This is all about Goldman Sach’s somewhat forlorn attempt to break into the UK’s retail banking market with its Marcus initiative. Surely the Masters of the Universe with plenty of brains, deep pockets, plenty of confidence could brush away stuffy old outfits like Barclays and Lloyds. It seems not and Goldman have now sidelined poor Marcus. The point being made here is that there is something fundamental in the British psyche that Prevents newcomers from achieving penetration in this boring and not very profitable market at scale. Wave after wave of digital “disruptors” have tried to wake up punters with their glitzy apps and Android friendly front ends but somehow, they just don’t get the traction. It remains to be seen how the sharply rising interest rates might affect this seemingly impenetrable fortress, but one must ask. If Goldman’s can’t do it, then who can?
One result of the end of cheap money is that it will wake up corporate treasurers to the fact that leverage can be expensive. While the expectations ae that interest rates will stabilise sooner rather than later at around the 5% level more in line with historical cost of money. I think that there are a couple of points to be made here. Firstly, highly leveraged “zombie companies” cannot afford borrowings at this kind of level and secondly banks are going to have to look very closely at their risk premiums if they are going to have to pay much more for their retail and wholesale deposits. There is, after all, a trade off between the rate charged and the ability of borrowers to pay it. Regulation in this area has just not helped. Secondly those outfits that are asset rich do have alternatives and they are increasingly going to have to weigh up the risks and opportunities of using them. Sound like going back to old fashioned banking might be the answer.
Daily Telegraph 24th October
Excellent piece by the Daily Telegraph’s Kate Andrew’s in which she points out that rising interest rates are putting pressure on governments everywhere to have a rethink on the wisdom of printing money as a substitute for real economic growth. The market turmoil that followed the sharp increase in gilt yields shone a light on the fact that the pension regulator was asleep at the wheel. Did they not know that leveraged products such as LDI (liability driven investments) contained a mechanism for restoring risk profiles in volatile markets? Did they not know how margin calls work? Seems not. Truss was going for growth but needed to roll the pitch first. However borrowing money for day to day consumption is not a sustainable strategy now and has never ever been one. The consequences of the pandemic and the hubris of central banks and governments for the last 15 years are going to have to give way to reality and it is the taxpayer that will need to foot the bill in declining living standards, government hand outs and public services. This is why six million people are on NHS waiting lists.
Howard Tolman is a well known London based Banker, entrepreneur and technology specialist.