Nick Macpherson has discovered that owning bank shares can damage your wealth. The former Treasury permanent secretary admits that the loss on the state’s £19bn holding of Royal Bank of Scotland is rather more permanent than his own position. One day, a chancellor will have to admit it.

The days of banking on a sliver of permanent capital, leveraged with debt, producing fat returns for shareholders and even fatter ones for bank executives, are over. Today’s regulators demand ever more capital. The banks are resisting, arguing that reduced leverage cuts the amount they can lend, restricting good things like economic growth and animal spirits.

Except it may not be true. A wide-ranging study for the Bank for International Settlements concludes that banks with more equity have lower borrowing costs and faster loan growth. This is grist to the mill of bank regulators everywhere, as they argue that there is still not enough permanent capital in the banking system to prevent the next crisis. As the study’s authors conclude: “Greater retention of net income…would almost pay for itself through lower cost of debt.”

In other words, stop paying dividends. In the five years to 2014, New City Agenda calculates that the top five UK banks paid £31.5bn to their shareholders. They also paid £32.6bn in bonuses and £32.9bn in misconduct costs, so attacking the egregious bonus culture and behaving better would be an even quicker route to stustainability. It is unlikely that the bank executives will want to take it.

However, the state does have leverage that other long-suffering RBS shareholders lack, in the form of voting control. It could insist on linking bonuses to dividends and good behaviour, rather than to some incomprehensible formula dreamed up by remuneration consultants.

Even at this price, selling the RBS holding might be prudent, if we discover that we can manage without banks altogether. Stephen Lewis argues in The Death of Banking that “The provision of credit will gravitate towards new, technology-based institutions.” All this, and negative interest rates threatening to destroy the very reason for being a bank, and you can see why Sir Nick reckons that the loss is permanent.

Managing to get away with it

Fund management is the City’s dirty little secret. The rewards from managing – in some case that is hardly le mot juste – other people’s money are out of all proportion to the effort. Consider: after private equity firm Permira bought Bestinvest in 2014, it made £39m in revenue from £5bn of assets. After its latest takeover, Towry, it expects to make £200m from £20bn of assets.

So much for passing the economies of scale on to the customers. It may be that Permira’s fund managers are so good that they earn their fees, but consistent outperformance is almost impossible, while many hardly even bother. The Financial Conduct Authority examined 19 fund management companies with 23 funds and £50bn between them. Five of the funds were, effectively, closet trackers of their benchmark indices, while “one used jargon that a retail investor might not have understood.” What, only one?

There is some pressure on fees following the Retail Distribution Review, which has forced more transparency on the industry, but the 3 1/2 pages of funds listed daily in the FT, compared to half a page of UK share prices, rather gives the game away. The profitability in this industry is out of all proportion to the value added. RDR looks like only the first step on a long road.

Ingredients for a bear market

*Rising annual tax on homes held corporately

*Higher stamp duty on more expensive homes

*IHT to apply to non-doms’ property

*CGT on property sales by foreigners

*3 per cent extra stamp duty on Buy To Let and second homes

*Restricted interest offset on BTL

*Bank of England curbs on BTL mortgages

(not to mention Brexit)

This is my FT column from Saturday

 

 

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