British banks must change to end customer alienation

Lenders pursuing ‘unsustainably’ high returns

LONDON, May 25, (RTRS): Britain’s banks are stuck with flagging financial returns while failing to tackle overpaid investment bankers and customer alienation, a senior Bank of England policymaker said on Wednesday.

Martin Taylor, a member of the BoE’s Financial Policy Committee which sets the regulatory tone for supervising banks, said lenders may be pursuing “unsustainably” high returns on equity of 10-15 percent at a time of low interest rates.

“We are in Siberia, where many people feel bankers belong,” Taylor said in a speech.

The former chief executive of Barclays added that nearly nine years since the financial crisis started in 2007 banks are showing signs of recognising that their business models need fundamental change.

“The length of time it has taken for this penny to drop has proved very costly,” Taylor said.

Behind the “improbably glossy surface”, retail banks have still not rebuilt trust with customers.

“Sermons won’t fix it, and nor will advertising,” Taylor said.

Banks must get out of “ghastly collective jams” such as free-incredit banking, which subsidises the better off at the expense of those who pay penalty charges on overdrafts, he said, and the overpayment of investment bankers is so baked in that it appears easier go out of business or to fire people than to pay them less.

Bankers fear that abandoning distortions that create customer alienation could create “first-mover disadvantage”.

“I have no easy solutions to offer, but feel that until issues like these are confronted, customer trust will continue to elude the industry,” Taylor said.

He was the second senior BoE official in as many weeks to offer a harsh assessment of banks’ progress since the crisis.

Taylor joined a string of BoE policymakers to reject criticism over bank capital levels from John Vickers, with whom Taylor served on the Independent Commission on Banking to reform a sector taxpayers propped up during the financial crisis.

Vickers has accused BoE of watering down the commission’s recommendations on capitalising “ring fenced” retail arms of lenders from 2019.

But the difference between what the BoE is implementing and what the commission recommended is “more or less invisible to the naked eye”, Taylor said.

Vickers may have been influenced by the “atmospherics” of various commentators alleging BoE “wimpishness”, Taylor added.

Reports of “ring-fenced” banks not being able to pay dividends were also “complete tripe”, he said. Since this is likely to take time, the ECB will increase the pace of its purchases only gradually and refrain from setting a monthly target, conversations with seven sources in or near the ECB’s decision-making body revealed.

“There could be big fluctuations in buys but if we succeed in inducing issuance, that would naturally smooth out the market,” one sources said.

Another source said there might be months when purchases will be in the region of just 1 billion euros.

France and the Netherlands, which account for 57 percent of the bonds that the ECB can buy according to Fitch Ratings, will initially be the main focus of the purchases, the sources said.

But the bank hopes to broaden the scope of the programme once supply in other countries, such as Spain and Italy, picks up.

One of the aims of the programme, indeed, is to encourage medium-sized companies, which have traditionally relied on bank loans, to issue bonds.

This would free up bank cash and indirectly force lenders to look for clients among enterprises that are too small to tap financial markets directly, the ECB hopes.

Creating this trickle-down effect will be crucial if the programme is to succeed and would address the criticism that it may simply supply more money to already well-funded companies that can borrow cheaply.

Fitch says, for example, that European issuers sold bonds with the lowest coupons on record in the first quarter of the year, with high-rated companies paying less than 2 percent on bonds with a maturity of 10 years or more.

In the meantime, while the ECB has yet to buy a single corporate bond, the mere announcement has had an effect on supply.

Since the second week of March, when the ECB unveiled the programme, nonfinancial companies in Europe have issued around 61 billion euros worth of euro-denominated bonds, or 50 percent more than in the same period in 2015, Thomson Reuters data shows.

But activity was still concentrated in cash-rich countries.

Issuers in Germany, Britain and France accounted for 70 percent of new bonds sold this year and there was little evidence of growing supply from peripheral countries.