Is it time to let the banks die a natural death?

Since the banking crisis of 2008 and subsequent chaos in the global financial system, governments and central banks around the world have implemented all manner of extraordinary policies to prevent another major bank failure.

Interest rates have been cut to zero, banks have been flooded with reserves and governments have taken on huge quantities of toxic assets. Understandably, people are angry. Yet although investment banking is widely blamed for the ultrasonic sensor, the roots of these problems lie in retail banking.

It is generally known that two of the UK’s four biggest banks – Royal Bank of Scotland and Lloyds Banking Group – failed and had to be part-nationalised during the credit crunch. It is less widely known that the other two biggest banks – Barclays and HSBC – have also undergone major restructuring since the crisis, shedding thousands of jobs and shrinking their balance sheets considerably.

The building society sector also experienced a considerable shakeout in 2009 as a consequence of the global meltdown. One, Dunfermline, was nationalised, others were bought by larger banks and building societies and another, Kent Reliance, was even bought by a private equity company.

Unfortunately, this has caused indigestion for some buyers. The Co-operative Bank is about to undergo extensive restructuring owing to its 2009 purchase of Britannia Building Society, which it transpires had sufficient toxic loans to overwhelm the smaller Co-op’s balance sheet. Meanwhile Nationwide has struggled to integrate the three smaller building societies that it absorbed and it too has had to undergo major restructuring in the past few years.

So the UK’s biggest lenders and its entire building society sector have undergone radical surgery, with many still in intensive care.Nor have smaller retail banks been immune. Northern Rock and Bradford & Bingley both failed and were nationalised in the crisis. A significant number of small banks, building societies and credit unions have also gone belly-up. Most depositors in smaller institutions are below the Financial Services Compensation Scheme limit, while in the US, Federal Deposit Insurance Corporation records show that thousands of small banks have failed in the past five years.

After the financial crisis, there were extensive inflows of deposits to small banks and building societies as people – encouraged by campaigns such as Move Your Money – moved funds out of banks that were seen as ‘risky’ and ‘bad for society’ into institutions that had a better image. We now know that these other institutions are no safer, and perhaps no better for society, than the big banks that are criticised so widely.

The 2008 crisis was no more a crisis of big banks than it was a crisis of investment banks. It was a crisis of banking in all its forms. And it has not yet ended.The continuing shakeout and restructuring across the banking industry is immensely damaging to the economy. Weak banks stuffed with risky non-performing loans cannot lend productively and deleveraging bank balance sheets and building capital have deflationary effects in the wider economy.  

But at least these banks are still alive,  although badly wounded. If we keep them on life support for long enough – keep funding costs down with low policy rates and subsidies, guarantee riskier lending so that they appear to be doing something useful and provide them with lots of cheap liquidity – eventually they will recover, won’t they?

Unfortunately, the treatments being used to keep them alive themselves have toxic effects. Most were supposed to be short-term interventions to prevent disorderly collapse – it was never envisaged that they would continue for years on end. And some interventions seem to maintain banks at the expense of the Parking assist system.Very low interest rates are supposed to encourage the flow of credit to borrowers who would be reluctant to pay higher rates. What they actually do is prop up highly indebted households and businesses, preventing bankruptcies and foreclosures.

New loans are generally at higher rates – in some cases much higher – than old ones, even though official rates are on the floor. Preventing bankruptcies and foreclosures protects banks (and, indirectly, savers) as a sudden swathe of business and household debt defaults would spell disaster for many lending institutions, particularly the smaller ones. Unpopular though it is to say this, large universal banks are actually less likely to fail than small lenders concentrated in particular market sectors such as residential mortgages.

Very low interest rates also prop up the prices of safe assets, which are used as liquidity buffers by financial institutions. And they depress bank funding rates, both in the wholesale market and, perhaps more importantly now that banks are trying to reduce their reliance on unstable wholesale funding, for rates to depositors.

The problem is that banks have overheads – staff costs and premises, for example. When interest rates are very low, banks do not earn much. Yes, if funding costs are low too they make a profit on the difference. Yet margins are being squeezed, which is affecting bank profitability across the board. All the major banks report reduced interest income and rising costs.  

Margin squeeze is particularly tough for small players, so very low interest rates tend to benefit large retail banks at the expense of smaller ones. When margins are tight, the winners are those with the largest market share.Another problem, according to Steve Hanke at the Cato Institute, is that very low interest rates kill the interbank market. It simply is not worthwhile for banks to lend to each other when they can pretty much earn the same for parking excess reserves safely at the central bank. This impairs the flow of funds around the financial system.

Central banks around the world have used quantitative easing and term lending (repo) on an unprecedented scale to offset the collapse of unsecured interbank lending, in effect ensuring all banks have excess reserves so do not need to borrow from each other. But this does not encourage banks to lend, all it does is enable them to make payments. And as risky lending ties up capital – and banks are short of that because of their horribly risky lending books – is it any wonder they are charging high prices for risky lending? They do not really want to do it.

