From Hans Baerlocher, chief executive, UBS.
WHEN I was asked to comment on Kevin Keen’s proposal for a Bank of Jersey I kept my comment very short and to the point because I considered this one of the more peculiar notions that so frequently blow through the Island.
A notion in the same category as the bridge to France, the National Gallery, our own currency, and the iconic Waterfront development. Ideas that will pop up during long winter nights on an isolated island … and tomorrow another pig will run across the village.
Unfortunately, I have realised that my comment has been mis-interpreted as intellectual arrogance. I therefore want to devote a bit more time to the idea and my reactions to it.
• I have been accused of having very quickly forgotten the US$55 billion loss (and probably more) my bank has suffered due to its completely unnecessary involvement in sub-prime exposure. I am the first one to admit that this was a monumental mistake. I am also probably the one person on this Island who, as a manager and a shareholder, has suffered the most emotionally and financially from it. However, I have to add that no depositor of UBS has lost a penny due to the seriously wrong management decisions.
• I have a lot of respect for Kevin Keen – that was the reason I asked myself ‘what the hell crossed his mind?’ Kevin has had my whole-hearted support for his campaign for States cost cutting. I therefore believe he strongly favours smaller government. As such, I was quite non-plussed by his idea that our government should enter commercial banking.
• My remark in regard to the losses of traditional bankers is due to the fact that we have had 200 years of traditional banking with bubbles and crashes popping up very frequently. Even the present crunch has, at its very origin, traditional mortgage lending ignoring some very, very basic rules. Globalisation and securitisation has interconnected all markets to a degree which makes diversification an illusion and has spread the disease to the four corners of this world.
• Let us finally come to the rationale behind the proposal for a Bank of Jersey. It is not clear what the supporters of such an idea want to achieve: Do they want to make deposits safer? Do they want to soften the effect of the credit crunch on small businesses? Do they think they can de-couple the Jersey economy from the rest of the world?
Nobody has lost their money because they deposited it in an existing institution in this Island. Would a deposit in a Jersey-owned bank really be safer? Banking business depends on trust. Trust gets created by capital and reputation. Reputation pre-supposes history. A Bank of Jersey does not have a history.
Therefore, deposits could only be attracted due to capital strength or by a mutual type of set up. Capital of £100 million is not very much for a bank and a mutual principle-based set-up would fly into the face of depositors protection, since mutuality means unlimited liability for any depositor. A bank typically leverages the capital with deposits. Leverage, however, means risk and more leverage means more risk.
What will a Bank of Jersey do with the cash it is entrusted with? It has to lend it on the same commercial principles as any other bank, otherwise it loses money, first its shareholders’ and then its depositors’. A bank is not just a till where money is taken in and paid out. A bank is a living balance sheet which changes daily and this balance-sheet has to balance all the time. That means the tenor of the borrowing and lending has to be matched.
Unfortunately, borrowers and depositors have different interests. Depositors want to remain flexible and therefore deposits tend to have shorter tenors, whereas borrowers want to make sure that they have the money for a longer period of time and the bank cannot ‘pull the rug’ from underneath them as it pleases. Therefore, assets tend to have substantially longer tenors than liabilities. This gap exposes the bank to substantial market risks. If clients do not renew their deposits, the bank runs out of money because it is invested longer term in mortgages and businesses around the Island.
That was the conundrum under which Northern Rock collapsed – on very traditional mortgage banking. To overcome this gap, even a Bank of Jersey would have to engage in derivatives and with the outside world. Unfortunately, the world is, for want of a better term, ‘global’ and metaphorically, there is no way around it.
I feel quite happy to live in my glasshouse since I do not throw stones, just opinions and arguments. It is definitely better than living in Cloud Cuckoo Land.
Staincliffe,
Avenue du Petit Mont,
St Helier.
