Headline, June02, 2013

'''NEVER BANK -ON- YOUR BANK'''

In 2005, the value of assets held by the world's 1,000  largest banks was $60.5 trillion.

They're holding all your cash, but how much do you know about them?

Any business can go bust, and banks are no exceptions, although it has happened a number of times in recent memory  -BCCI in 1991, and Barings Bank, which went spectacularly belly-up in 1995. And then there are those American Banks of so recent a happening.

However, from time to time banks can experience liquidity problems, which is different to insolvency. Liquidity problems mean that a bank cannot meet its short-term financial commitments. This is resolved by borrowing from other banks or through loans from the ''Lender of Last Resort''  -which in this part of the world is called the State Bank; while in England it is called the Bank of England. In America, the Federal Reserve Bank.

In 2007, Barclays reportedly went   -cap in hand to the Bank of England for a loan because funds from HSBC were delayed. the news barely caused a ripple. However, when Northern Rock went to the Bank of England with a begging bowl a few weeks later, it started a run on the bank.

Over £4 millions is the amount of money dispensed by ATMs every 10 mins. So this should give you some idea of the cash needs to keep the wheel going. Normally, and even in these times, Bank's biggest fear is a housing crash. In 2007, UK consumers were in debt to the tune of over £ 1.4 trillion, of which £ 1.1 trillion was secured against the home.

So, any sign of deterioration in the housing market sends jitters all over as recession comes calling, and that dents the bank profits. This variable alone should contradict any notion that banks have conquered the bank cycle. In other words, the bad times justify the excessive profits of the boom years.

Not so long ago, banks operated a 3-6-3 model. This meant that customers were paid three per cent on savings, charged 6 per cent on loans, and bank managers would be on the golf course by 3pm sharp. Hahaha!

But today, the Banks have much better understanding of risk. Some even think that the banking cycle has disappeared. This makes banks very vulnerable to egg-throwing by critics. in 2007 HSBC announced a record profit of £22.1billion.

Each country in the world has its own model, but in the UK the Competition Commission has the final say whether the British Banks can merge, but it does not regulate them. That job is handled by four separate bodies: the Financial Services Authority, the Financial Ombudsman Service, the Office of Fair Trading and the Banking Code Standards Board. The Banks themselves are represented by the British Bankers Association.

This is not only confusing for banks, but bewildering for the customers who may receive conflicting advice depending on which regulatory body they approach with a problem.

As predominantly quoted companies, investors of any nationality can own the shares. Being listed on the Stock Market means that banks are always in the danger of being acquired. Interestingly, the British Banks are most at risk from overseas predators because the Competition Commission will probably block any attempts by UK banks to merge with each other. This might explain why, in 2007, Barclays was so determined to buy the Netherlands ABN Amro. It's a case of eat or be eaten.

Lastly, in UK the banks contribute over £100 million to charities each year and 97% of the population use banks.

With respectful dedication to all Great Bankers of the world. Just too many to name and to the science and art of Financial Engineering.

Good Night & God Bless!

SAM Daily Times - the Voice of the Voiceless