As UK banks get a much-needed overhaul, three are voted among the soundest in the world!
Monday morning saw the release of a report aimed at giving British banks their biggest shake-up in a generation.
Wanted: safer banks
Formed in June 2010, the Independent Commission on Banking (ICB) -- headed by economist Sir John Vickers -- has now released its final report into banking reform.
In this 358-page blockbuster, the ICB makes the following recommendations to make our banks safer:
1. Banks' main retail operations must be ring-fenced from their risky investment-banking arms. Retail operations include things like deposit-taking, providing mortgages and running payment systems. A firewall between the retail side and riskier ‘casino’ banking is supposed to make another financial crisis less likely.
2. Banks must keep a bigger 'capital cushion' against future losses. This buffer will be a minimum of 10% of assets, climbing to 17%-20% for the biggest banks.
3. Banks must launch a free 'redirection' service, enabling easy switching between current accounts within seven working days. Switching current accounts has become easier in recent years, but there is still plenty of room for improvement.
4. Lloyds has to sell 632 branches to create a 'strong challenger' with at least a 6% share of high-street banking. The European Commission has ordered this as the price of taxpayer support for Lloyds. Improving competition should encourage the birth of a real rival to the ‘Big Four’ of Barclays, HSBC, Lloyds and RBS.
Bad news
Now for the bad news: the Vickers Commission estimates the cost of these changes at between £4 billion and £7 billion. I expect banks will make customers shoulder this burden. Hence, in future, we can expect to see higher rates for mortgages, loans and credit cards; lower rates for savings accounts; and new and higher charges for day-to-day banking.
Also, the free, improved switcher service need not be in force until September 2013. This two-year breathing space allows the banks to drag their feet on this issue yet again. Also, higher capital requirements will not be brought in until 2019, so as to coincide with new global standards for minimum levels of capital, known as 'Basel III'.
In effect, banks won't be safer for another eight years. Yikes!
Some banks are safer than others
I suspect that many readers won’t want to wait that long for safe banking, so it’s worth looking at which are the best banks right now.
The safest British banks have higher credit ratings, bigger capital buffers and lower-risk business models.
This was demonstrated by a new report from New York-based magazine Global Finance. Late last month, the journal published its 20th annual ranking of the world's 50 safest banks. This evaluation was based on long-term credit ratings and total assets of the 500 largest banks worldwide.
No British bank made the list's top 10, which included four German and three Dutch banks, plus one bank apiece from France, Luxembourg, Spain and Switzerland (two banks tied for seventh place, placing 11 banks in the top 10). However, Banco Santander -- the Spanish owner of former UK brands Abbey, Alliance & Leicester and Bradford & Bingley -- did take tenth place.
Outside of the top 10, only two British banks made Global Finance's world's 50 safest banks: HSBC (16th) and Barclays (49th). One British building society, Nationwide BS, took 41st place.
This means that market leaders Lloyds Banking Group (41% owned by taxpayers) and Royal Bank of Scotland (83% taxpayer-owned) didn’t make the top 50 list. I suspect that Global Finance has ignored the implicit state support for these banks and decided that, without this implied government guarantee, neither bank is strong enough to make this list.
An important lesson to learn
I spent much of my early life living in Germany, where adults don't share the British obsession with ever-rising property prices, reckless over-spending and living on 'easy credit'.
Indeed, in the Bundesrepublik and other Northern European nations, lenders have a well-deserved reputation for careful, even over-cautious lending. As a result, only two in five Germans (40%) are owner-occupiers and, when buying their own home, buyers have to put down large deposits, typically 30% or more of the purchase price.
As a result, Germany didn't experience a housing boom during the Noughties.
Apart from a four-year boom after the collapse of the Berlin Wall in 1989, German property prices have been remarkably stable. Indeed, after adjusting for general inflation (the tendency of the price of goods and services to rise over time), German homes are worth no more today than they were in the mid-Nineties.
In short, what I'm saying is this: we can choose to have safe, sound and secure banks with sensible lending criteria, but with lower lending levels and slower growth in house prices. On the other hand, we can opt for loose lending, steeply rising house prices, and periodic bank failures.
As a saver and investor, rather than a borrower, I'd choose the former over the latter every time!
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