David Kuo speaks with Angela Knight from the British Bankers' Association.
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David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and if you're wondering what is going on in the banking sector, I have just the person who knows. My guest today is (don't laugh, Angela!), my guest today is personally responsible for one of my small pleasures in life, believe it or not – it is the collecting of £2 coins, because she introduced them to us in 1998. My guest needs no introduction, because you've already heard her laugh in the introduction there, because she is the Chief Executive of the British Bankers' Association. Welcome to Money Talk, Angela.
Angela:
Hello.
David:
I bet you didn't know I was a compulsive collector of £2 coins, did you?
Angela:
I didn't, I didn't.
David:
I have a whole jarful of them, and I bring them out regularly to admire how much I've got. I personally think it's time well spent, on a bleak, blustery night in Barnet. So anyway, when I extended the invitation to you to come on to Money Talk Angela, so many things I wanted to ask you at that time, but things have moved on so quickly in the banking landscape, I think it's sort of changed immeasurably. So how do you keep up with the changing banking landscape?
Angela:
I don't know, is the answer! I mean, you're absolutely correct, I was thinking yesterday that actually it is now 15 weeks since I had a weekend off, because every weekend something happens, something changes, somebody jumps up, somebody – got another idea, and do you know, it goes on and on and on, and so you're absolutely right – what's the latest change, what's the great idea, what's happening in banking? – it does move so fast that I'm not entirely sure that I can remember it all, so you'll have to ask me, and I'll do my best.
David:
I suppose it's a bit like having to be as flexible as you can, because ultimately, when somebody says something, something else happens. I mean, for instance, take a look at Bank of China moving into the mortgage market – what are your views about that, when people are saying there's no competition in the mortgage market?
Angela:
Yeah, absolutely. In one respect, they're right to say that there's been a complete reduction in the number of mortgage suppliers and so competition has shrunk like nobody's business, because as you know the majority of building societies now are finding it very difficult to advance new loans, and so it has really come down onto five, six banks and perhaps two or three of the building societies, and not many more, and it is important for individuals that they have choice, that it's not all the same.
It doesn't have to be so different that almost every mortgage was terribly different as was the case two or three years ago, but yeah, I'm not surprised that people say we want a bit more choice, and they're right – where's it going to come from ? Well, the fact is that the UK's always been a pretty open market, and so if you end up with short supply in one area, it's possible to get it from somewhere else. China is the great rising economy – it's China, you know, that'll pull the world out of recession.
David:
Well, I certainly hope so, because I mean, talking about China, if China can voluntarily come into the UK market because it wants to, rather than because it's been told to, why do we need Europe to tell us what we need and what we don't need in terms of competition?
Angela:
Complicated, isn't it?
David:
It is a little, yeah.
Angela:
I mean I scratch my head sometimes. Part of the whole European idea was to have this single market, so that goods and services could flow much more easily across borders, and in some areas it does. Let's take the media, I mean that's one that certainly flows across borders.
Finance can too, as well, because again you don't necessarily need to have bricks and mortar in every country to do so, so I can understand the idea, but what tends to happen is that we all can say the principles are fine, but you'd end up sometimes in the details of the practice and you scratch your head. I mean, you've raised one, that the so-called state aid rules, which is if you actually put money, as a government, into one or two or whatever businesses in your country, that counts as state aid.
It has to be agreed by the European authorities, whether it's here or whether it's elsewhere, but like a lot of things, one does sometimes wonder whether the rules actually operate perhaps in the same way, should I say, across the borders?
David:
So are you saying that it's actually right for the government to force banks to lend money against their will? – because if the banks say, I don't really want to lend money, because I see the situation as being a little bit risky for my shareholders, are you saying that the government has a right to actually twist the arms of these banks and force them to lend?
Angela:
No, I was talking about state aid rules, state aid rules are the broad competition rules which are operated by Europe. If you come to the specific question of making lending decisions, so lending decisions have got to be made based on the borrower, what their likely say business model, how that's looking, what are their customers like, what's their business plan? – because the money you're lending is not your money as a bank, it's your savers' money, and so lending to companies that haven't got a survival plan in place is just throwing good money after bad.
But you know, David, it's a long time since we had a recession. You see, if you came out of university, you were aged sort of 22, 23, at the start of the '90s, it's all been up since then, and you're 40 now, and it's the first time you've really seen a recession, and to my mind, my real recession, the big one of this country, was the one of the Midlands and the north of England in the late 1970s/early '80s, when we had all the big manufacturing and engineering changes, and you've got to be as old as I am to remember that one.
David:
So you're not that old, Angela!
Angela:
Well, it feels it on a day like this! So you know, it's only Monday. But the point is this, David, is that if you haven't seen a recession before, if you haven't really sort of been working, or you've not worked in a reasonable position in a recession before, then it's a whole shock to find that you've got to pay for your credit, you've got to get your business model right, you've got to make people redundant, maybe sometimes it's your family you've got to make redundant, but your orders aren't just going to come back next week.
You can't just borrow to tide everything over, treading water for the next two to three years; life doesn't work like that, and I say to businesses, you need to get your own advice, and the Business Link is one place to get it, that's the, what I still refer to as the DTI, but I think I've now got to call "BIS" sponsored entities, they're all over the place, and actually the banks themselves, you mightn't like the answer, but they're right there prepared to talk it through with you, because it's – they're in the business, their business is lending, their business isn't not lending, so if they're saying to you, look, we're not going to lend you something, then it's the business model that needs to be addressed, and do it together with them.
David:
But that charge against people not being old enough to know what a recession is like, doesn't really apply, Angela, to the banks, because I mean most of the bank executives have actually experienced recessions. Now, isn't there a danger that, if we start telling the banks what they can and cannot do, that they'll just take their ball and go somewhere else?
Angela:
That is a big, big worry that I have, David. There's a lot of real angry people in the country, of course there is, they've been frightened, they've seen problems arise, safe as houses, safe as banks – all that sort of thing, values have gone down, recession, and I'm not surprised people are angry, I'm not surprised people are saying the industry's done this, the industry's done that – it doesn't matter actually the rights or wrongs of it, that's how they feel, that's how they believe, and we would be foolish as an industry if we didn't say that we do hold some responsibilities here, because of course we do – not everybody's done everything right, and I wish they had, but I can't turn the pages back.
However, if we carry on also sending out a very public message to both banks that don't have to operate here, let alone into the international environment, that Britain's all about hostility, that we're not open for business in the way that we've been in the past, that we're not going to want to carry on fostering this large international centre here, then we would not only lose more jobs, we will also have less money being paid into the public purse in taxes, and we will see what we've built up here just go to other countries.
This is an international industry, we need to be sure that we've got the right message going out from the UK, and I worry about some of the things that are being said, and some of the ways that people in other countries say to me that they think of London now.
David:
You know, I couldn't agree with you more, because I mean I was talking on LBC yesterday, and this was on the James Max business show, and I was saying that reading between the lines of what is going on at HSBC, for instance, HSBC at the moment has already sent its chief executive over to Hong Kong, this is Michael Geoghegan, he's gone over to Hong Kong; they're selling their headquarters in Canary Wharf; they're looking for a stock market listing in China, and some people might be saying, you know, this bank could be getting ready to leave these shores, and we don't really want HSBC to leave the UK, do we?
Angela:
We don't want them, and we don't want any other banks to leave the UK. I have 230 banking members, that's actually not even all the banks that operate in the UK, and there's 50 nationalities that sit round the table – that's a good thing, not a bad thing, because they could actually do the business they do here in another financial centre, and they've elected not to, and because they're here, that's real money being pumped into the economy.
So yes, by all means be cross, but be careful as well, and let's get the right steps, and we think the right step things are: getting the economy out of recession, it's going to take longer than we'd hoped, because as we all know, the UK economy was not in a very good state and some of it was already rapidly going to recession anyway, but we can get the economy out of recession, that's step one; step two, pay back the taxpayer – at the same time, let's create the new regulatory future, a lot of work going on there, and that's right as well, a greater amount of stability, and all those sorts of things by the international standard setters; and step three is, let's make absolutely sure that we do operate and can operate in a competitive way here in the UK, so we become a, or retain this net exporting of financial services, which is such a big income earner into the UK.
