Sometimes exposure and transparency go too far?

By Justin Urquhart Stewart 09:22 16- Nov -2009

The truth is that if all the customers put their bankers up against a wall (no, not to shoot them necessarily – no matter how tempting that may be on occasion) the bank concerned would almost always be unable to pay back everyone’s money at once.

After all, a joint stock bank is not a Piggy Bank but operates on the basis that not all funds are needed at once and consequently money can be applied to other uses. A bank will always work on the basis that only a relatively small proportion of their cash will need to be made available at any one time. Thus the basis of banking isn’t in fact the holding of money – it is the holding of trust – the customers’ trust.

Therefore if at any one time you had to publish to customers just what proportion of their money is not actually available, I think many would be rather concerned, especially given the events of the past couple of years surrounding the reliability of the banking industry. Banks will always have a range of different lending facilities and services in which customers’ cash is being applied and thus it is down to the good judgement of that bank to evaluate the risk and return of those facilities to ensure that client confidence is being retained.

From this simple premise perhaps then we should question some of the broader statements of exposure of banks’ valuations. We, of course, would all agree that we want effective probity and honesty, but does that have to include a constant measurement of value of assets even at times of severe illiquidity when proper market values will have been made impossible to establish?

This brings me then to the repetitive mantra from many about the banks. This has been the need for absolute clarity and transparency. This has resulted in calls for ‘mark to market’ accounting requirements – which in easy terms just means trying to attribute a real value for an asset at any given time. Obviously such an open and honest approach is laudable in its aims, but unfortunately does not really address the issues of the real world.

In reality banks’ assets, i.e. loans and investment facilities, can be extremely difficult to clearly value as they are not usually day to day tradable items which have clear pricing structures. If then you force someone to mark a price at any one time to such items, the answer can quite often be at least misleading and at worst create catastrophic financial panic. An example of this can be seen with the recent figures coming out on the banks.

The major banks that have been forced to open up their assets to evaluation have seen their corporate value collapse however, the likes of Barclays - by avoiding the involvement of the State as a shareholder, has been able to steer around such exposure and thus although considerably weaker than before, has avoided the worst of the storm to date. One wonders exactly what position they would have been in had they been forced to openly attempt to ‘mark to market’ all their facilities as RBS and Lloyds have been obliged to do? What price confidence.

***

One sign of the growing Chinese consumer base has been the decision of Tesco to carry out a £100m joint venture expansion. The UK’s largest supermarket is planning to build three large shopping centre developments to add to their existing chain of hypermarkets. Although playing catch up with the other international supermarket giants of Carrefour, Metro and Wal-Mart, there is still a huge amount of business to aim at.

By way of perspective, China’s total retail market grew by 281% between 1999 and 2008 to Rmb 8,500bn (£750bn) - a compound growth rate of 16% (data from Access Asia) and no doubt a lot more to go yet.

***

As I write, President Obama is well on his way for his first Asian Presidential tour, and no doubt one subject coming up will be the relative values of both the Renminbi and the Dollar. The Chinese have made no secret over their fear of continuing US$ devaluation and the impact it would have on their US reserves and investments however, I suspect the President will also be hearing of the regional concerns over the need for the Chinese to let their currency appreciate beyond its current $ peg.

The APEC (Asian Pacific Economic Co-operation Forum) meeting in Singapore has called for a more ‘market oriented’ approach to both exchange rates and interest rates – which is conference-speak for revaluing the Renminbi! Given the move towards greater regionalisation rather than globalisation in South East Asia (with less Dollar and US dominance and dependence – what a change from the last decade before the Asian crisis) this may be better received by the Chinese authorities, and especially since most recently some of the seemingly relentless downward pressure on the US currency has eased off.  Such an easing would be welcome however, I hope this should also be accompanied by further agreement between the US and Chinese leaders to stop the dripping of protectionist sand into the engine of Sino-American trade. This must stop – that is the path to recession and depression.

***

And finally........  London commuters listening out for the latest news about train services got a broadcast with a difference when the noise of a couple apparently having sex was blasted out over a station's loudspeaker system.

Instead of the usual messages about delays, passengers at West Ham station in east London heard a couple's love-making antics being relayed over platform loudspeakers during the evening rush hour on Thursday.

"The noises heard by passengers were not from within our station. We believe they were a result of some sort of interference with our public address system," a Transport for London spokesman said on Friday. "It certainly wasn't coming from our staff."

"It was definitely a couple doing it there and then," passenger Laura O'Connor told the London Evening Standard newspaper. "He was grunting loudly and she sounded like she was having a great time. The driver must have heard it, too, as the doors stayed open longer than usual."

Gosh – tube travel will never be the same. They really should mind the gap.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited