New law to break up errant banks

Updated 05 February 2013
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New law to break up errant banks

BOURNEMOUTH, England: British banks that fail to shield their day-to-day banking from risky investment activities could be broken up, Chancellor of the Exchequer George Osborne said yesterday, bowing to political pressure to come down harder on reckless lenders.
European countries are retooling their financial systems to prevent a repeat of the 2008 financial crash, trying to strike a balance between popular calls for banks to be reined in and warnings that too tight a leash will choke off recovery.
With Britain's banks buffeted by scandal on an almost daily basis and part-nationalized Royal Bank of Scotland (RBS) set to be fined up to 500 million pounds this week for interest rate rigging, Osborne decided to “electrify” the ring-fence around banks' core retail activities with the threat of break-up.
“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real,” Osborne said in a speech ahead of the publication of the banking reform legislation.
“Let's turn that anger from a force of destruction into a force for change,” he said, speaking at the offices of US bank JP Morgan in Bournemouth, southern England.
London's structural reforms go further than France and Germany, which, like the United States, are only demanding that banks separate out their proprietary trading, where they invest the banks' own funds, from the rest of their businesses.
The German government is, however, considering a new law that would see executives jailed for up to five years if they are found guilty of reckless behavior that jeopardizes their bank.
“We want to send a signal to Europe with this,” a senior government source in Berlin said, adding that EU moves in this direction “have not been fast enough”.
Osborne said Britain could ban directors of failed banks from working in the industry.
In the absence of international agreement, national regulators are increasingly pursing their own banking rules, to the dismay of industry insiders.
“We should not create unnecessary obstacles to pan-European rules with a zig-zag approach. A crisis does not stop at the national border. We need a coordinated approach in this area,” said Michael Kemmer, managing director of the German banking association.
All the major British banks, including Barclays, HSBC and RBS, will be affected by the UK legislation, and the industry has warned it will put them at a disadvantage against continental rivals such as Deutsche Bank and BNP Paribas.
“This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses,” the British Bankers' Association said in a statement.
But a source close to one of Britain's biggest lenders was more sanguine, saying that with banks already under intense scrutiny, Osborne's decision was a longer term move designed to prevent banks letting standards drop when attention is less focused on the industry.
Fitch ratings agency said the legislation could improve the credit profile of Britain's retail banks.
Shares in UK banks were lower on Monday but still outperformed the benchmark Stoxx Europe 600 Banks Index, which fell nearly 2 percent due to rising sovereign bond yields in Southern Europe.
“It's probable that today's move represents the market's need for a bit of a breather after a spectacular run in January rather than any long-term concern over the ability of the banks to operate profitably under the ring-fencing rules,” said Matt Basi, head sales trader at CMC Markets.
Under the new rules, the Bank of England will monitor whether banks' investment banking arms, which trade complex securities, are endangering their retail operations.
If the central bank finds a breach, the government will decide whether to flick the switch on the electric fence, forcing the bank to sell one of the two arms.
“Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place,” said Andrew Tyrie, the chairman of the parliamentary commission that had demanded the break-up threat.
Part nationalized RBS is expected to be fined this week for its role in a global interest-rate-fixing scandal, and Osborne repeated his call for the settlement with US and UK regulators to be paid out of bankers' bonuses, saying it would cause “enormous public anger” if the taxpayer footed the bill.
The UK has spent over $100 billion propping up its over-leveraged banking system, much of it poured into RBS.
Asked whether there should be resignations at RBS as a result of the bank's imminent fine, Osborne said it was “quite well known that RBS are thinking about changes” amongst the investment bank's senior management.


“It is right that those who are responsible — not just those who are directly responsible, but also those who were dong the supervising — must also bear a level of responsibility,” he said.
RBS is expected to part company with the head of its investment bank, John Hourican, when the settlement is announced later this week.


Gulf companies challenged by debt and rising interest rates

Updated 22 April 2018
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Gulf companies challenged by debt and rising interest rates

  • Debt restructurings on the rise, but below crisis levels
  • Central Bank of the UAE has raised interest rates four times since last March

There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.

 

Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”

FACTOID

Four

The number of interest rate rises in the UAE since March 2017.