We are, after all, an importer in most things, we're an exporter in financial services, so we need to get our steps in the right order, but I think the run up to the general election is not particularly helpful, because this is very much all about politics at the same time.
David:
That is really sad, isn't it? – but I'm glad you touched on regulation, because who in your opinion should be regulating our banks?
Angela:
I think you're probably asking me that question, you want me to say either the FSA or the Bank of England?
David:
Well, more to the point, I mean should we be allowing Europe to regulate our banks – who should be regulating our banks here in the UK?
Angela:
Well, in the UK, we're actually the only international centre, financial centre, that's got two lots of regulators, if you like, two lots of authorities: those which we have here in the UK, and those which we have in Europe, and that's why so many of us spend such a long time and so much time in Europe arguing the toss, because if we don't get the European piece right, then it doesn't matter what we do here, we can't get it right here, so we've got to anyway, and whatever may happen in the future, I do not know, but I've got to deal with what we've got now.
The real people who need to be setting the standards for regulation though are neither in Europe nor in Britain, we're now calling them the "international standard setters", and they're things like the Basle Committee, which does capital, and how much capital in the system, and how much capital banks should hold, not just here, but in the competitive financial jurisdictions (some of the other European countries), but the US, Canada, China, India; and then we've got the Financial Stability Board, again has got a big big role in getting the rules right, the regulations right, and saying, OK, and this is how we're going to do it together, so that's actually where it needs to be done, and the reason is because otherwise business will shift around, you know, one country says, oh, well I'm not going to do that, and so it's going to be a lot cheaper for some business done out of there, and business will shift there.
Now, in the long term, that might be bad for that country, because the business they get may not be particularly stable, but in the short term, it's destabilising in the country where business leaves. So that's why international standards applied equivalently on a sensible timetable in the major financial jurisdictions, under the overarching eye of the G20, administered by things like the Financial Stability Board and Basle, is the start, and then back home, well we've got to do our own, as they call it, prudential systemic bit, and frankly that can either be the Financial Services Authority, or it can be the Bank of England, and then tie up the consumer regulatory a bit better as well, because that's been unstable for years, with the Office of Fair Trading's got some parts of it, FSA's got other parts of it, and then there's, the law's not clear in some areas, and there's not enough rules in others, so we can get to grips with that as well.
And I'm all for getting proper changes in place actually, David, I'm not for hanging around particularly, but there's a timetable that's got to be sensible, but I don't think any of it helps when all that's happening is you've got authorities and politics warring away around your head – it certainly doesn't give you a lie in on a Sunday morning, and do you know, what I really resent is, I haven't heard the Archers' omnibus for weeks, and that's my soap!
David:
Well, I think it's the same here, because I'm called upon to try and comment on things that are going on, I mean I'm glad you sort of raised the issue about the OFT and all that, because why was the Banking Code Standards Board closed, and its powers transferred to the FSA?
Angela:
Well only some of it unfortunately, I've never actually been prepared to pass the lot there. The Banking Codes Standards Board had done an excellent job over the years, but it sort of stands to one side of the legislation, because it filled the cap where nobody quite decided how you matched up deposit taking and overdrafts and all of those sorts of things together, so it was self-regulatory, and I think the days have passed when you can have self regulation in an area, and people will say they think that's right.
So to put some of it into a more formalised structure I think was right, the pity was they left lending behind, so you couldn't actually give the deposit taking and lending activities to the FSA, because apparently the law won't let them take it over, though I would have thought that we could do a bit of a quick change there to make that possible, but they didn't. So nevertheless there's a greater degree of security for people on the whole of the deposit taking side, so I think that's good.
The decision though that … I still look at that and I think this was complete madness, is we said it's the BBA – well, come on, OK, we'll finance the lending board, but let's still have that one document that goes to all consumers which has got deposit taking and credit cards and all that sort of thing all together, what we all knew is the banking code, let's just keep that all together, and apparently the answer was, well you can't do that, because of FSA regulation, so bad luck, you can't have one document, so you've got to have two, or three, or whatever it is.
