Goldman Sachs, Brexit and a Japanese digital cash initiative
Patrick Jenkins and guests discuss Goldman Sachs as it falls down the rankings, the latest thinking on banks and Brexit and a new digital cash initiative in Japan.
Presented by Patrick Jenkins and produced by Fiona Symon
Welcome to Banking Weekly from the Financial Times with me, Patrick Jenkins. Joining me in the studio today is Martin Arnold, our banking editor. And down the line from Frankfurt, we have Laura Noonan, our investment banking correspondent.
This week, we'll be taking a look at Goldman Sachs as it falls down the rankings. Secondly, a look at the latest Brexit evidence, as banks start to think about decamping from London. And finally, Japan and the new digital cash initiative being launched by Japan's banks.
First, though, to that tale about Goldman Sachs. Laura, you've been looking at the numbers from data provider Coalition, and Goldman's not doing as well as it traditionally has. Tell us exactly what's going on.
Yeah, so Coalition has compiled lead tables every six months, where basically they look at the positions of the 10 biggest investment banks in the world when it comes to both their investment banking slash advisory businesses, and also includes their sales and trading, [INAUDIBLE] fixed income and equity sales and trading.
Goldman Sachs has traditionally dominated the rankings since they were established 10 years ago, but now they've actually just fallen to their lowest ever position. So over the first half of this year, Goldman Sachs came joint third. So they're now joint third and on par with Bank of America Merrill Lynch, and they're behind both JPMorgan and Citigroup. That is the worst that they have ever been.
We all know that Goldman hasn't had a great start to the year, and very poor results for the first and the second quarter, largely because of issues in their fixed income businesses. So this basically shows how their poor performance in the first half of the year has really affected their market positioning.
And this is probably an impossible question to answer, but do we think this is just a blip?
I think probably naturally Goldman Sachs will have a bigger investment bank than Bank of America Merrill Lynch, so I think they are going to rebound somewhat. But I guess it shows that they don't have a God-given right to be number one or number two, which is where they have been traditionally. So I think they will definitely be in the top two, top three going forward, but it shows that they are as vulnerable to bouncing up and down as anybody else is.
OK. Well, we'll keep monitoring that. Obviously, the next six monthly data will be even more interesting than usual to look at.
Let's move on to the second tale. And staying with you, Laura, because there's a couple of bits of news that have emerged lately around Brexit planning. Particularly last week, you and I were involved in reporting the news from the so-called Chevening summit. This was a gathering at Boris Johnson's country residence, where senior politicians met senior business figures, including representatives of the city of London. And there was an initiative launched there on the regulatory front. Tell us first about that, and then we can put it in the context of some of the more recent news this week.
Yeah, so one of the things which they discussed was recently, everyone's been fighting for equivalence. And the idea is that after the UK leaves the EU, they will try and have a regime here for banks and for financial institutions which is roughly the same as the one in the EU. That would give them equivalence, and that would enable them to continue doing some business with the EU [INAUDIBLE] the UK.
Now, what happened at this meeting was that the authorities in [INAUDIBLE] in particular floated the idea that, instead of equivalence, you might have something different, which would give the UK a competitive edge. So rather than the UK just trying to be the same as the EU, they would try to be better, more attractive to institutions. He also said that it might be possible to have an exact standstill for the duration of the transition period, so that the UK would effectively have the status quo for the transition period, but then at the end of it it would move to a new and better model.
It's fair to say there were very mixed reactions in the room. I mean, everyone would like the idea of having a status quo and having exactly identical conditions for as long as possible, because certainly a two to three-year transition period where the UK remains within the single market would be attractive.
In terms of the second part, and going for non-equivalence thereafter, banks in particular were pretty unenthused by this idea, because if you think about what's happening in the overall global banking regime, it's all about global convergence. So the idea that the UK would then try to be an advantageous location for banks, so they would try to push less hard on certain things, that isn't actually something banks want.
Banks want equivalence. They want to be part of the global convergence. And they think that they would get quite a hard time from their international regulators if the UK was seen as being an easy territory on some of these things. So they were trying to discourage the UK from this race to the bottom approach. And what they want is the UK to be as closely aligned as is possible, unless you have some truly bonkers regulation coming out of the EU.
That's the only situation where, if the EU were to do something totally mad, it would be advantageous for the UK not to actually follow that. But I mean, as things stand, I think the view for most financial services is that they would like the UK to very closely mirror what the EU does, rather than trying to move outside that.
Well, that whole way of thinking dovetails interestingly with the formal paper that was launched today, actually, from [? Mark ?] [? Hoban, ?] the former city minister, who is now the head of a regulator lobby group in the city, a paper which actually we reported on a couple of months ago ahead of the official launch, which is basically a blueprint for a kind of alternative to equivalence, a kind of-- a mutual recognition system.
