ACCORD CONFERENCE
Banking: Our Strategy, Politics and
Regulation to 2015
Dominic Morris
26 APRIL 2012
INTRODUCTION
 How hard to get the message across? Where do you rank banks vs big
pharmaceuticals, oil, junk food, alcohol, estate agents, tobacco
industry?
 Very few signs of improvement in 2011 (see next slide)
 Several banks went backwards
 Variance in brands. But Lloyds Banking Group closing the ‘negative
gap’ (S 09 -22% W 11 -8%)
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FAVOURABILITY – All MPs
• Nationwide are clear leaders with HSBC and Barclays in second place
• Favourability towards Lloyds TSB and LBG have increased, but MPs are now
less favourable towards Halifax
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WHY?
 Lending (not)
 Bonuses: US attitudes to Capitalism and Scandinavian Puritanism.
 Misselling
 General public beginning to feel the pain
 Characteristics of Balance Sheet Recessions
 All banks regarded the same
 i-banks tarnish retail/commercial (some allowance for mutuals)
 Need to differentiate
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THE TIDE OF REGULATION
Change, Change, Change…
Run rate c.420 consultations in 2012
300+ Consultations
in 2011
400+ expected in 2012
>80 Consultations
in 2003
Source: Lloyds Banking Group data
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REFORM IS NECESSARY BUT REFORMERS HAVE
INCONSISTENT GOALS
 Crisis had many causes. But search for a ‘single club’ solution
 Tensions between stability and growth agenda
 Higher capital/liquidity = less lending capacity
 Unintended consequences
 Bail-in + depositor preference = reduction in senior unsecured funding =
higher cost of money market funds = dearer mortgages/loans
 Ring fencing may increase corporate reliance on foreign banks
 Solvency II rules could knacker UK annuities market
 Inconsistent rules
 Vickers vs. Volcker
 But combination of capital/liquidity, ‘living wills’, governance/ incentive
changes, ring-fencing and better micro/macro-prudential regulation will
lead to safer banking system
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THE ICB AND AFTERMATH
 Higher capital and liquidity
 Ring-fencing: the “Big Idea”
 Depositor preference
 Switching/transparency for competition
 No change to Verde
 LBG least impacted of major UK banks (though not negligible)
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HOW MUCH DOES IT MATTER? WHAT ARE WE DOING
ABOUT IT
 Total reform package costs
 One-off implementations
 Ongoing costs
 Capital/liquidity holding costs
£1-2bn for LBG
+ £500m-£1bn p.a.
+40-70% = Lower ROE
 Running harder to stand still
CLOSE
 Making a Difference
CLINCH
MULCH
 Some wins (e.g. FSCS = £500m+ cost avoided for LBG)
 But banks ‘will only regain respect when (a) taxpayer stake sold (b)
balance sheet recession ends = regain our ‘licence to operate’
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WHAT WILL CHANGE IN POLITICAL LANDSCAPE
TO 2015?
 “It’s (still) the economy, stupid”
 Coalition friction 2013
 Continued political fragmentation (Con/Lab share of vote 88% 1966,
75% 1979, 65% 2010)
 Restructuring of the UK? (Scotland Referendum 2014)
 Increased power of Local Government/elected Mayors
 Will Labour find its vision (beyond ‘Not the Coalition’)
 2015 outcome may be inconclusive
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HOW WILL OUR STRATEGY HELP?
Start with what’s wrong
 UK retail banking model high cost base
 Supported by fat revenues from often complex, opaque products with
high margins
 Repeated compliance problems/misselling scandals
 = Unsustainable - new model needed
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THE NEW MODEL
 Low cost, efficient
 Deliver with scale (large branch networks; investments in technology)
 Multibrand (the importance of Halifax but also guerrilla brands like BM)
 Simpler/transparent products
 Remove misselling risk/multi-billion £ provisions
 Lower margin but sustainable and profitable for long-term
 = Happier customers
= Repay the taxpayers’ investment
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CONCLUSION
 Cost reduction not an end in itself
 But an essential foundation for new, ethical and sustainable model
 LBG possibly only major bank in UK that can do this


Stable, safe, profitable, responsible bank for industry,
individuals, communities by 2015
 That’s all folks
 Questions?
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