study.
Business consultancy group Bain concludes that UK retail banks face a tough future in which their return on equity (RoE) could be 50 per cent lower than pre-recession peaks.
The high RoE was generated by banks holding less capital and using financial leverage. Banks benefited from consumer inertia, namely customers not switching current accounts or mortgages, that allowed banks to make substantial margins on some lending and savings accounts.
So, Bain's suggestion:
[T]hat to combat these pressures retail banks might have to use radical means to cut costs and boost profits. These could include shutting 30 per cent of branch networks and focusing the remainder on sales and service.
Banks might have to end the “free” current account model where most customers use their bank account free of charge and which is effectively subsidised by the minority of customers who overdraw and pay charges.
Retail banks could focus more on their top 5 per cent of customers from which banks make their greatest profits and that use a number of bank products.
Three comments:
1) Whoever thought 24% was sustainable was mad.
2) Banks are heading for 16% RoE - isn't that also mad? Returns of this sort are clearly not possible in the long run (and I am well aware I make myself a hostage to fortune by saying so - as a welter of statistics will be released to try to prove me wrong - none of which will persuade me otherwise)
3) The answer to this crisis is to abandon the 95% of people in the UK who have bailed banks out and concentrate on the 5% that includes those who put them in this mess.
The case for a People's Bank grows stronger by the day.
It is now outright folly to pesist with the existing model of banking. Tthe one we need must focus on financial inclusion - the very opposite of Bain's prescription - which comes straight out of the consulting madhouse.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
You say “folly to persist with the existing model of banking. The one we need must focus on financial inclusion “
Please define “financial inclusion” for us… from what I have often seen this means giving everyone an access to a line of credit so that he can share into the taking on debt and consume philosophy.
Also, when you speak about “peoples bank”, what are you referring to, since many of the so called people’s banks I have witnessed, are just enrichment opportunities for those managing it. If you can regulate a people’s bank to operate adequately why could you not regulate a private bank to operate likewise?
By the way I agree with the profit margins of the banks should go down but that will only happen when you get some regulators who stop feeding the banks with so many juicy regulatory arbitrage opportunities.
Per
Read what the New Economics Foundation has to say, then come back with better informed comments
These don’t meet that criteria
Richard
Well yes, I now went to nef and they, sort of, define financial inclusion as everyone having right to financial services (which would presumably also include consumer loans to the poor, even though we know that any consumption of the poor financed at an interest over the risk-free rate, by definition, makes him only poorer)
What is we should most expect from our banks, to provide financial services (as nef correctly states that the post offices could do, or any grocery store for that matter) or to help to foster economic growth? The real problem with our current regulations is that the purpose of the banks is not discussed.
Wrong, NEF is discussing it
And I note with interest you’d deny credit when micro finance proves it can work, very well indeed
So maybe you believe in the wrong sort of growth?
Not at all! I am all in favor for microcredit lending for productive purposes but I am indeed against “most” microcredit for the purpose of financing non-urgent life saving consumption.
As James Robertson has written, most eloquently, banks are the only businesses which get their main materials (credit) for free. (Actually, I would maintain that this also applies to big landowners with inherited land, like Charles Windsor and Gerald Grosvenor). This is one of the reasons why they can make excess profits. There is no good reason why credit creation shouldn’t be nationalised. The Treasury could then levy seignorage, useful additional revenue, on the banks.
Oh the government is already getting a lot of it, although I admit they got it quite well camouflaged. When a bank lends to an ordinary non-rated citizen it has to put up 8 percent in capital but if it wants to lend to the government it can do so as much as it wants without any capital!!!
Carol Wilcox: “As James Robertson has written, most eloquently, banks are the only businesses which get their main materials (credit) for free.”
When I deposit money with a bank, I expect interest in return. They certainly don’t get their main materials for free from me.
So, Per, are you trying to say that the Treasury was a major beneficiary of the huge increase in personal debt (mortgage and credit card debt) which has led to the current financial crisis?
Re above comment, I’m talking about revenue from credit creation not from Stamp Duty Land Tax, which of course increased massively.
Of course not! But just the same way that anything rated AAA was blessed by Basel requiring only a 1.6 percent capital requirement for the banks equivalent to an authorized 62.5 to 1 leverage the capital requirement for any loan to the government is more than low… it is 0 percent.
Per,
RE: your first comment.
The poor already “share into the taking on debt and consume philosophy” they don’t live in a world without advertising do they? They aren’t having their wants artificially inflated any less than the rest of us. They aren’t some how deaf to the call of consumerism that gets at the rest of us.
So here’s an example of where the poor are currently getting their credit for “non-urgent life saving consumption”: http://www.provident.co.uk. And they’re not even the worst of the lenders out there, they’re just the most famous. Not to mention payday lenders, pawn shops, cheque cashers, log book loans and unlicensed lenders.
Financial inclusion as defined by the main authorities on the subject in the UK (Toynbee Hall, OFT, FSA, CAB) is a state where people have access to and use of appropriate, affordable and desired financial products and services. In particular access to a transactional bank account is becoming vital for participation in modern society. As we move towards an electronic payment based economy financial exclusion becomes a more and more serious issue.
A couple of years ago the annual poverty premium, most of which would be removed by access to banking, was estimated at £1000 I suspect it’s much higher now. Here’s the poverty premium research. http://www.family-action.org.uk/uploads/documents/Poverty%20Premium%234%23.pdf
1.85 million adults in the UK are without access to a transactional bank account. That’s 4% of UK adults or over twice as many as work in the UK IT and telecoms industry.
