Article

Wheels Spinning, Going Nowhere

An economic recovery in the UK demands that the incoming Bank of England governor, Mark Carney, (who takes up his post in July) runs a loose monetary policy. This sounds uncontroversial. Indeed, it is what the Bank professes to have been doing since early 2009, when the bank rate was r educed to 0.5 per cent and quantitative easing (QE) was initiated. But a simultaneous and ongoing massive tightening in bank regulation has meant that this official ‘looseness’ has not translated into cheap or available credit for individuals and businesses.

UK lending has been in absolute decline for over four years now. This is historically unprecedented. Loans outstanding are still falling – and this is a key driver of recessionary behaviour among businesses and private individuals: if credit tomorrow will be less available and more expensive than today, why swim against the deflationary tide?

Various Treasury-sponsored schemes have tried to rectify the problem of low official rates being lost in translation to the real economy. Funding for Lending is the most significant, Help to Buy the most recent. But the Bank has been pedalling so furiously in the opposite direction, through its regulator (the Prudential Risk Authority) and its new macro-prudential body (the Financial Policy Committee), that credit conditions have been consistently toughened. Carney will need to call a halt if any unconventional monetary policies are to have a chance of succeeding.

While banking is an inherently risky business, there is one essential question that has not been asked: how safe do banks really need to be? Happily, and contrary to much of the media and political narrative, what needed to be done to make banks less risky was put firmly in train at the peak of the crisis almost five years ago. A narrative of stability that presses on regardless of the costs incurred is exactly the ‘stability of the graveyard’ that the chancellor seeks to avoid.

The UK cannot afford the luxury of chasing a zero-risk banking system. It already has a system that is safer than it has been for decades. Now it has an opportunity, with Carney’s impending arrival, to back out of its current economic dead-end. He will need the political backing to declare victory over banking demons and move on.

That was then: dealing with the banking crisis The last Labour government did not see the banking crisis coming.

What it did do was an excellent job of judging what needed to be done – and what should not be done – in the few short weeks after Lehman Br others collapsed. Management groups were thrown under the proverbial bus; billions of pounds of fresh capital injections into banks were demanded. As a result, the healing process began very quickly.

Importantly, the private sector was kept involved. Nationalising banks completely is not to be done lightly, as is clear from the current government’s drift into attempting to run RBS. Between coalition politics and national debt accounting, the chances of civil servants running a ‘better’ bank are low.

The diagnosis

What ailed the banks in 2008 were several interlinked issues. It is worth listing them briefly, as the changes over the past five years are crucial to our case.

  1. There was little tangible common equity in several of the banks. In early 2008, RBS, Barclays, Lloyds and HBOS had £65 billion between them.
  2. Assets at these four banks had grown by more than £2.5 trillion in the previous four years, through rapid organic growth and acquisition which brought new and less well-known risks onto balance sheets.
  3. Several of the banks had very high levels of short-term wholesale funding. Borrowing for a day is the cheapest form of finance, but relying on hundreds of billions of this left the banks exposed to abrupt cash flow issues.
  4. Most of the banks held very little cash on hand.
  5. Several of the banks had large concentrations in two areas of risk: complex, structured securities, such as the infamous collaterised debt obligations (CDOs), and commercial property.

This combination of factors meant that as the financial markets deteriorated concern built up that banks could become insolvent – concern which soon expressed itself in the banks becoming illiquid.

Why the response worked

What was done in the wake of the crisis dealt effectively with each of these issues. The Credit Guarantee Scheme provided long-term funding and as a result rapidly improved the market’s confidence in the ability of the banks to access funding. It worked, and was fully repaid in 2012 at a tidy profit to the Treasury.

Huge amounts of equity were required of the banks in short or der – £40 billion was raised from the private sector and £60 billion from the Treasury. Only RBS relied wholly on the state.

And even in the case of RBS, the balance of state versus private action was judged well. Injecting more equity in 2008 would have driven an accelerated sell-down of the bank’s assets – into a terrible market. Full state ownership would likely have required the closure of the investment bank, then a £1 trillion behemoth. Far better to run it down against realised profits over time, which is just what has been done: the assets of this division are now a quarter of what they were, with the run-down paid for by pre-impairment profits of £8 billion and the assets sold for £10 billion over expectations.

Then, in 2009, the banks were aggressively stress-tested. At some level, this merely formalised what Lloyds management was doing as it went through HBOS’s books and was forced to issue five profit warnings in the five months after its takeover was announced. With new management at RBS also going through the books with a fine tooth comb, UK bank impairments spiked massively. But these peaked by the middle of 2009 and have since fallen by four-fifths. Contrast this with the banking system in Spain, which has been allowed to roll over its problems and where, as a result, impairments continued to rise year-on-year through at least to 2012.

