Category Archives: Articles

Lloyds Bank Employees: Victims or Villains?

This post has also appeared on James Dempsey’s website

Another day, another record fine for a banking group. This time it is Lloyds Banking group being fined £28m for incentive schemes that led to the mis-selling of individual savings accounts and income protections products between 2010 and 2012. In some cases staff were offered bonuses of up to 35% of their monthly salaries, in others £1000 in cash. On the flip side, employees who failed to meet targets were threatened with demotion – the Financial Conduct Authority (FCA) highlights the case of the individual who sold to himself, his wife and a colleague to avoid this fate. Read more »

New RBS Reports Raise Old Questions

This blog is reposted from James Dempsey’s website.

Last week two new reports appeared on the Royal Bank of Scotland, this time focusing on its activity since the financial crisis. Both, in their own ways, raise new versions of concerns that have been around since the crisis and before – (1) that penalties imposed on banks target the wrong people; and (2) that banks are still failing in one of their primary responsibilities, the good management of risk.

The more serious accusations appear in the Tomlinson Report compiled by the ‘Entrepreneur in Residence at the Department for Business, Innovation and Skills’. Tomlinson says that:

‘The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets.’

Whether these accusations should be upheld will be determined by the Financial Conduct Authority and the Prudential Regulation Authority, to which Vince Cable has handed the report. If they are, however, and penalties follow as a result, who will those penalties hit?

If they are financial penalties they will, primarily, hit shareholders, or in other words tax payers (who own 81% of the bank). This is a crazy state of affairs. Those who have allegedly done wrong are the employees who directed and engaged in the activity in question, not the public who are reluctant owners of the bank as a result of rescuing it from previous irresponsible activity.

The second report, by Sir Andrew Large, focuses on RBS’s SME lending operation. Some reasons it identifies why RBS failed to meet its lending targets are as follows:

  • ‘RBS’s SME lending objectives were not consistent with its tougher credit standards, and limits on certain types of lending (especially to the Commercial Real Estate sector) introduced to manage portfolio risks
  • ‘Internal restructuring had a negative impact by fragmenting responsibility for SME lending
  • ‘The ongoing SME business has had difficulty in finding the best way to deploy its people and investment budget to originate and win the lending opportunities that are available to it
  • ‘Although risk management policies are in line with good prudential standards, customer-facing staff and Credit Officers are risk averse in their behavior
  • ‘RBS lending process is time consuming and loan applications take longer than at other banks
  • ‘Credit skills of customer-facing staff that were neglected in the run up to the financial crisis have improved, but remain variable
  • ‘Until relatively recently, deposit gathering was prioritised over lending’

One way of summarising these points is that RBS is not managing risk well, since internal structures and procedures are inefficient, and behaviour is overly risk averse. Banks have rightly been criticised for helping precipitate the crisis through poor risk management, by taking on too many high risks. Now, it appears, things have gone the other way.

Banks have an obligation to manage risk well and this involves striking the right balance between recklessness and extreme risk aversion. It appears that this obligation is still not being met, although for different reasons than before.

New Paper by Andy Mullineux – Banking for the Public Good

Follow this link for the latest draft of a new paper written by Andy Mullineux on ‘Banking for the Public Good’.

Abstract:

Bank shareholders cannot be expected to provide good stewardship to banks because there is a conflict of interests between the shareholder owners and a non-mutually owned bank’s depositors; who provide the bulk of the funds in traditional retail banks and are willing to accept a lower return on their savings than shareholders, in return for lower risk exposure.  Regulation is required to Read more »

Taxing Banks – An Ethical Perspective

In this post James Dempsey and Tom Sorell, who are working on the ethics stream of the FinCris project, comment on some of the themes that have emerged from the work of the taxation stream of the project, led by Andy Mullineux.

  1. Taxation and the Financial Crisis

The financial crisis has raised serious concerns about the current organisation and operation of the banking sector in the UK. The tax regime that is imposed upon banks and other financial institutions is one place to look for failures that precipitated or exacerbated the crisis, and for tools to improve the functioning of the financial sector in the future. Read more »

Responsible Lending and Borrowing – Two Briefing Papers

Lindsey Appleyard has written two briefing papers on the responsible lending and borrowing work stream, the links to which are below:

‘Taxing Banks Fairly’ by Andy Mullineux

Andy’s paper ‘Taxing Banks Fairly’ is to be published in the International Review of Financial Analysis, and is now available for download here: http://dx.doi.org/10.1016/j.irfa.2012.11.001

Abstract:

There is no reason to continue to exempt financial services and products from Value Added Tax in the UK, and indeed elsewhere. Its introduction in the UK Read more »

Articles

All articles written by the project team will be posted to this website and can be found in the ‘articles’ tab on the menu at the top of this screen.