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Banks expensive at any price
Investment Strategy | 5 Comments | Mon 21 Mar 2011
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"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness." Charles Dickens' opening to A Tale of Two Cities could well be a description of Western banks' trials and tribulations over the last five years. The ‘wisdom' of 2008 / 2009 appears forgotten; ‘foolishness' has reappeared in just two short years. This article is a reminder of the risks assumed by shareholders in banks. Is there a price cheap enough to compensate for owning them?



Comments

1.
On 21/03/2011 19:59:37, Colin Farrier wrote:
Good article.

I will first declare an interest. I have an investment in the Source ETF USA Financial Services. I am willing to make money from the pain of the directors of the banking industry.

You allude to the bonus structure of the banking directors and employees. While they use the defense that all their competitors do it and therefore they must do it to retain staff, I am not sure that other sectors could get away with it. Not lawyers, but the decision makers who seal the contracts for their firms but do not demand a percentage of the incremental revenue.

I believe that banks and their parallel organisations should be treated in a similar way to regulated utilities. The regulators are there to protect the shareholders and consumers from predatory actions of the directors of duopoly firms. Regulation would be used to force the directors to consult shareholders, consumers and regulators before issuing any bonus.
Finally, deposit taking would be separated from mortgage operations in a way that deposit taking would be (and already to some extent is through the lifeboat system) an arms length government office. Mortgage lending would be a commercial way of raising money and making a small profit on loans. Good Article.

2.
On 23/03/2011 16:29:43, Matthias Riechert wrote:
Excellent article. I agree 100%. It reminds us all how fragile the current financial system is. A speculative investor who bet on the recovery of financial institutions has so far fared well, judged by current share prices. However, these investors bank on the willingness AND financial ability of governments to provide guarantees for banks. Hence, any investment analysis must include an assessment of the financial strength of the guarantor. A quick look at various fiscal households reveals that the next crisis will most likely occur in this space. It remains to be seen whether banks will do well in such an environment.

3.
On 25/11/2011 11:23:04, David Coyne wrote:
Andrew Haldane, Executive Director of Financial Stability at the Bank of England, recently wrote this paper. It's a fantastic read, giving a great insight into the change in risk appetite of banks over the last two centuries - and more importantly, why the change occurred. Enjoy

http://www.bis.org/review/r111026a.pdf

4.
On 21/09/2012 14:40:32, David Coyne wrote:
See below a link to a John Kay article in the Financial Times, dated 12/09/12.

Kay discusses a speech given by Andrew Haldane (see comment 3 above) at the recent Jackson Hole conference. His analysis shows that the well-intentioned Basle bank capital ratios had no predictive power when it came to forecasting the probability of a bank failing.

Banks adhered to the Basle capital targets, but abjectly failed to deliver what was really desired -- a better and safer financial system. This was the outcome we should have expected from such a regulatory system.

http://www.ft.com/intl/cms/s/0/e5436a62-fb49-11e1-87ae-00144feabdc0.html#axzz26HdOYs00

5.
On 03/10/2012 15:56:22, David Coyne wrote:
See below a link to an opinion piece on Bloomberg by Simon Johnson, a professor at MIT. In summary, the "risk weighting" of banks' assets is a nonsensical and dangerous policy, as it leaves our banking system with far too little equity capital for the risks involved.

A far better measure of capital, Johnson argues, is the simple tangible equity-to-tangible assets ratio, which he suggests should be moved back towards 20% (from the current low-single digit).

Perhaps there's nothing new in the article, but it's a good reminder of the riskiness of the banking sector.

Note the first comment by "Allezy", who presents the flip side of Professor Johnson's proposal -- what a colleague of mine calls "going back to the dark ages"! He might be right.....but it's not that the current situation is without its risks, right?

http://www.bloomberg.com/news/2012-09-30/a-very-strange-way-to-assess-the-safety-of-banks.html

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