So the idea was the right one, very much in favour of that, but how you execute ideas is important as well, and I don't think this one's been executed particularly well, but there is good protections for consumers, I'm sorry that they've got multiple documents instead of one, not my fault, but your protections are better.
David:
You know, again I have to agree with you, I think the two of us probably sort of think along the same lines, I mean needless to say that both you and I studied chemistry when we were at university – not together, I might add, because you were in Bristol and I was over here in London.
Angela:
How much can you remember?
David:
An awful lot of it, yeah, because ….
Angela:
Oh well then … I can't!
David:
Can you not recite the periodic table then?
Angela:
No no, terribly sorry, no no.
David:
Now then, can I just ask you a couple of final questions, and this one is concerning quantitative easing – do you think the Bank of England's quantitative easing has done enough to safeguard the future of our banks and their investors?
Angela:
Yeah, quantitative easing really doesn't actually, it's not targeted at the banks themselves, it's targeted at the real economy, and the idea there is in effect is sort of pump money into the economy, just as when inflation's going up, you take money out of the economy by raising interest rates as the Bank of England, so when everything's gone down through the floor, so you try to keep things running along by pumping some money in.
I think that this is one of those questions to which we won't get the answer for years, frankly, but that doesn't mean that I think that they were wrong to do it. There's a whole load of things that were done at the same time, quantitative easing, reducing VAT, cash for bangers, there's some things in the housing market, and there'll be others which I can't think of at the moment, and the very fact that a huge amount of different initiatives all were undertaken here and in other countries, all at about the same time, all because of having seen what happens, the lesson of the past which says if you don't do it, you have a much worse recession, means that you're not quite sure which of the ones did the trick, and which of the ones maybe were just easy riders.
So quantitative easing is part of that, I think they were right to do it. The big big question though is, how we actually do what the Americans refer to as "the exit strategy", so getting into something, we all can get into things – getting out, that's where the clever stuff lies.
David:
I think you're absolutely right there as well, because the economists at the moment are so divided as to whether or not quantitative easing is going to be inflationary or deflationary, I think it's almost 50:50 right now, so unless Mervyn King, the Bank of England Governor, phones a friend to find out which is the right answer, I think we're going to have to wait, as you say, until we see the final tally.
Angela:
Yeah, asking the audience is no good!
David:
Well, that's right. Now I promise you, this is going to be my final question, because I know you are very busy. Now, what lessons do you think the bankers have learnt from the events of the last two years, Angela?
Angela:
Oh, every lesson that you can possibly think of actually, they've learnt lessons that they're not infallible; they've learnt lessons that, if you don't control your risk properly, you mess up; they've learnt lessons which have said that the models that they used simply didn't survive the test; they've learnt lessons about how unpopular they are – no banker is immune from the fact that, if they ever wondered what people thought of them, they now know; and they've learnt a lot of lessons about culture, about attitude, and about the need to be much closer to your customers. So that's a bit of a long list, and people say to me, will those lessons last, and my reply is – yes, they will.
David:
You think so?
Angela:
I do. There's a wonderful quote, which I'm now going to get wrong, so I shouldn't have started it, but it's …
David:
Are you going to be doing my quote of the day?
Angela:
I am, but it won't go something like this: "The time in which the lesson is forgotten is when the last person who worked through the crisis leaves or retires", and there's something about that, because you know, corporate memory loss does occur.
David:
Yes, they do.
Angela:
It does indeed, but this is so deep, it's so scarring, and because it's got so many young people as well, I think that that lesson will stay well and truly learnt.
David:
I think we'll end there Angela, and in fact I won't even do my quote for the day, because you have done the quote of the day for me!
Angela:
Sorry David!
David:
That's OK Angela! So anyway, this has been Money Talk, I have been David Kuo, and my guest has been Angela Knight, Chief Executive of the British Bankers' Association. If you have a comment about today's show, you can post it on the Money Talk blog, which you can find at www.fool.co.uk/podcast, and if you have a suggestion about future shows, you can email me at moneytalk@fool.co.uk. Thank you, Angela.
Angela:
Thanks very much.
David:
And thank you everyone for listening, have a great week.
