Gamechangers: Banks

[SharperDingaan]

Have you noticed that we're now 7 years (2013-2007) into the banking 'crisis', and the 'game' hasn't changed at all ?

(1) We have to keep with the bail-outs, because if we don't the failure could trigger another Lehman, & bring down the house ? (2) All manner of 'name' banks in trouble around the world, and not one newly formed bank created to attack their market share? (3) Stone age business models that are acceptable - just because they are used by a bank?

 

ING proved that you can do a virtual bank, & that you don't need bricks & mortar to raise client deposits. Mortgage backed securities have already developed the originate & sale infrastructure; you can now buy whatever kind of mortgages you want, in whatever credit bracket, whatever major currency and mortgage structure, AND force them back on the seller if they blow up. All you need is 5 guys in a office, & maybe $500M of start up Tier 1 capital. Selling to the internet generation (thank you smart phones), with minimal overhead, lots of operating leverage, & minimal need for extreme financial leverage as the monthly overhead is so low.

 

A new (european) bank, free of today's financial corruption, competing for retail deposits against the existing knee capped banks - is going to pull in deposits hand over fist (if their regulator allows them to establish). They are also going to benefit from property slumps as the brick & mortar banks close branches & go virtual. To spike the deposit penetration; their deposit/underwrite competitors are going to have little choice but to repeatedly try taking them out; to avoid their own shop being broken up, & if they fail - their retail stub is going to have to make a knock out bid. Regulatory protection while you're growing? & a knockout bid when it relaxes? and depositors/central bankers experiencing a lot less risk of failure while it is happening ?

 

First to market would trigger a rush, and 10B of initial capitalization is chicken-sh1t to raise if your intial investors are sovereigns & senior institutional. At 12.5% leverage (top end of Basel III), 10B would let you do an immediate 80B of fully backed (high street) mortgage lending - & 7-10 years ahead of the Basel III schedule. At 120B you have one years worth of the feds current QE (80B/month x 12) ... & were it primarily held by sovereign pension funds .... a large part of the solution to the developing pension issues.     

 

What the regulator giveth the regulator also taketh away .....

So you have to wonder how long until this replaces QE? .... & especially in an era where growth versus austerity is now seen as the way out of the mess.

 

One mother of a pair trade  ;)

 

 

 

 

     

[bmichaud]

Given the randomness of this post I have to ask.... are you conducting said pair trade?

[Sunrider]

 

A new (european) bank, free of today's financial corruption, competing for retail deposits against the existing knee capped banks - is going to pull in deposits hand over fist (if their regulator allows them to establish). They are also going to benefit from property slumps as the brick & mortar banks close branches & go virtual. To spike the deposit penetration; their deposit/underwrite competitors are going to have little choice but to repeatedly try taking them out; to avoid their own shop being broken up, & if they fail - their retail stub is going to have to make a knock out bid. Regulatory protection while you're growing? & a knockout bid when it relaxes? and depositors/central bankers experiencing a lot less risk of failure while it is happening ?

 

   

 

No they won't. Nice idea - but ... no dice :)

 

1. Getting a licence takes more than money - especially now and especially in Europe (US not so much so, you can probably still go 'regulator shopping'; Canada also quite hard - I know some people that just got their letters patent and that took 4 years or so).

2. Collecting retail deposits requires some scale - only a few managed it without branches (IG Direct springs to mind). Typically, people trust what they see, they will want their paycheck to go into a bank with a branch they can drive by. Just opening a few branches ain't enough if you want to actually make money. What do you do with the deposits? You still have to pay people something and you won't make much of a margin lending this fairly risk free to other banks or the central bank. Lend it out to retail clients? Corporates? Well, sure, but what advantage do you have here --- diddly squat in my view. Everyone (with money) has access to the same skills, risk models, marketing folks, IT systems, etc. So you can build something that's maybe a little more efficient than your competition and thus slightly lower cost re operations but you won't have a meaningful leg up in risk identification and pricing, which is ultimately what banking is about.

 

... hate to say it, banking is a fairly comfortable business in most markets (even where you have a comparably large number of meaningfully sized competitors ... if you're in, say, Canada then you can basically get away with murder as far as service, pricing and product innovation goes in the retail space).

 

But ... if you find someone with 10bn who would like to start a bank - PM me - I've worked across most areas in a bank, from the bottom to the top so I'd be happy to give it a go (as long as it's mostly someone else's money)!

 

Cheers - C.

[SharperDingaan]

Not so sure  ;)

 

Keep in mind that the FSA, BoE, & Exchequer need to evidence 'proof of concept'. FSA to monitor the day-to-day, Exchequer to prime the pump, BoE to redirect QE.

 

The 1st out will be the template others follow. Outsourced (ING) virtual infrastructure, virtual deposit taking, market purchases of residential & commercial mortgages. Lots of marketing, & a few credit/finance folks, but little else - its oursourced, & mortgages are just bought, NOT originated. KISS principle.

 

Instant critical mass if deposits from existing state wards are transfered to the new bank. Depositors make the decision to stay or not, & why wouldn't they when they are now in 'good' bank? In most cases the Exchequer is the majority owner of the ward, & would have full control over timing, etc.

 

Were RBS the target, & the state Pension Plan/BoE the buyer of last resort of its capital assets; the collapse of RBS would be both clinical, & orderly. An orchestrated LEHMANS, thousands of bankers deliberately put on the street, & a PR campaign widely proclaiming that bank welfare is being replaced with infrastructure replacement. Down with bankers, jobs for John Bull, & a muscular end to moral hazard.

 

With this new 'spawn of hell' open, you either split your retail branches off immediately (brick & mortar approach) or start a rival virtual bank. Wait & you lose the regulatory shield, becoming vulnerable to take over. And the faster it happens, the more money to John Bull infrastructure, & the better a political parties chances of getting re-elected.

 

We're not esteemed enough to make the 1st cut (WEB, Soros, etc.), but the 2nd or 3rd with a short on RBS is a real possibility.

 

Notable is that the Cyprus banking collapse just adds to the need. If you run any kind of significant  business, your treasurer really has to justify why you aren't clearing your accounts through a German (Deutsche) bank. If you're using your local bank - he really has to go with the least risky &  best capitalized; the virtual bank.

 

SD