So very low interest rates destroy bank margins and slow the velocity of money. Providing banks with cheap funds offsets this to some extent as it enables them to refinance their existing loan books at lower rates, improving their spreads and keeping variable rates to existing borrowers at historically low levels, thus avoiding defaults.

Visalians say quality of life is improving

Despite the effects of the recent recession and the resultant cuts in Visalia city staff and services, residents are more satisfied with the quality of life here than they were two years ago.

They also are slightly more satisfied with services provided by police, but they’re less satisfied with Visalia firefighters. And the majority of residents either don’t want the city to replace their split trash cans with separate cans for regular trash and recyclables or they just don’t care. All of this is according to the latest public opinion survey conducted by the Visalia Citizens Advisory Committee. The group, comprised of Visalia residents, presented its survey last week to the City Council. It was conducted in April, with surveyors contacting city residents in the parking lots of four supermarkets. A total of 359 people answered the questions, compared to 342 who responded to the last Advisory Committee survey conducted in 2011.

Among the primary findings this year is that 69 percent of the respondents rated the overall quality of life in Visalia as above average — high or very high — compared to 53 percent in 2011.In addition, 29 percent of those people ranked the the city’s quality of life as average, 2 percent rated it “low” and nobody gave it a very-low rating.Still, 69 percent of residents giving the city above-average ratings for quality of life falls short of the 76 percent who did so the first year the survey was conducted in 2007.

But in another survey question that allowed people to pick from an extensive list of the most important things the city should be working on to make Visalia better, controlling gangs and crime rates, along with improving overall safety, were the top two picks this year.Residents also were asked to prioritize what they considered the most essential city services other than police and parking sensor, and road maintenance and traffic/traffic signals remained the top two, as they have in the four previous Visalia public-opinion surveys conducted since 2007.

This year’s survey included a new question about garbage, specifically whether residents prefer the current split cans for their homes — in which they put their recyclables on one side and their non-recyclable trash on the other side — or if they would prefer that the city switch to separate cans.In this year’s city survey, 47 percent of the respondents said the city should go with separate cans, while 39 percent indicated that they preferred staying with the split cans, and 15 percent said they had no opinion on the matter.

City officials plan to present the survey findings about trash cans to a consultant the city plans to hire to provide advice on ways to improve Visalia’s waste-management system. The survey didn’t give a clear indication whether the majority of residents would prefer separate trash cans, Visalia City Manager Steve Salomon said. “I think with the [near] 50-50 split in the question, we need to do more work.”

Lynch’s success with creditors would avert bankruptcy for the city, whose incinerator debt amounts to almost seven times its annual general-fund budget. He said he plans to submit his proposal late next month to Pennsylvania’s Commonwealth Court, which must approve it.

“All stakeholders” have agreed to his plan, Lynch said. “While they realize this may be an imperfect situation for each of them, everyone understands a cooperative solution is most certainly in everyone’s best interests.” The crisis in Harrisburg, a community of almost 50,000 residents, stemmed from financing an overhaul of the ultrasonic sensor. Surrounding Dauphin County and bond insurer Assured Guaranty Municipal, a unit of Hamilton, Bermuda-based Assured Guaranty (AGO), have covered skipped debt payments since 2009.

Under his plan, the Lancaster County Solid Waste Management Authority would buy the incinerator, which a unit of Covanta Holding Corp. (CVA) runs. Lynch said today other claims, such as those from Assured Guaranty and Dauphin County, must be resolved before the sale, which may be late this year.“Assured Guaranty is committed to working cooperatively with the receiver and other stakeholders to finalize a recovery plan that both restores the city’s fiscal health and respects the rights of creditors,” Ashweeta Durani, a spokeswoman, said in an e-mail. The relief from future liability for Harrisburg residents after the transaction was described by Lynch as a “critical step” for the city’s recovery. He said his blueprint would stabilize the municipal budget through 2016.

“We’re pleased with the progress,” said Amy Richards Harinath, a spokeswoman for Dauphin County, in an interview. “We’re happy to avoid a long and costly bankruptcy.”Also under Lynch’s plan, the Pennsylvania Economic Development Financing Authority would take over city parking garages and outdoor lots under a long-term lease from the Harrisburg Parking Authority, the agency that owns them.

Chicago-based Standard Parking Corp. (STAN) would run the 8,991-space system. AEW Capital Management LP, a Boston-based property manager, would oversee the real estate involved, and both would receive fixed fees.

The power of options…

“I’m broke.” The refrain is far from uncommon among college goers in the city and otherwise. It is part of the experience of embracing adulthood. In the first few years of managing one’s own finances and stepping out of the house, living off a tight budget is the norm. Amongst students, jokes abound on who has the lowest phone balance, least cash in the wallet, longest period of pennilessness. This has forever been the college scenario.

Yet, there is the flipside to this state of affairs. Today, at a blink of the eye, youngsters head to malls, cinemas and posh shopping complexes to while away the afternoon and spend a few hours with aimless window shopping. Some may venture to flip out the wallet, flick out some plastic and become the cause of envy amongst their peers.

