Jul 302013
By Ryan Brightwell, on Jul 30, 2013. Republished from Blue & Green Tomorrow.

Most commentators seem to agree that a return to ‘back to basics’ banking is needed if we are to avoid the kind of speculative bubbles that tanked the global economy in 2008.

This means banks should focus on taking deposits and offering loans, and making a fair margin on the difference in interest rates between the two. (Once, bankers were said to adhere to something called the 3-6-3 rule: pay 3% interest on deposits, loan at 6%, and be on the golf course by 3pm. This was characteristic of a lazy, uncompetitive banking market, but one which, at least, didn’t crash the world economy.)

How close are we to achieving this ‘back to basics’ banking model in the UK?

Greg Van Elsen of the Belgian NGO FairFin last year published a report, A Bank in Reverse, which investigated this question in a Belgian context. The report looked into the financial statements of banks active in Belgium, and sought to identify the country’s “most respectable” bank, that which was most dedicated to funding the real economy and least concerned with short-term trading for profit.

“We are convinced”, wrote FairFin, “that most banks should become somewhat better behaved, and be mostly at the service of the real economy. So in fact, a bank in reverse.” So let’s look at the equivalent data for the main banks in the UK.

One of the important ratios the report looked at was the proportion of a bank’s assets which is accounted for by ‘loans and advances to customers’, including lending to businesses and individuals (but not to other banks). This is, after all, what we expect banks to be doing with our money.

Looking at this data for the UK’s main banking groups shows that overall, banks are only using a minority of their assets to provide loans to their customers. In fact, just 42% of the total assets held by British banks is actually loaned to customers. While some of the rest is held as cash and in central banks, a much larger amount is held in derivatives and other short-term assets ‘held for trade’.

Barclays stands out as the only bank with less than one-third of its assets being lent to customers. HSBC and RBS also use a minority of their capital for what most of us recognise as ‘banking’. While none of the British banks fared as badly as Deutsche Bank, which FairFin found used only 19% of its assets for lending, this is a poor picture overall. The Co-operative Bank was the only bank lending out more than two-thirds of its balance sheet to customers.

Table 1: Loans to Customers / Total Assets

Bank 2012                   2011
Barclays 29%                   29%
HSBC 37%                   37%
RBS 38%                   34%
Lloyds 56%                   58%
Santander 59%                   61%
Co-operative 67%                   69%
Average 42%                   41%

Source: Banks’ 2012 Annual Reports – Loans and advances to customers divided by total assets.

This is a simple ratio to calculate, but it tells us something about how much of a bank’s attention is focused on financing the real economy. [1]

Calculating the amount of money banks set aside for short-term trading is a more challenging task, and directly comparable figures are not available for all banks. (As such, this data should be treated with caution.) Again, following FairFin’s methodology, the data below looks at the securities portfolio of the banks to identify ‘securities held for trading’ – the assets most likely to be held for short-term profit-making. (‘Securities held to maturity’, in contrast, concern assets that a bank intends to hold to maturity, and thus are not speculative in nature.)

These figures show a clear correlation between those banks lending a smaller proportion of their capital to customers and those with investing a greater proportion in speculative trading. The Royal Bank of Scotland (RBS) and Barclays stand out as the two banks dedicating more of their assets to short-term trading than they do to actual loans to customers. For RBS – 82% owned, of course, by the British taxpayer – more than half of its assets are ‘held for trading’. The Co-operative Bank, meanwhile, reports investment in derivatives at just 2% of its total assets.

Table 2: Trading Assets / Total Assets, 2012

Bank Trading Assets Total Assets Ratio
RBS £666,458m £1,312,295m 51%
Barclays £602,555m £1,490,321m 40%
HSBC £471,682m £1,665,335m 28%
Santander £145,424m £1,037,756m 14%
Lloyds £68,324m £924,552m 7%
Co-operative £1,159m £49,573m 2%

Source: See footnote [2].

This is analysis is certainly a simplification of the complex operations of today’s banking giants, and further research is needed to identify trading assets which may support the real economy in a positive way. Also, it must be noted that few banks disclose enough information to identify how much of their loans to customers are supporting unsuitable or unjust economic activities.

However, the aim of this analysis is to identify what proportion of a bank’s attention is focused on the productive economy, and what proportion is being gambled in pursuit of short-term profits. The data suggests that, for most of the sector, ‘back to basics banking’ remains a long way off.

[1] Note, while this analysis is new, similar data has been produced by others in previous years. After compiling these figures, it came to my attention that a similar exercise was carried out on the basis of 2011 data by the European Green Party for the website http://bankingsins.eu/. This data is consistent with their figures, but provides an update for 2012, as well as some additional analysis on the picture for the overall market. Their methodology for calculating speculative activity was slightly different, focussing purely on derivatives.

[2] Total Assets from 2012 Annual Reports (Consolidated Balance Sheet). Trading Assets:  Lloyds, HSBC and RBS sourced from Form 20F SEC filings – “assets held for trading”; Santander sourced from Annual Report Consolidated Balance Sheet – “financial assets held for trading”; Barclays sourced from Form 20F SEC filing – “total derivative assets held for trading” + “other securities – held for trading”; Co-operative sourced from Annual Report – “Investment securities – held for trading” + “total derivative assets held for trading purposes”. Data for HSBC and Santander has been converted to GBP using Oanda.com exchange rates at the balance sheet date (31/12/2012). While every effort has been taken to source the most appropriate data for each bank, care should be taken as data may not be directly comparable.