Now, it's not clear whether exactly that thinking chimes with what Lord Hill, the former EU commissioner, spoke about at Chevening. Maybe it will. Maybe we are going to see all of this coming together. But we'll have to keep watching this space for many months to come, I suspect.
I think it is worth bearing in mind that banks can't afford to sit and watch this space for too long. They are taking decisions in real time, and have to take them on the basis that this isn't all going to work out too nicely. This week, we saw JPMorgan announcing 2 and 1/2 thousand jobs for Warsaw. Those are jobs which, in another environment, may have actually gone, some of them, to some of the lower cost parts of the UK. So I think we're not going to know how it evolves for some time. But in the interim, banks are going to be voting with their feet.
Very good. Thanks for joining us from Frankfurt, Laura.
So let's move on to our third topic. Martin is with us. And he's just back from Japan, looking slightly weary. But you had a selection of interesting meetings there, Martin, I think, including one with Yasuhiro Sato, the chief executive of Mizuho Financial, with whom you were talking about this digital cash initiative that Japan's banks are going in for.
Yeah. So I started off asking Mr. Sato what the digital currencies were aiming to achieve. The banks are looking to develop various kinds of digital currencies. And the furthest advanced is so-called J-coin initiative. It's not really a cryptocurrency. It's not blockchain-related.
It's an electronic cash system, really, that would use smartphones and allow people to transfer money and pay for goods in stores using QR codes. But it's an electric form of cash that would try to wean the Japanese society off of its strong attachment to cash, which is unusually high. 70% of all transactions in Japan, which is highly unusual for a developed economy. The average for developed economies is about 30%.
And particularly surprising for Japan, which you think of as a technologically advanced economy. I suppose there's a bit of a parallel with the media industry, as we've seen at the FT with our new owners, Nikkei. They're a very newspaper-based organisation, as opposed to digital format.
Yeah, indeed. And the parallel there with the banking system definitely holds true, from what I saw and what I heard talking to people who live in Tokyo. Japanese banks are quite far behind in terms of their digital offerings. For instance, I heard that it costs businesses more to have an online bank account, rather than operate through branches. So that doesn't make very much sense economically. But that's the case.
So this is the Japanese banks trying to catch up. They see the Tokyo 2020 Olympic games as the opportunity to showcase some of their digital capabilities. But the other motivating factor for them, interestingly, is the threat of the Chinese, and in particular Alipay, the payments arm of Alibaba, the huge e-commerce group in China.
And Alipay recently started providing some of its services in metropolitan areas, like Tokyo and other cities. And that's a real worry to the Japanese banks. They are particularly presenting this to their own regulators and saying there's a danger here of some of the data on Japanese consumers being taken back to China by Alipay. So they feel like they need to keep control of the data.
So if they can have an electric currency, whether it be a smartphone-based app or MUFG, which is the biggest bank in the country, is actually working on a blockchain-based digital coin, which they currently call the MUFG coin, and they're testing that with their own staff. Either way, if they can get people to spend money using that rather than Alipay or Apple Pay or some of the other digital wallets that are out there, that would allow the banks to keep control of the data. And I think that's where the real battleground is.
So Martin, it's a basic question, but what is actually different between what the Japanese banks are planning in this area and the kind of services that we're used to in the UK, for example, where you just transfer money between bank accounts or do payments online through apps?
It's smartphone-based. So many of the payments that we do in the UK are using contactless cards. Contactless cards are very popular here. The Japanese banks, what they're looking to do is to leapfrog cards and go straight to a digital currency, which would mean on your smartphone you load up with J-coins, for instance, which basically you buy for yen, and they're convertible on a one to one basis into yen from your bank account. And then you can pay for things in stores or pay your friends with the J-coins. So they're transferable between banks, with retailers. They have full transferability.
What's so different about that compared to just being able to do that with pounds or with yen?
Well, you could do some of that with, say, Apple Pay in the UK, but you can't do it with any of the bank apps that we have at the moment in the UK. You can do it with a contactless card, but then you're doing it on the card system. So then retailers have to pay fees. So it's more expensive, whereas there wouldn't be fees for this. This would be a cheaper and more efficient way of doing it.
Is this unique?
I think it's pretty unique. There are other examples of banks coming up with their own coins, either on blockchain or otherwise. And there are lots of central banks around the world that are examining the possibility of putting the fiat currencies, their national currencies, onto some kind of blockchain system, whereby those currencies could be spent directly by people with a claim directly on the central bank, rather than, in a way, disintermediating the commercial banks.
So there's lots of innovation in this space, and lots people are looking at this possibility of making cash digital for some of the benefits that I mentioned, which are lower cost, higher speed of settlement, and more efficient, really, systems than cash or even cards, which are what most people use in most countries.
Well that's it for this week. All that's left me to do is to thank Martin here, and also Laura in Frankfurt. Thank you for listening, too. Remember, you can keep up-to-date with all of the latest banking stories at ft.com/banking. Banking Weekly was produced by Fiona Simon. Until next week, goodbye.