Banks get until 2019 to ringfence high street operations

Sir John Vickers, chairman of the Independent Commission on Banking, speaks at a press conference on the commission's interim report earlier this year. Photograph: Dominic Lipinski/PA

Britain's biggest banks are to be given until 2019 – longer than had been expected – to implement radical reform of their operations to prevent another taxpayer bailout of the system.

The Independent Commission on Banking – issuing its report almost three years to the day after the collapse of Lehman Brothers which led to the major 2008 bank bailouts – said that banks should ringfence their high street banking businesses from their "casino" investment banking arms.

The much anticipated final report by Sir John Vickers admitted its proposed reforms would cost between £4bn and £7bn but were more practical and less expensive than the full-scale separation of the kind that business secretary Vince Cable had called for in opposition.

The ICB conceded that its reforms were "deliberately composed of moderate elements" but insisted "the reform package is far-reaching".

It said: "Together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007. In many respects, however, it would be restorative of what went before in the recent past – better-capitalised, less leveraged banking more focused on the needs of savers and borrowers in the domestic economy. Banks are at the heart of the financial system and hence of the market economy. The opportunity must be seized to establish a much more secure foundation for the UK banking system of the future". George Osborne welcomed the report and said: "The government will now get on with implementing the report." He promised legislation would be passed before the end of this parliament – but would give banks the time frame recommended by Vickers. The chancellor is to address parliament on Monday afternoon.

Up to £2tn of assets could end up inside the 'firewall' – including all domestic high street banking services – as the ICB said that the aggregate balance sheets of the UK's banks was over £6tn and that between one sixth and one third of these should be protected from investment banking operations.

While the ICB made it clear that the current crisis in the eurozone should delay the reforms, it also set a deadline of 2019 for implementation of the changes to coincide with the international capital rule changes being introduced by regulators in Basel, Switzerland.

"Postponement of reform would be a mistake, as would fail to provide certainty about its path. However, it is important that the current economic situation be taken into account in the timetable for implementation of reform. The Commission's view is that setting 2019 as the final deadline for full implementation provides ample time to minimise any transition risks."

The ringfencing is expected to have the biggest implications for Barclaysand the bailed-out Royal Bank of Scotland.

But the ICB provided some relief for bailed-out Lloyds Banking Group by back-tracking on an idea that it be forced to sell off an extra tranche of branches in addition to the 632 currently up for sale to meet EU demands on state aid. However, it said that the high street banking businesses – dominated by Lloyds since the rescue of HBOS in September 2008 – should be referred for a full competition investigation in 2015. Lloyds, which had lobbied hard against the proposal, said on Monday it is "currently assessing the full implications".

The British Bankers' Association said: "UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained. The ICB's recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."

US jobs data puts markets on recession alert

An outdoor job fair in South Los Angeles. Markets fear that the US economy is sliding back into recession. Photograph: Robyn Beck/AFP/Getty Images

Fears are mounting that key US unemployment data will show the world's biggest economy is teetering on the brink of re-entering recession.

US non-farm payroll data – due out at lunchtime on Friday – is expected to show an increase of about 60,000 jobs in August, far below a 117,000 increase in July. Economists at Goldman Sachs warned investors on Thursday that they expect an increase of just 25,000 jobs, compared with an earlier estimate of 50,000. There have even been suggestions that the figure could be negative, which would send further shockwaves through global markets.

Reflecting those fears, gold, the traditional safe haven in troubled times, jumped more than 1% to $1853.

The expected slowdown in job creation is worrying because the US generally needs to add about 150,000 jobs each month just to keep up with the growth in the working-age population.

Fears about jobs and the overall health of the US economy pushed down markets across the world, with the FTSE 100 down 87 points to 5330, a fall of 1.6%.

Tim Schroeders, who helps manage $1bn of equities at Pengana Capital in Australia said: "The US recovery remains anaemic, with lingering concerns over job creation and house prices. Expectations are relatively low for tonight's jobs data."

Ben Potter, market strategist at IG Markets, said traders were suffering with "classic nervousness" ahead of the jobs data. "As it stands, the market is expecting a figure of around 70,000 jobs. However, the whisper numbers have been as low as zero," he said. "So an inline result could see the market move higher."

Michael Hewson, market analyst at CMC Markets, said: "At the beginning of the week expectations were for a number of around 90,000, but as the week has progressed subsequent revisions have moved the bar lower.Thursday's Institute for Supply Management [ISM] manufacturing number gave the markets a brief boost after the headline figure remained in expansion territory against expectations, however after scratching a little below the surface the picture wasn't as rosy as first appeared with new orders contracting at 49.6, and construction spending for July falling back by 1.3% much more than expected.

