Sunday, 22 November 2009

The Gnome (of Zurich) is dead long live the Gnome

Even if ratings agencies are a necessary evil, do they have to be so shite? By this I don't mean the jaw-droppingly obvious (and very lucrative) conflict of interest that saw them being paid by sub-prime debt salesmen to rate the self same sub-prime debt. And its not the fact the AAA ratings they actually awarded (which increased the debt's value and enabled it to be sold) turned out to be completely wrong either (ahh, but that was the credit rating, not its liquidity rating or some such bollocks said the rating agency PR department in the earlier stages of the crunch). Nah, I'm more thinking more about their general stupidity as opposed to collosal incompetence.

So there was me listening in on a conference call hosted by one of the big 3 global rating agencies on the future of UK high street banking. To quickly summarise the view presented by the agency (1) UK high street banking has seen a long term trend towards concentration and (2) the sell-off of primarily retail bank assets being forced on the two banks that have received the most state aid, by allowing new entrants into the market, could well see the fundamental restructuring of the market into one with more big players and more competition. This mattered because in the rating agency's (woefully simplistic) view more competition = less profit.

What an utter pile of ignorant pish. Even ignoring the untested assumptions about competition being presented, besides the sell-offs and the potential for say Tesco and Virgin to use them as a means of setting up shop (as banks) on the high street, you've also already seen foreign banks leave the UK market (think anything vaguely Icelandic), the Nationwide Building Society merge with or acquire the Portman, Derbyshire, Cheshire and Dunfermline building societies and Santander add the Bradford & Bingley and Alliance & Leicster to its existing Abbey business during the crunch.

A fundamental restructuring that will produce a more competitive market? Swings and roundabouts more like and thats being generous. So while RBS and Lloyds have to sell off over 900 branches over the next however many years, Santander alone has already added 451 branches and 140 agencies (god bless you wikipedia) to its network.

So there you are then - in 2009, 2010 and 2011 (and possibly beyond), the UK high street banking market will be more concetrated than it was up until 2007. Its not an especially complicated conclusion, more a bloody obvious one thats hard to disagree with. It's also one that anyone with access to wikipedia and could have worked out. But, not this rating agency. I wonder why?

Obviously, what they were saying (1) was a big notion and as such more likely to grab people's attention and (2)was cautious, which presumably is an impression they want to convey given their sub-prime experience. I'm also guessing (3) its a product of the kind of analysis they produce, which seems to fixate on sticking today's wanked up business headlines to the side of overly complex financial modelling at a remove from actual events.

Except, given the influence rating agencies actually have over corporate and public policy (e.g. Britain needs to cut public spending to preserve its rating agency awarded credit rating) such basic ignorance strikes me as simply unacceptable.

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