6.6 Institutional issues Flashcards
When do the government hope to sell its shares in RBS?
They hoped to sell them before 2015 but the sale will take much longer - the next significant sale of shares starts in 2019
Why is the government wary of selling its shareholding in RBS too soon?
RBS did not make a profit after financial crisis until 2013 - its share price remains low and the government wants to ensure that it returns to the public purse as much of the funds used to bail out the bank as possible by waiting until share prices rise
What do analysts agree to be a source of uncertainty in the selling of the government shares in RBS?
The absence of a timetable
Divestment definition
Disposal of certain parts of their business to make them smaller and to improve competition
What is ‘Project Rainbow’?
The RBS divestment procedure - they were to dispose of more than 300 of its branches and some other interests, including some insurance brands, e.g. Churchill
Details of Project Rainbow:
- RBS were given until end of 2013 by EU commissioner but a sale to Santander fell through so RBS asked for extension of at least two years
- EU instead planned to revive ‘Williams and Glyn’ (a long-dormant brand) to create a new challenger bank but this was not seen as a viable separate bank after the Brexit vote
- RBS agreed to spend over £800m for business customers to switch to competitor providers
What is the Parliamentary Commission on Banking Standards’ argument against Project Rainbow?
That they are insufficient - it should be split into a bad bank and a good bank
What is ‘Project Verde’?
The LBG divestment procedure
Details of Project Verde:
Sale to The Co-Operative Group collapsed so LBG converted 631 of its former branches into a separate bank, called TSB
What does the new TSB bank comprise?
All of the Lloyds branches in Scotland and all of the Cheltenham and Gloucester branches
What did Ed Miliband suggest in 2015?
- Banks had become too powerful and should be forced to give up a number of branches
- There should be a threshold limit for market share
- CMA should set a timetable for banks to sell off branches by 2020
What were the biggest challenger banks in 2017?
- Atom
- Monzo
- Tandem
- Starling
What have bankers predicted in regard to Ed Miliband’s idea to cap market share of banks?
It may have a perverse outcome - as banks approach their maximum size, banks would rid themselves of lower quality customers and so contribute to financial exclusion
What banking services within the ring-fence?
- Current accounts and payment services
- Savings accounts
- Lending
- Trade and project finance
- Advising on and selling products from non-ring-fenced banks, where no exposures are created for the ring-fenced bank as a result
Ring-fenced body definition
One that carries out one or more ‘core activities’
What is the only core activity at present?
The accepting of deposits
What does the accepting of deposits include?
- Opening accounts to hold deposits
- Provision of facilities for withdrawing money and making payments
- Provision of overdraft facilities
Financial Services (Banking Reform) Act 2013 provides for the government to add to the core activities if it believes what?
That an interruption of their provision may adversely affect the stability of the system
What type of provider does the Financial Services (Banking Reform) Act 2013 not include?
Building societies
A ring-fenced body is not permitted to do what?
Carry out ‘excluded activities’
What is the only current excluded activity?
A bank dealing in investments as a principal (ie on its own behalf rather than acting for another party)
HM Treasury has powers to define other excluded activities if it believes what?
They could have an adverse affect on the continued provision of core services
Under what circumstance will the HM Treasury allow a ring-fenced body to deal in investments as a principal?
If no adverse affect is likely to result
What does the Financial Services (Banking Reform) Act 2013 give the PRA powers to do?
Force an individual banking group to separate its retail and wholesale banking completely if the PRA believes that the bank is undermining the aims of ring-fencing - known as ‘electrifying the fence’
Arguments in favour of breaking up the banks into retail and investment arms:
- The bigger a bank, the more confident it is that it will be bailed out - splitting would create two smaller banks so there would be no expectation of being bailed out
- Basic retail banking services are classed as ‘utilities’ so must always be available meaning a retail bank’s funds should be protected
- Large banks are difficult to control
- May rescue bad reputation to some extent leading to confidence in retail banks
Arguments against breaking up the banks:
- Inter-connectivity is a big problem which splitting banks would not solve
- Less funding directly available to retail banks from within and cost of accessing funds would rise so increased charges for borrowers
- Retail banks also played their part in the financial crisis through irresponsible lending and failing to manage risks - would be better to tighten regulation in these areas
- Large banks may feel disadvantaged so move out of London to centres where they can remain intact
Regulatory risk definition
The risk involved in increasing and tightening regulation`
Cost implications of compliance with regulation:
- Compensating victims of mis-selling
- Administrative costs associated with the way in which products are sold and operated e.g. more forms before a mortgage is approved
- Costs of complying with mandatory BCOBS and voluntary Standards of Lending Practice - training etc
- Employing compliance staff
Providers react to a cost increase in ways that aim to preserve their profit margins. This could be:
- Raising prices either in terms of a higher interest rate or fee
- Stop granting loans to small customers
How does regulation help to reduce differences between providers?
By laying down standard ways of operating
Smaller organisations (most commonly IFAs) have sought to lighten the burden of compliance costs by doing what?
Banding together into networks
How does it work when smaller organisations band together into networks?
- Costs of compliance are spread among the members
- In some cases adviser pays the network a set fee and receives support services, such as assistance with compliance, while retaining control over all other parts of the business
- In other cases the network has much more control and may actually own firms of advisers