There now remains a concern in some quarters that Friday's number could well be negative, which would be a shock and certainly give the Fed and the markets food for thought. In any case the consensus has now moved to between 25,000 and 65,000, with the unemployment rate staying at 9.1%."

Clash with Boehner

President Obama is due to unveil his plan to tackle unemployment and revive the economy next week – but only after settling a diary clash battle with John Boehner, the Republican speaker of the House of Representatives.

White House officials had asked Boehner if the president could address a joint session of Congress next Wednesday. Normally, such a request for a big set-piece speech would have been granted automatically. However, growing political friction in Washington led Boehner to deny the request. Boehner said the speech would have clashed with a series of already scheduled votes. But many political experts say the real reason was because it clashed with the next Republican presidential debate.

Obama has been forced to delay his speech until next Thursday when he will arguably be up against even tougher competition: the nationally televised opening game of the new NFL season featuring the defending Super Bowl champions, the Green Bay Packers.

The FTSE 100 index was down 1% to 5357 at 8am, with only two companies – Inmarsat and Rangold Resources – in positive territory. Banks were among the biggest fallers today, with RBS down more than 3%, at 25.42p and Barclays 3% lower at 175p.

The decline in the FTSE was mirrored by similar falls across Europe and Asia, with Japan's Nikkei falling back below the 9,000 points level after six straight days of gains. In the US the S&P 500 is forecast to open 0.5% down.

US authorities to sue big banks over sub-prime crisis

The FHFA claims banks failed to notice borrowers were taking on mortgages they could not afford. Photograph: Getty Images

US authorities are preparing to sue more than a dozen big banks over claims they misrepresented the quality of mortgages sold during the 2006-7 housing bubble.

The US Federal Housing Finance Agency (FHFA), which is overseeing the remains of failed mortgage giants Fannie Mae and Freddie Mac, is reportedly planning to argue that America's biggest banks failed to check the health of mortgages before they sold them on to investors. The collapse of hundreds of thousands of sub-prime mortgages triggered the 2008 credit crisis and the collapse of Fannie and Freddie.

The New York Times said the FHFA is expected to file the lawsuit against the banks, including Bank of America, JP Morgan, Goldman Sachs and Deutsche Bank, as early as Friday. The agency, which is seeking billions of dollars in compensation, claims the banks failed to notice that borrowers were taking on mortgages that they could not afford.

The FHFA lawsuit, which follows a subpoena issued to the banks last year, demands that the banks pay compensation to cover some of the $30bn (£18.5bn) Fannie and Freddie lost on mortgage-backed securities. Most of Fannie and Freddie's losses were borne by US taxpayers after the government was forced to step in and bailout the pair to the tune of $141bn.

It follows a similar $900m lawsuit filed against Swiss bank UBS in July. At the time UBS said it would "vigorously" defend all charges brought against it.

In total the FHFA issued 64 subpoenas to the issuers and servicers of mortgage-backed securities last year. Last week the agency's director, Edward DeMarco, who declined to discuss the pending lawsuit, said there were "more to come". The banks declined to comment to the New York Times.

Action by the FHFA comes as the US Federal Reserve announced a formal enforcement action against Goldman Sachs "to address a pattern of misconduct and negligence relating to deficient practices" in its handling of mortgage loans. The Fed said Goldman will be legally required to compensate any homeowners that were found to have been financially harmed by the alleged misconduct. It did not speculate on the size of the potential compensation claims.

The Fed's action is the latest step in the US government's investigation of "robo-signing" – in which bank employees signed foreclosure documents without reviewing case files as required by law. The Fed said employees at Goldman's Litton Loan Servicing unit engaged in robo-signing and took actions in foreclosure and bankruptcy cases "without always confirming that documentation of ownership was in order".

Separately, the New York State Banking Department announced that Goldman had agreed to write off $53m of the outstanding debts on about 150 mortgages it owned in New York. Accepting the writedown was a condition for allowing Goldman to sell Litton to Ocwen Financial in a $260m deal late on Thursday.

Europe rejects IMF call for more bank capital

FRANKFURT | Thu Sep 1, 2011 7:33am EDT

European bankers and politicians leapt to defend the region's banks on Thursday, rejecting an International Monetary Fund (IMF) estimate that they need 200 billion euros ($290 billion) in new capital to reflect sovereign debt losses.

IMF chief Christine Lagarde's call on Saturday for mandatory capitalization of European banks to prevent a world recession has reignited a debate over whether they have raised sufficient capital to withstand a severe downturn.