Result:
– permanent secure employment is virtually impossible to find
– any savings are kept at home in danger of being stolen, lost or even damaged for example by fire or flood, all more likely in deprived areas also more tempting to spend than when out of sight out of mind in an account
– carrying large amounts of cash (again in high crime deprived areas) is unavoidable
– no credit history means that in the event of a need to borrow the alternatives are limited and usually very expensive
and various psychological and social effects.
I dislike the tone of your argument which implies that people in poverty should not be allowed to borrow because they may do so for frivolous reasons. Firstly they mostly won’t as fear of debt is ingrained in people in poverty. Secondly wealthy people borrow for frivolous reasons all the time. Being middle class doesn’t give anyone the right to make a moral judgement about what the ‘right’ reasons are for a person on a low income to borrow.
We shouldn’t be protecting the poor from themselves by refusing to lend if they can afford to repay. How patronising! But attempting to create a less consumerist society for everyone whilst doing our best to eliminate financial exclusion as far as possible.
Martha
Martha
I greatly appreciate your contribution
Richard
@Paul Lockett
Paul – if banks just lent out what was deposited with them you would be correct, but they don’t – they lend out far more. They do in fact manufacture credit out of thin air.
On a lighter note, with the current levels of interest they get your deposits almost for free too!
You write “I dislike the tone of your argument which implies that people in poverty should not be allowed to borrow because they may do so for frivolous reasons.”
And I do not like when you do not read what I am saying about the fact that the way it is set up the poor are often induced to borrow much over the risk free rate and which can only help them to keep them poor. It is not only that they have to buy the goods at the store of the mine but they can also not pay cash but have to pay high interest rates.
And so I could just as well turn around and say that it is you instead that are intent on keeping up the very profitable lending opportunities for the financiers… which I don´t because I assume that is not what you are doing.
Cheers
James from Durham: “Paul – if banks just lent out what was deposited with them you would be correct, but they don’t – they lend out far more.”
I hear that claim being made quite often, but it’s a complete myth. I think at some point, somebody has confused deposits with reserves and the mistake has been accepted by others.
It’s true that banks’ reserves are almost always much lower than the amount they lend, but for every pound the bank lends out, it has to obtain at least a pound from somewhere else first.
In general, the total amount a bank lends will be less than the amount it owes on deposit accounts.
Paul
You clearly have a great deal to learn about banking
If I ask for a loan and get it the bank credits my current account and debits my loan account. The two equal each other. But no cash was ever involved. The money is made out of thin air.
That’s how banking works.
And how the asset it lends costs nothing to create.
Richard
Richard,
You may have expertise in accountancy, but you clearly have very little knowledge of banking, if any. You might be wise to restrict yourself to commenting on subjects you have some understanding of.
The bank cannot loan the money without first receiving the deposit which is used to fund any amount taken from the bank.
The example you give is pointlessly trivial, as moving balances between two accounts at the same bank held by the same person functionally achieves nothing.
Paul
Respectfully, you are wrong. Try this:
The answer to question one, “Who creates money?” is that almost all of it is created by commercial banks. Most people find this answer quite staggering. Even bankers do. Lord Stamp, a director of the Bank of England at the time, commented in 1937: “The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.” As the economist J. K. Galbraith remarked:”The process by which banks create money is so simple the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.”
Both were referring to the process I describe. The fact your mind is repelled does not mean I am wrong, just that you need to open yours.
Richard
Richard
You are misinterpreting the information that you have to hand. Increasing the money supply and creating credit at no cost may seem to be equivalent to somebody with a superficial awareness of the workings of the banking system, but they are very different.
I suggest you research the issue in more depth. You clearly have an interest in the field, so obtaining an understanding of the underlying mechanics would probably be a worthwhile use of your time.
Oh dear, PaulL, don’t you think it’s time to stop digging?
Paul
Given I have all informed people on my side, why not tell us your version first?
I have researched this. That’s why I am entirely confident of my facts.
Richard
@Richard Murphy
Sorry Richard, but whilst banks may create money out of thin air in the example you quote, the bank is lending precisely the money that is placed on deposit because when the bank credits your current account it accepts your deposit.
If you then decide to spend the funds placed in your account the bank debits your account and either credits the account of the vendor if at the same bank or the account of the correspondent bank, but in either case when the dust has settled deposits at the bank have increased by the amount of the loan. The bank has increased its funding amount by the amount of the loan and until the loan is repaid it will continue to roll over deposits or secure finance from other sourced to cover the amount of the loan.
Alex
That’s a fallacious and circular argument that adds nothing to debate
You’re saying I’m right but then dismiss the cause
That’s illogical
Richard
Richard,
In response to your request, I’ll try to give you a very simple example, which I hope will aid your understanding (hopefully you will also find this useful too, Carol).
Imagine person A deposits £100 in cash with Bank X, which then lends out £95 of it to person B.
This act increases the (M4) money supply from £100 to £195. The bank has £5 as reserves, so it is lending well in excess of its reserves. However, it should be clear that the bank has not been able to advance the credit at no cost. In order to receive the interest on the loan of £95, it has to pay interest on the £100 deposit.
@Richard Murphy
Richard,
I am saying that you are right that banks create money out of thin air (up to a point because they are limited by their risk weighted capital), but you are wrong to say that deposits are not required to create loans.
Your example only works on the assumption that the borrower leaves all their funds on deposit at the bank (although the bank has actually created a deposit alongside the loan).
In reality the borrower is usually free to withdraw the cash to use it for a specified purpose, in which case his deposit is transferred to another beneficiary, and if that beneficiary is another bank, eventually settled by payments of net amounts owed through the central bank, then the bank needs to raise deposits to fund the settlement.