Monthly Archives: October 2014

Points of View: ECB Stress Tests

This week Oliver Phillips focuses on the European Central Bank.

This weekend the European Central Bank (ECB) released the results of its much anticipated health check on the Continent’s banking system. The stress tests, and an accompanying review of the quality of banks’ assets, assessed the ability of 150 leading European banks to withstand a deteriorating economic and financial environment and were the culmination of more than a year of intensive work aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt.

The results revealed the majority of banks to be robust; of the 25 Eurozone banks that failed the ECB’s tests, which were carried out as at the end of 2013, only 13 still need to raise capital after action taken this year.   This signifies that Eurozone banks are broadly in better financial shape compared to when they were last tested in 2011. Of the banks that still have to bridge the gaps in their capital, Italy faces the biggest struggle, with nine of its banks on the blacklist. In particular, Banca Monte dei Paschi dei Sienna was identified as having the largest capital hole to fill and has since seen its shares tumble.  Four UK banks were subjected to concurrent stress tests conducted by the European Banking Authority (EBA) and, as expected, they all passed.

The European Commission welcomed the results of the assessments, saying that both the ECB and EBA undertakings involved robust exercises, unprecedented in scale and among the most stringent worldwide. However, bankers and analysts were quick to cast doubt on claims that the exercise would open the floodgates to a rush of new bank lending in Europe.


Parliamentary Democracy: Perhaps we should try it?

Marcus Johnson, CEO of NW Brown, calls for exams and CPD for MP’s.

Relief post Scottish Ballot

On 19th September, like a huge majority of the English speaking world, I breathed a sigh of relief that a sufficient number of the silent majority in Scotland turned out to vote ‘No’ to the question asked of them. The idea of our common citizenship and culture being destroyed was anathema to most inhabitants of the British Isles. The conclusion that we are better together was, luckily, clear cut but how did we get to a point where a minority, which probably never exceeded 40% of the electorate, nearly broke up what has to be the most successful voluntary political union in recent times?  Whose fault is it that the security of future generations was put in the hands of a hundred thousand teenagers?  How do we best prevent existential threats of this nature putting the livelihoods and lives of our children at risk in future?

The consequences of Scottish Independence would perhaps have been rather less dramatic in terms of consequences for population exchange or armed resistance than the earlier departure of the North American or Irish parts of the Kingdom. At most, the Shetlands and Hebrides might have asserted their historical separation and perhaps Berwick moved the other way. If Ireland is a good guide only 10% or so of the Scottish population would have left post-partition and the only obvious immediate change for most English would be longer summer evenings as the Scottish veto on adopting standard European time disappeared.

But Referenda are Bad

But the fact is the decision was made by referendum – and referenda are a bad way to make any decision. Swaying the popular vote requires simple emotional arguments not detailed forensic analysis.  Dictators love referenda – you ask a single question and if you phrase it correctly you can almost guarantee the result. A dictator would have made  the question “Do you want to abandon your British Citizenship, the Queen and break up the British army or would you prefer stability, continuity and a secure future for your children?“.

What we should ask is why has our parliamentary system of representative democracy decayed so far that a Cambridge MP feels it vindicates his position on supporting Iraqi independence to say “I voted against military action in Iraq as most people who contacted me suggested”.  Is Dr Huppert a representative or a delegate?  Is it an inevitable consequence of increased speed of communication that populism must replace parliament? Is it impossible for rational debate to precede considered informed conclusion?  How do we promote an atmosphere where those we send to Westminster consider that it is their job to decide first and explain later, to lead debate rather than follow opinion polls? If we cannot find good answers to these questions we will gently slide into majoritarian dictatorship and the loss of those liberties associated with the parliamentary system.

Promote the concept of Representation of the People

To begin to approach an answer we must look at both reinforcing the positives and removing the negatives. Firstly, we must not just remember but remind others that when we elect an MP it should be someone who we believe will make good decisions – we should emphasise that it is the skill of weighing evidence and reaching conclusions we seek – we should demand a history of successful judgements and a range of relevant experiences as a necessary condition for any aspiring candidate. Weight should be given to evidence of independent thinking and to involvement in varied decision making bodies in the selection process before a candidate’s name gets on the ballot paper. On selection, every parliamentary candidate should have a compulsory residential qualifying course on the nature of parliamentary democracy and decision making skills. At the end of three months an assessment process should award marks out of 100 for decision making skills and the marks achieved should appear next to the name on the ballot paper. This should just be the start – continuing professional education should also be compulsory with 3 months every five years to be spent in summer school at a non-UK university with a mixed party group being taught by the political science faculty with an emphasis on evidence based decision making. The last positive action I would suggest is that the job title is amended to “Representative” from MP – thus clearly identifying the job they are paid to do. These measures should promote a certain amount of independence in thought and action and also encourage the electorate to value decision making skills more highly.