The clash highlights diverging views about the underlying safety of the European banking system. The IMF and the International Accounting Standards Board (IASB) have both voiced concerns, while European regulators, politicians and banking associations argue that banks have a sufficient capital cushion to cope with market turbulence and worries over sovereign debt after several rounds of capital raising across the continent.

A European source told Reuters on Wednesday that the IMF had estimated European banks could face a capital shortfall of 200 billion euros, a figure rejected by European bankers and policymakers.

The IMF figure is much higher than estimates of banks' capital needs following stress tests in July.

J.P Morgan has estimated that based on the stress-test data, European banks showed a capital deficit of 80 billion euros, with UK banks needing 25 billion euros, French banks 20 billion euros and German lenders 14 billion euros.

The European Commission reiterated it saw no need for drastic action since the publication of the stress test results, echoing comments made by the European Banking Authority on Tuesday.

"Our analysis of the situation hasn't changed, it is in fact shared by the member states. We did have an in-depth discussion when the results of the stress tests for banks were presented and this our diagnosis and there is no reason to change it now," Commission spokesman Amadeu Altafaj told a regular briefing.

The bank stress tests did not factor in the impact of a significant drop in the value of sovereign debt.

A Euro zone official who declined to be named said "We are aware of those (IMF) numbers, but we think there are serious methodological flaws in that paper and discussions are going on with the IMF about them."

Eurozone governments and the European Central Bank disagree with the "very questionable" methodology of the IMF estimates on bank capital requirements, another European government official said. The European Central Bank declined to comment.

The view was echoed by the German Banking Association BdB which represents lenders such as Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE), and the VOEB, which represents troubled lenders such as WestLB. Both insisted there was no immediate need to inject capital into German banks.

"We do not understand how the IMF has come to this conclusion. Earnings statements do not back the conclusion of such a situation among German banks," the German VOEB said.

France took a similar line on its banks, whose shares came under intense pressure during August amid concerns over access to funding, with French Budget Minister Valerie Pecresse saying they were not a cause for concern.

"French banks are now better capitalized than a year ago; they passed stress tests which were extremely tough less than a month ago. I don't think there is any cause for worry over French banks," she said at an event on Thursday.

European bank shares traded slightly lower by 1043 GMT, with the STOXX 600 European banking index .SX7P down 0.4 percent. Meanwhile, key euro-priced bank-to-bank lending rates edged higher, driven by concerns about the outlook for the economy and euro zone banks.

The fight over whether European banks have sufficient capital highlights a flaw in the accounting treatment of sovereign debt, experts say.

"One enormous weakness is that European banks are encouraged to load up on sovereign debt without pricing in the appropriate risk penalty," said Roger Myerson, winner of the Nobel memorial prize in economics in 2007. "It creates the wrong incentives for governments and banks."

Myerson, who was recognized for his contributions to mechanism design theory, said that under Basel accounting rules, sovereign debt is still given a risk weighting of zero.

This encourages banks to buy risky debt without having to build an appropriate capital cushion, and provides an incentive for governments not to address their deficit levels since they are still able to issue debt.

"This looks like the entire problem of the euro zone," Myerson told Reuters.

But accounting body the IASB said European financial institutions should have been more aggressive in booking losses on Greek government bonds. Writedowns disclosed in results varied from 21-50 percent.

At the low end this corresponded to the so-called "haircut" on banks' share of a planned second bailout of Greece now being finalized. A 50 percent loss represented the discount markets were expecting at the end of June.

Eight European banks failed the EU stress test in July, and the total new capital they needed to remedy the situation was 2.5 billion euros ($3.6 billion), less than had been expected before the tests.

($1 = 0.695 Euros)

Brent falls on poor Europe, U.S. data

LONDON | Thu Sep 1, 2011 9:02am EDT

(Reuters) - Brent crude fell on Thursday as U.S. productivity data and European manufacturing data pointed to a slowing economy, fuelling fears of a decline in fuel demand from industrialized nations.

U.S. non-farm productivity fell by 0.7 percent, the biggest decline since the last quarter in 2008, while new U.S. claims for unemployment benefits last week fell as expected.

Front-month Brent touched $115.27 a barrel, the highest intraday price since August 3, before falling to a low of $113.61. By 1249 GMT, October Brent was at $114.19, down 66 cents. U.S. crude benchmark West Texas Intermediate (WTI) fell 29 cents to $88.50.

The U.S. data was preceded by figures showing weakening German manufacturing activity in August, which grew at its slowest pace in almost two years, and French manufacturing activity, which contracted for the first time since July 2009.