The results in the UK were rapid. By late 2009, HSBC and Bar clays had raised over £20 billion and Lloyds was able to raise £8 billion from private investors, mainly British institutions. By the time of the general election in 2010, bank shares were trading above the levels at which the government had invested.

Overview

Strategic advantage in a volatile world

The Firm

Nader Mousavizadeh and David Claydon founded Macro Advisory Partners in 2013 to provide a global client base with a competitive advantage in a complex world. Driven by a belief in the value of independent, long-term strategic counsel, MAP's co-founders created a firm that delivers actionable macro strategies to decision-makers in business, finance and government.

A volatile and fragmenting global landscape requires an integrated understanding of the political and economic drivers of change. Drawing on MAP's unique network, the firm’s partners — including Mona Sutphen and John Sawers — create tailored and innovative macro solutions mapped to the specific exposures, risks and opportunities facing the firm’s clients.

MAP's London and New York-based team of partners, directors and associates is supported by a Global Advisory Board and a group of Senior Advisors drawn from leadership positions in the worlds of business, finance, politics, diplomacy and technology.

Partners
Global Advisory Board
  • Kofi Annan

    Chairman, The Kofi Annan Foundation
    Kofi Annan was the seventh Secretary-General of the United Nations (1997 to 2006), and now serves as Chairman of The Kofi Annan Foundation.
  • William Burns

    President, Carnegie Endowment
    Ambassador Burns is President of the Carnegie Endowment for International Peace, and was the 17th United States Deputy Secretary of State.
  • Mala Gaonkar

    Co-portfolio Manager, Lone Pine Capital
    Mala Gaonkar is Co-portfolio Manager at Lone Pine Capital, and a former consultant at the World Bank.
  • Vikram Mehta

    Chairman, Brookings India
    Vikram Mehta is Executive Chairman of Brookings India and former Chairman of the Shell Group of Companies in India.
  • David Miliband

    President, IRC
    David Miliband is President and CEO of the International Rescue Committee, following a distinguished political career in the United Kingdom.
  • Vali Nasr

    Dean, SAIS
    Dr Vali Nasr is Dean of the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University.

Concept

Macro Advisory Partners provides corporate, investor and sovereign clients with the strategic insights to navigate the intersection of global markets, geopolitics and policy.

In a world defined by volatility and uncertainty — and an abundance of information, yet scarcity of insight — we identify the strategic implications for decision-makers tasked with maximising opportunity and minimising risk. The Archipelago World is characterised by fragmenting markets, populist politics, policy unpredictability, revolutionary technology, and weaponised arenas of finance, regulation and cyber.  The implications of this environment are dramatic and lasting. To help our clients anticipate and navigate these shifts in the macro landscape, we bring together deep on-the-ground analysis with long-term strategic judgement tailored to our clients' specific interests, exposures and concerns.

For today's global investor and business leader, macro is just as disruptive a factor as technology. Our advice — delivered by the firm's partners through trusted, personal, long-term and dynamic client engagements — is drawn from the policy expertise and connectivity of our global network, supported by advanced data analytics. The firm's Global Advisory Board and a team of Senior Advisors with backgrounds in diplomacy, macro intelligence, investment strategy, academia and industry, support our partners with the judgements that enable us to provide clients with relevant, actionable and investable macro solutions.

Principles

A culture of partnership defines our firm — among the individuals we have attracted to our endeavour, and with the clients whose long-term interests we view as our own. Our team brings to our work a diverse range of global business, finance and government experiences that enable us not only to interpret a changing macro environment for our clients, but also to design specific solutions that enhance their performance and prospects.

The principles of independence, integrity and intelligence define our culture. Our clients include the world's leading technology, consumer, energy and financial services institutions. Our commitment to them — and to our people — is to deliver on our founding aim of building the world's leading macro advisory firm.

Portfolio

  • Engagement

    Middle East Market Expansion

    Facing a fragmenting market and changing regulation, a global financial services company uses MAP's advice to enhance its performance and footprint in the Middle East.
  • Engagement

    Managing a Complex Portfolio in a Volatile World

    MAP provides ongoing and ad-hoc advisory services to a significant investor client, which manages a complex portfolio of equity, credit, interest rate, commodity and foreign exchange exposures.
  • Engagement

    China Market Strategy

    A global consumer goods company achieves success in China with support from MAP's distinctive macro insights.

Contact

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Tel: +44 207 917 9947

New York
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New York, NY 10036
Tel: +1 212 602 8721

info@macroadvisorypartners.com