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Monthly Archives: September 2013

To help provide the economic situation in the UK with some much needed funding, there are contemplations of splitting the troublesome Royal Bank of Scotland into two banks, one “good” and the other “bad” to help alleviate the problem.

However, ratings firm Fitch has said that the price of making this split could actually be more damaging than the money raised.

The company stated that the “bad bank” split might cause obstacles and uncertainty, which could end up being worse than the bank remaining as it is.

Their findings have emerged as Rothschild’s investment executives analyse whether the bank, a recipient of significant bailout funding, should be divided. One aspect of the Royal Bank of Scotland, Ulster Bank, is likely to be moved to the “bad bank” section, as are commercial property loans.

The government is commissioned Rothschild’s analysis to see if credit can be provided to the UK’s economy, and whether the sale of the taxpayers’ hefty 81% share of the company would help.

The review was ordered in June of this year, which heralded George Osborne’s statement that he was thinking of divesting the stake of the taxpayers.

In other Royal Bank of Scotland news, the Financial Times has reported that the bank is in latter stage discussions with Bank of England regulators to place Ross McEwan in the role of Chief Executive Officer.

The new appointment would be as a replacement for Stephen Hester, who left the bank in July 2013. According to the newspaper, McEwan is a lead favourite with the board.

However, no confirmation from the Prudential Regulation Authority of England has been made and Bruce van Saun, the bank’s current director of finance, is one candidate for the replacement.

McEwan is from New Zealand, and was chosen to oversee the Royal Bank of Scotlands retail banking sector last year in August. Prior t this, he was in charge of retail banking at the Commonwealth Bank of Australia, giving him ample experience for the role.

For more information on the Royal Bank of Scotland situation, please read my Slide Share.

Ireland will have to continue to be monitored by the International Monetary Fund even if it leaves the European Central Bank’s bailout programme, it has emerged.

Ireland was part of the beleaguered trio of countries (Ireland, Greece and Portugal) which were bailed out by the EU throughout 2010 and 2011. The bailout programme, which cost €67.5 billion, has helped the country to recover and economical progress over the past few years has made Ireland become more stable.

However, once Ireland exits the bailout programme – which is looking ever more likely, given that Greece and Portugal are still struggling – Ireland will still have to submit to monitoring by the International Monetary Fund. It can only depart from the bailout programme if it subscribes to a safety measure programme from the Euro zone, designed to provide credit should things go awry. Additionally, Ireland needs to protect itself against those who renege on bonds, and the European Central Bank’s promise to guard unlimited purchases of debt in secondary markets can do this. This has led to the introduction of the International Monetary Fund’s watchful eye.

The jump from bailout programme to monitored programme could appear to some as though Ireland still has little control over its own financial destiny. However, whichever the method, Ireland would still have to rely on others for funding; private markets would have to provide the necessary funding for Irish institutions to survive regardless.

The deficit in Ireland’s budget has not decreased for its high level of 7.5% GDP, and the debt of the government has hit the high note of 125% GDP. The real cost, however, is even more than this amount, because the debt that makes up part of the GNP (which Irish residents draw from) is more than 150%.

The revelations come as Angela Merkel begins her fight for her third term in the September elections. The Eurozone economy may well be moving out from the recession, but the bailout programmes will not be unfolding entirely as planned, and this may negatively affect the EU and the upcoming elections.

For further information on the Irish bailout situation and how it will affect other EU countries such as Portugal and Greece, please read my Slide Share.

Moody’s, the credit ratings firm, has released its findings on the position UK financial sector for the future.

Fortunately, things seem to have taken a turn for the better, as Moody’s has judged the situation as “stable”, rather than the “negative” rating it gave previously.

The change, the firm said, was due to the balancing of the economic situation in the UK, even though growth has been slow.

In a statement, the company said: “Unemployment has not increased as much as in previous recessions, thereby contributing to a stabilisation in banks’ asset quality.”

Profits are currently still low, and given the world economic climate growth seems unlikely. However, Moody’s seems to have faith that the UK banking industry will recover.

New rulings over the financial industry also seem to have had a positive impact, with the stricter regulations improving the banking system.

The statement from the company elaborated, commenting with the following: “Overall, we believe that UK banks are sufficiently well capitalised to absorb expected losses from both our central and adverse stress scenarios.”

Moody’s is of the opinion that once the new stipulations of the Prudential Regulation Authority are followed, the more extensive UK banks will have created the reserve capital to be used as a failsafe for capital deficits. This will put the industry in a secure position to face any risky situations in future, and will put the UK financial institutions ahead of the European counterparts.

The new regulations put in place by the Prudential Regulation Authority forces lending agencies to create a buffer sum of approximately £27.1 billion to safeguard against losses through risk. The Royal Bank of Scotland was the worst culprit, and therefore has been asked to produce £13.6 billion of this buffer sum.

Though Moody’s outlook for the future is positive, low interest rates could negatively affect the profits of the banks. Overall, however, the company does foresee an improvement in profits.

Another factor to consider is the price of introducing new regulations, which could lead to one time charges. The implementation of the regulations could have a variety of effects, but for long-term prospects the Prudential Regulation Authority’s ruling should reduce risk.

Additionally, the debt and deposit ratings of the UK banking system was seen as negative by Moody’s, due to the decision by the government to try not to use taxpayer money to bail out struggling banks.

The European Union will also be suggesting new regulations that will force creditors to pay rather than the general public, should a bank encounter difficulties.

To read more on this subject, please see my Slide Share.

Three major Irish banks will have to follow regulations set out by the European Central Bank in Frankfurt, Irish Minister for Finance Michael Noonan has said, speaking at the Oireachtas Committee on Finance, Public Expenditure and Reform.

He elaborated, saying that the European Central bank will have direct control of the regulations over the banks once the new supervisory system is implemented.

Noonan has not confirmed all three banks that will be participating as yet, but he has stated that AIB and the Bank of Ireland will be two of them. “We could have a number of bids on the table for the third,” he explained. Ulster bank is a likely contender, he said, but it all depends on which institutions are seen as “systematically important”.

The supervisory system will place the European Central Bank as the responsibly party for all major banks, taking over from national regulatory bodies. The change will take place during the middle of 2014.

The role of the central regulator will be to guide national regulators, but it will be the central regulator’s decision that is final. Those not included in the scheme will continue to be overseen by the Central Bank in Ireland.

The pressing issue of whether Irish banks require more funding input was also addressed by Noonan. He said: “There is no evidence whatsoever that any of the Irish banks will need extra capital next year. They are very well capitalised. I have no evidence [to the contrary] at this point in time either.”

His statement was met with some animosity, with Sinn Féin’s financial representative countering his words. Pearse Doherty asked how the banks would be financed, should Doonan be wrong and the banks would need capital after the stress tests. Noonan replied that he was “trying to construct a theory on a fake premise.”

The new budget will be brought forward to fall in line with the new ruling from Europe. It will be presented on the 15th of October, a full two months before its usual schedule. Noonan has said the finance bill will be released before mid-December.

For more information on this topic, please read my Slide Share.