Opinion Polls and Manifesto Promises should go

Removing the negatives is a lot more difficult because politicians, like everyone else, all love to avoid responsibility for decisions and crave popularity. It is much easier to say “I did what I thought you wanted” than to say “I decided what would be best for you”.  It transfers the blame to state “well, it was in the manifesto – you voted for it”. It is harder to claim “I thought it was the right thing to do when I voted for it”. It is opinion polls and manifestos which have done the most to destroy informed debate and replace perusal of possible answers by populism. There are several sensible measures we could take to reduce the havoc caused by them; it seems inconceivable that opinion polls could be banned entirely but there is no good reason to allow opinion polls on any subject which is currently under discussion (a ‘sub judice’ rule) and no taxpayer support should be made available to any party which makes promises or commits to future actions in an election manifesto (an ‘unfettered decision making’ rule).

Parliament is where debate should take place

Protecting the right of the House of Commons as the law making institution should perhaps be reinforced by a renewed emphasis on the separation of the executive arm from the legislative – it should be clearer that, just as we pay MP’s to sit, to think and to decide what the law should be, so we pay the government to execute and lead. Each is then accountable for their actions – MP’s to the electorate and the government to the House. Clarity in this division would help voters realise that what they want from their MP is not slavish adherence to what they perceive as the popular will, still less rigid obedience to the partly line. What they need are representatives who will search out the truth and fearlessly pursue the right answers whilst keeping the executive on its toes. Parliament literally means talking or discussion – the reason representative democracy works is because informed debate, where well educated good decision makers consider the options, is an effective way of making the most important decisions. We all have a profound interest in its succeeding and the Scottish Referendum should be a warning of what can happen if parliamentarians abandon their duty to decide on our behalf what is good for the country as a whole.

Download our Group Newsletter

In the latest edition of the NW Brown newsletter we focus on pensions and auto enrolment.

NW Brown Group Newsletter Autumn 2014

Points of View: Market Volatility

The last month has been tough for markets, with the FTSE 100 falling over 8% – the largest 30 day fall since mid-2013. This is amid concern over the global economy.  In particular, a large slump in oil prices (down approximately 20% from their 2014 peak), weak German data and the International Monetary Fund’s downward revisions of growth forecasts have helped renew disinflationary fears.  Furthermore, idiosyncratic geopolitical events such as ISIS, Ebola and the protests in Hong Kong have added to investor uncertainty.

Despite this, there are pockets of optimism.  Recent data suggests that US growth remains on a solid footing while the European Central Bank remains prepared to do “whatever it takes” to avoid deflation in the Eurozone. Furthermore, whilst the slump in oil prices has spooked markets as a potential sign of decreasing demand, the lower cost is ultimately a positive for the global economy.  Indeed, lower oil prices and a benign inflationary environment should help boost consumers’ real disposable income and it may be that the market is under-estimating this positive knock-on effect. In the meantime, however, investor sentiment is fragile and uncertainty is creating volatility.

Points of View: The End of Tapering in the US

In contrast to my article two weeks ago on the ECB’s plans to implement quantitative easing (QE), the US Federal Reserve’s bond-purchasing programme (tapering) is due to end this month.

Since 2008, the Fed has injected nearly $2.1tn (£1.3tn) into the US economy via three rounds of QE. The latest round (QE3) began in late 2012 at a rate of $85bn per month, until December 2013 when then Chair Ben Bernanke announced it would be steadily reduced by $10bn per month. His successor Janet Yellen has kept this on track, despite the ensuing sharp sell-off in bonds and volatility in equity markets, as data indicated the US to be in a much stronger position to withstand any turbulence.

As the deadline approaches, concerns have been mounting on the impact of tapering on Emerging Markets. Artificially low interest rates in the developed world as a result of QE have exacerbated capital inflows into fast-growing emerging economies as investors sought higher returns on their investment. Year-to-date this has reversed, with significant declines in both equity markets and currencies; and further withdrawals of capital to the US could potentially threaten growth in developing nations.

Closer to home, at the time of writing the UK stock market has fallen by approximately 8% since it peaked at the start of September. Analysts are of the view that companies – the earnings growth of which continues to be anaemic – will start to perform more in line with economic fundamentals, thus delivering single-digit returns rather than the double-digits seen in 2013.

September 2014 Market Review

This edition of the Market Review discusses the effect sterling volatility has on markets, whether past FTSE patterns should be a guide to the future, and why we remain strongly in favour of equities.

September 2014 Market Review