"The main thing putting pressure on oil this morning is the really bad PMI (Purchasing Managers' Index) readings in Europe," Olivier Jakob from Petromatrix said. "We have an contraction overall in Europe in the PMIs, this is confirmation that the economy is slowing down."

The weak European data sent financial markets into a rout, with a broad sell-off only tempered by hopes of further quantitative easing in the United States. <MKTS/GLOB>

"The weak PMIs point to a slowdown in world economic activity," Christophe Barret from Credit Agricole CIB said.

Prices rose earlier in the session after China's manufacturing data showed an improvement in August, raising hopes growth in the world's largest energy consumer could offset slowing industrialized economies. China's PMI rose to 50.9 in August from a 28-month low of 50.7 in July, official data showed.

"Generally China has surprised on the upside and we expect it to continue to do so, although it will continue to moderate growth," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

"We acknowledge the difficulties for China's policymakers to deal with inflation, but we still think that the economy will be stronger than the market is fearing."

China Premier Wen Jiabao signaled on Thursday that controlling inflation would remain a top priority in coming months even as the world economy wobbles.

EYES ON U.S. JOBS

Investors remained focus on Friday's U.S. non-farm payrolls report for August as a guide for direction in the oil market. Payrolls are expected to have increased by 75,000 jobs, according to a Reuters survey, slowing from July's 117,000 rise.

Crude prices rose on Wednesday after a report showed the U.S. private sector added 91,000 jobs in August, while an index of factory activity in the U.S. Midwest in August and U.S. July factory orders were better than expected.

Still, the data continued to portray an economy struggling to mount a sustained recovery, raising expectations the Fed would adopt new measures to shore up the economy.

"It is still mainly the hopes of further liquidity injections from the Federal Reserve that are giving lift to oil prices. From a fundamental perspective, prices have meanwhile exceeded their justified level," Commerzbank analyst Carsten Fritsch said in a note. "As long as speculation about 'QE3' continues in the market, this current exaggeration should remain intact, although the air will get thinner for further price gains."

HURRICANE WATCH

Concern about hurricane-related disruptions to supply in the U.S. Gulf of Mexico also supported oil prices.

Katia strengthened into a hurricane over the Atlantic on Wednesday, while another mass of thunderstorms that could become a named storm this week triggered evacuations of some oil workers from the Gulf of Mexico.

BP (BP.N) began to evacuate more than 500 non-essential workers from four platforms in the region, home to large volumes of crude and natural gas production.

Brent crude gained in the previous session on the back of a sharp drop of 2.8 million barrels in U.S. gasoline stockpiles last week and as North Sea production issues keep European crude supplies tight.

House prices show August fall

Nationwide says house prices are a 'picture of relative stability'. Photograph: Dan Kitwood/Getty Images

House prices fell by 0.6% in August, according to Nationwide's latest survey, more than reversing July's rise and surprising economists who had expected them to stay flat.

The building society's monthly snapshot of the housing market showed the average price of a home in the UK fell by £2,817 over the month to £165,914. This is 0.4% lower than in August 2010.

Economists polled by Reuters had forecast that prices would remain flat in August, giving a 0.4% rise year-on-year.

Nationwide said house prices had actually increased by 0.1% over the less volatile three-month measure, though this was lower than the 0.3% rise seen in the previous three months.

Its chief economist, Robert Gardner, said a "picture of relative stability" had characterised the market over the past 12 months, and that this was expected to remain the case for the rest of 2011. However, he warned that any increase in unemployment could lead to sharper falls.

"For some time now the residential property market has been moving sideways, as weak demand for homes coexisted with a situation where relatively few homes were coming on to the market," he said.

"A further fall in employment would be likely to upset the relatively delicate demand-supply balance and put downward pressure on prices."

Howard Archer, chief UK economist at IHS Global Insight, said the latest figures were consistent with his expectation that house prices would continue to fall.

"The fall in August ties in with our belief that house prices are likely to trend down gradually over the coming months in the face of persistently weak economic activity, rising unemployment and low consumer confidence. Specifically, we forecast house prices to fall by around 5% by mid-2012.

"We suspect that squeezed household purchasing power, tightening fiscal policy, a weakening labour market and persistent serious consumer concern over the economic outlook will limit potential buyers and weigh down on house prices. On top of that, there are still significant difficulties in getting a mortgage, particularly for first-time buyers."

Nationwide's index is based on mortgages it has approved in the previous month, so does not reflect the whole market. Figures from the Land Registry, which are based on completed sales in England and Wales, have tended to show larger annual price falls than Nationwide in recent months. The figures for July, published on 26 August, showed house prices down by 2.1% year on year.