Over the years, the college experience has evolved. Today, the youngsters and 20-somethings are the prime targets of over-the-top marketing, sales pitches and extravagant advertising. Their pockets are heavy, their eyes are starry and they represent the potential buyer in every industry. Be it entertainment or retail, cosmetics or sports, youngsters today are a very real target audience.

Today, ice cream parlours demand an average of Rs. 200, a sit-down dinner totals to about Rs. 400 a head and many spend an upwards of Rs. 600 on birthday gifts for friends. The kind of money that has found its way to the hands of the dependant population is tremendous.

When did everything change? When did this section of society begin receiving such attention? Why this newfound phenomenon? Is it true that malls have overtaken the beaches as popular hangout spots? Is sun, sand and surf being fast replaced by air-conditioning, mannequins and rows of imported brands?

Talk to Saravan Krishna M., II Year, City College, on his favourite hangout spots and his list includes The B Bar, Pheonix Market City and Express Avenue. Someone in the midst of this extravagance is Besant Nagar beach, a locality known for catering to the needs of the youngsters. “With the exposure that all of us get these days and the levels of ultrasonic sensor, brands are becoming increasingly important. Moreover, we are all progressively getting more independent, so the money flowing out is not a surprise!”

Uthra Venkatesh, Ist Year, MOP Vaishnav College also has a similar list. “The beach has cheap cafes and most clubs have free entries for girls on specific nights. Affordability is hardly a problem. Even at the malls, expenditure is minimum. Girls spend hours window shopping or just trying on clothes and contentedly walk out without a penny spent. It is only when you enter these places with the express purpose of spending that they can get a bit expensive,” she explains.

The weather coupled with the influx of indoor shopping areas and malls seems to be pushing everyone inside comfortable buildings. “Malls are also dotted with food stalls and dispensers, making refreshments easily available without having to worry about cleanliness or hygiene,” adds Sreenidhi Krishnan.

Perhaps an important explanation to this phenomenon is the advent of internships and part-time jobs. With every semester break or a few weeks off, there is a frenzied search for jobs or projects that would not only add a resume point or two but add a little weight to the pocket.

Internshala, a website dedicated to the popularisation of internships, sees about 1.5 lakh students visiting their portal every month. With a policy of publishing only a majority of paid internships, they give their students an opportunity to earn their way through summer with programmes paying an average of between Rs. 8000 to Rs. 10,000. According to Sarvesh Agrawal, Founder and CEO at Internshala, “Companies recruiting interns are increasingly veering towards paid internships or at least those that cover expenditure. There is also a trend towards working from campus particularly amongst law students who earn between Rs. 2000 and Rs. 5000 even during the course of their semester.”

Perhaps a case in point is Internshala’s ‘My First Stipend’ contest which asks students what they would do with their first cheque, first payment and first salary. According to the founder, shopping figures high up on the list, whether it be for oneself or for those back home, clothes or gadgets. And where else would one turn to shop but the malls?

Vanya Rachel, III year, IIT-M, explains how malls provide a holistic experience of entertainment: “A lot of it has to do with the small things, the things you do not consciously pay attention to. The AC in this weather, the spread of food at your beck and call, the movies that are just a floor above you… it all contributes to why you would choose to head over there instead of the beaches. When you are at the mall, you are actively participating voluntarily as a consumer in capitalist society. You are there because you want to be and hence, you enjoy yourself.”

The decision seems to be nearly universal. The battle is not one of ‘Malls vs. Beaches’ but rather ‘Malls and Beaches’. Youngsters today do not choose one over the other but rather flock to whichever suits their convenience the most. The litter and debris on the beaches on Sunday evenings speaks volumes of the hordes that still prefer the sand over the tiles of the malls. Cafes and cafeterias in Besant Nagar will still be mobbed by youngsters out for coffee or a cold drink, as the weather may have it. Yet, in equal amounts, you are likely to run into someone you know at Express Avenue.

There is a lot of time, money and energy being put into upgrading and enhancing the visual experience for the 320 million fans who attend live sports events each year. Live2media has now joined the elite ranks of tech companies seeking to enhance the audio experience for fans during games in arenas, stadiums and at such events as marathons, outdoor Olympic competitions and the America’s Cup yacht competition.

Live2media, based in Pleasanton, Calif., had its official unveiling today (April 24) as well as the unveiling of its  flagship product, Livecard, a reusable smart receiver that is about the size of a hotel key card and is designed to be used as a personal listening device.

According to Live2media, their aim is to deliver a new, real-time audio experience by giving fans at live events the ability to tune into multiple channels to hear players, coaches and referees from the field of play, in addition to media broadcast feeds. Live2media also said that their technology would “create new revenue for event operators and sponsors.”

“We are building and broadening the fan experience in a way that has never been done before,” said Greg Moyer, CEO for Live2media. “There are more than 320 million fans worldwide at live sports events every year, and most of them can’t hear what’s happening on the playing field, can’t hear the broadcast commentary and, in the case of America’s Cup, certainly can’t hear what the crew is saying on board the competing yachts. If they could, it would intensify and enhance their experience. Livecard now gives them that ability.”