After the interim report from Mr Vickers, it is still a valid question to ask if the banks are still a risk. Presumably his initial views were designed to smoke out the arguments from the various ends of the spectrum from the extreme banker bashers to the integrationalists (if there is such a word?) of the giant banking combines. It is very easy to slip back into a level of complacency to think that all is fine just because nothing else has gone wrong, but in fact there are still some significant risks.

Vickers, of course, must be in a quandary. By pressing for more ring fencing and capital reserves he could be accused of constricting any potential lending; equally by taking a more relaxed view to the requirements, he could be accused of increasing the risks of repeating the banking failures of before. The answer of course lies somewhere in the middle, and inevitably the one thing he can be certain of is that he will never please either end of the scale.

One area of risk is that of the sovereign debts from the weaker Eurozone members. Although the chance of a default is being denied thrice by all concerned, the restructuring or extension of the loans is almost inevitable no matter what imaginative titles are used. Currently giving further facilities to nations like Portugal is like giving to debtors who have maxed out on their credit cards, another credit card – this really is unlikely to solve the problem. So you can argue that as these loans are on the balance sheets of many banks, it is the banks that are in fact being rescued or protected, not the sovereign nations. So what happens when the restructuring does occur? It will be those same banks that are affected that will have to take the reductions in value on their balance sheets – and thus we come back to the potential need for the Brady (Trichet) Bonds I mentioned a few weeks ago.

There is one issue though which Vickers didn’t cover about the different types of banks and that is culture. Investment banks and utility banks are very different businesses and have very different people and cultures – and quite deliberately so. One is a risk taking organisation, the other a much more service related organisation (or was supposed to be). As we have seen in the past where these cultures meet, it is often not very creative, with one frequently not appreciating the strength and usefulness of the other. This reason alone, in my mind, means that they have to operate separately even if they are linked corporately at a higher level.

And another issue I have which does not feel right to me is where assets from one side are being applied to the other. Investment banks love deposit banks as a wonderful source of cheaper capital, but I feel very uncomfortable with the thought that the average depositor puts their money into a utility bank for it to be then utilised by the investment bank – if asked I suspect most would take their money out straight away. The popular media would describe it as ‘Nurses’ savings should not be seen as investment banking fodder’.

This article represents a personal and lighthearted view from Director, Justin Urquhart Stewart of Seven Investment
Management Limited, and is based on current financial news and events around the world. Its content should not be used
for investment purposes and you should contact an independent financial adviser before making any investment or
financial decision.

An idea for more SME Lending

The issue of more lending, especially for SMEs, is still a raw subject for many. Unfortunately, the agreements under Project Merlin for the banks to commit to levels of lending will, on their own, not solve the problem. It’s not the willingness to lend from the banks; it is the price and margin of the lending being offered to the borrowers – ‘yes to a facility, but not at that price!’ – is not an unusual refrain I have heard.

Perhaps a more interesting enhancement would be to extend the government guarantee scheme which is currently offered via the banks – but here, it seems, is the drawback. It appears that many of the guarantees offered via the bank don’t seem to get translated into lending – for whatever reason! Therefore why not let professional intermediaries such as corporate accountants and solicitors apply for the guarantees and let them then source those banks who they do know have the appetite for lending?
In order to get investment for growth moving into the economy, we need to open up as many channels for lending as we can. If the blockage is inside some of the banks – then go around them to those professionals who can get things fixed. ‘Simples’.

And finally....time for some good forward planning. News from Paris of a new exhibition about preparing for your final mortal journey. ‘Care to try out the coffin?’ a young man is asked as he lays himself down on the ivory satin fabric and holds his breath as the heavy lid closes over him.

The Salon of Death is a free exhibition taking place underneath the famed Louvre museum. Funeral parlours, organ donation societies, embalming techniques, and lots of marble are all on display. Organisers hope some 25,000 visitors will stroll through the Salon to admire the rows upon rows of biodegradable coffins or the luxurious funerary urns made from cotton and even blocks of salt.

For those who prefer to remain upright, there's a ‘widow's bar’ sponsored by the champagne maker Veuve Clicquot, which takes its name from the widow who owned the company in the early 19th century.

Also for those who crave more physical proof of their existence, funerary masks are also now coming into vogue.
It’s a serious problem, as I am sure it must be so uncomfortable having a coffin that doesn’t quite fit.

Have a good week and, for those celebrating, may I wish you a Happy Passover.

Justin A. Urquhart Stewart

Director Seven Investment Management Limited