Thursday, 16 August 2012

Rob Burgeman: Where next for the banking sector?

Palazzo Salimbeni, Siena, Italy. Source: Wiki
The banking sector has submitted investors to frequent visits to the red room of pain over the last few years, culminating in the latest spat between the New York Department of Financial Services and Standard Chartered Bank where, apparently, the US regulator gave the bank 90 minutes notice that it was going to announce allegations of money laundering.  Although this situation has been relatively quickly resolved, it follows quickly on from the resignation of the Chairman and Chief Executive at Barclays and a plethora of other crises afflicting the global banking sector.  Even the oldest bank in existence, Monte dei Paschi di Siena which has been operating continuously since 1472 has not been immune, with the implicit threat that it will lose its five-century old independence if the latest restructuring does not succeed.

What is often lost sight of is the crucial role that the banking sector plays in the wider economy.  Banks provide the liquidity and capital to enable companies to grow and, thus, for the economy to expand.  They act, to some extent, as the clearing house between savers and borrowers and are the arteries through which capital flows.  They help to provide the velocity to money. By this I mean the mechanism by which, say, £1,000 injected into the financial system is lent to a company, who then uses the funds to manufacture goods, buying materials from suppliers, employing workers, paying third parties to sell the goods etc. etc.  You can quickly see how, in a properly functioning economy, the effect of a £1,000 injection can be multiplied many times over.  So it is in everyone’s interests that these institutions resume their traditional practices as a matter of urgency.  What cannot be legislated for, however, is the conflict between the banks desire to de-risk their balance sheets, industry and the consumers reluctance to borrow and governments desire to see a greater degree of economic stimulus emanating from the banking system.

Where does this leave the outlook for the banking sector?  It has certainly been a tumultuous few years, but the environment does seem, at least, to have stabilised for the time being.  Banks with a domestic and European focus are likely to spend a considerable period of time trying to soothe their tender regions for a little while yet before shareholders can see any meaningful return to the generous dividend payments of the past. It is equally clear that the regulatory landscape is shifting and the ability of the sector to return to the kind of profitability (ethereal or otherwise) that it enjoyed in the early years of the century are unlikely to return anytime soon.

Rob Burgeman
Divisional Director

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