Banks customers still paying for mistakes by investment bankers


Julia Kollewe,  Friday 20 August 2010 


• Barclays, RBS and Lloyds investment banks lost up to £118bn

• Individuals and small businesses bear cost in higher charges


UK retail banking and small business customers are paying for the mistakes made by Britain’s big banks in the financial crisis by their investment banking divisions, where losses are five times higher than in retail banking, a City analyst has warned.


Bruce Packard at Seymour Pierce said that, according to “the bankers’ paradox”, those most in need of assistance are the least likely to be given help. “With £75bn of cumulative investment banking losses – five times higher than UK retail banking losses – we are rather surprised that UK banks haven’t given their markets divisions the cold shoulder.”He added: “Investment bankers, traders, markets divisions shouldn’t be cross-subsidised by the retail bank and therefore indirectly by taxpayers.”


He has worked out that investment banking losses, including impairments and writedowns, over the last two and a half years at Barclays, Royal Bank of Scotland and Lloyds Banking Group amount to £74bn, against £14.7bn in retail banking losses. Lloyds and RBS are part-owned by the government.If the goodwill writedowns and “negative fair value adjustments” on acquisitions – RBS’s ABN Amro purchase and Lloyds’s HBOS takeover – are added, the losses rise to £118bn.


Barclays Capital’s losses for 2008, 2009 and the first half of 2010 amount to £16bn, against nearly £2bn in the bank’s retail banking division. Lloyds has run up cumulative losses of £41bn in wholesale versus £9.3bn in retail banking while RBS has racked up investment banking losses of £61bn and retail banking losses of only £3.4bn. At HSBC, however, it was mainly the retail bank that lost money.


Packard said he is concerned that some of Britain’s big banks are recouping investment banking losses by expanding margins to retail and small business customers. “Large corporates are sophisticated institutions who know how much banks charge them. It’s much easier to make money from retail customers than it is from corporate customers,” he said.


It is easier to “whack up the mortgage spread or have poor deals for retail customers. I was surprised that banks raised their net interest margin so much in the first half. I hear that banks are expanding their margins to SME [small and medium enterprise] customers too.”


A Lloyds spokesman said: “We do basic retail and commercial banking. We have no intention of becoming a fully fledged investment bank.”Barclays and RBS declined to comment.As part of a strategic review, RBS is seeking to make the retail bank self-funding – in other words, to fund all retail loans from deposits by 2013 – and to make its retail bank the dominant part of the group.Packard also noted that UK banks need to refinance up to £800bn by the end of 2012. While the government is not prepared to see a large bank fail, shareholders should be asking what price the politicians will demand in return.


Packard added: “Aside from the fairness of UK customers paying for losses in an alphabet soup of ABS, CDO, CDS and CPDOs, we think that this could create an opportunity for new entrants.”




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