Money market funds have long been a popular haven for conservative investors, but they could become one way that the tremors of the financial crisis in Greece touch the pocketbooks of Americans — about 50 million of them.
For years, the funds in the United States have taken investors’ money and lent it out where they can get the best returns. European banks have been a target lately — so much so that about 50 percent of the funds’ $1.6 trillion in prime money market assets is in the debt of European banks.
Now that Europe is struggling to contain its debt crisis, these safe investments could be a tad less safe, especially if Greece’s Parliament votes down a set of deeply unpopular austerity measures Wednesday morning.
While any losses on money market funds could be minimal, especially compared with the turmoil that could ensue in stock and bond markets, the possible effect on this corner of the financial markets shows how the ripple effects could reach far and wide if Europe cannot resolve its debt crisis.
“A lot of them are exposed to a risk of a blowup somewhere in Europe,” René M. Stulz, professor of banking and monetary economics at Ohio State University, said about money market funds. “It does present systemic risk.”
Some experts and the funds themselves play down the risks, expressing confidence in the underlying safety of the European banks’ debt that they own.
A primary fear is that if a European bank indebted to the funds is weakened in the crisis, then it might have a hard time repaying its loans. But even the perception of trouble could, in a worse case, cause financial markets to seize up and send investors rushing to withdraw money. That is what happened after the collapse of Lehman Brothers in 2008 hit one fund that owned Lehman debt, the Reserve Primary Fund, causing a huge run on all funds.
Some investors have already withdrawn money from these funds. Their worry is that the chance of a Greek default increases if the country’s lawmakers fail to approve a set of tax increases, wage cuts and asset sales. The legislation is necessary to qualify the country for $17 billion in outside aid to get it through the summer. Unless the European governments step in, the fear of a default could potentially set off turmoil across the world’s financial markets.
If that happens, analysts say, Greek bond yields would jump. The euro and stock markets would fall. The cost of lending between European banks might potentially spike as banks doubt one another’s creditworthiness.
The funds hold large amounts of debt of banks in nations at the core of Europe, like France and Germany. They now lend about $240 billion to French banks, or 14.8 percent of the funds’ assets, according to Fitch Ratings. French banks are among the biggest holders of the government debt of Greece and other weak countries, which would leave them exposed if Greece or other nations run into more trouble.
As the crisis has simmered over the last two years, fund managers have decreased their direct lending to banks in the weakest countries of the euro currency zone — Greek, Portugal and Ireland — and even in Spain and Italy. Their holdings in Greek debt are zero. Their percentage of assets in Spanish debt has declined to 0.2 percent from 3.3 percent in 2008.
“With very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems,” Ben S. Bernanke, the Federal Reserve chairman, said last week. “They do have substantial exposure to European banks in the so-called core countries: Germany, France, etc. So to the extent that there is indirect impact on the core European banks, that does pose some concern to money market mutual funds.”
Underscoring those worries, the president of the Federal Reserve Bank of St. Louis, James Bullard, told Dow Jones Newswires on Tuesday that the bank planned to keep open its dollar lending program with the European Central Bank and other central banks beyond the Aug. 1 expiration date. That move should help ease some of the pressure on European banks by providing an alternative to money market funds to help them fund their daily operations in dollars.
In his earlier remarks, Mr. Bernanke said the industry was still working on reforms to make money market funds safer. After the financial crisis of 2008, the Securities and Exchange Commission put in tougher regulations, cutting to 60 days from 90 days the average maturity of debt that the funds can hold so that they can get out of bad loans more quickly.
Wednesday, June 29
A protester in Athens in front of riot police during a 48-hour general strike on Tuesday.
Up to one in six European banks is set to fail an EU-wide financial health check
Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk.
The result, which the European Central Bank and others hope will persuade investors the European Union was finally coming clean about the extent of banks' problems, will pressure reluctant states to prop up lenders that cannot raise money.
Euro zone sources said the European Banking Authority was set to announce within weeks that 10-15 of 91 banks being scrutinized had failed, with casualties expected in Germany, Greece, Portugal and Spain.
The checks will provide the first picture of the health of EU banks since a previous round a year ago was deemed too lax.
In that round, Irish banks were all given a clean bill of health months before their difficulties drove the country to seek an international bailout.
The new checks will measure how well the core capital that banks rely on to absorb losses such as unpaid loans holds up when exposed to an economic dip or fall in property prices.
They also gauge the impact on banks should government bonds they own, issued by states such as Greece, lose value. But the tests stop short of assessing the full impact of a country defaulting, including the likely resultant freeze in interbank lending.
In the drive for credibility, the EBA, which runs the tests and the ECB, which sets the economic scenarios, have pushed for more banks to fail than last year's seven
Wednesday, June 22
Pinned down in a series of "Alamos" across the north of Helmand, British soldiers became magnets for attacks from Taliban, drug gangs and locals
Back in 2005, the Blair government committed itself to rebuilding Afghanistan's Helmand province, with a vision that went far beyond what proved possible as revealed in the original planning document released to the BBC.
Helmand has proved by a long way to be the Afghan war's bloodiest ground.
It is the poorest province in one of the world's poorest countries. But some in Whitehall thought they could transform it into something closer to Belgium when Britain deployed there in the spring of 2006.
The hope was that not even a shot would be fired with troops home in 2009.
Instead, 323 British servicemen and women have so far been killed in Helmand, 9,500 British troops are still there and the vision has been revised to the development level of Bangladesh, at best, in another 20 years.
Continue reading the main story
FIND OUT MORE
John Ware presents Afghanistan: War Without End? on BBC Two, Wednesday 22 June, 2100 BST.
Afghanistan: War Without End?
According to Mark Etherington, the planning team leader, they were confronted with a challenge on the ground of "biblical proportions" that bore no relation to what people in Whitehall had in mind.
It is easy to see why. A declassified copy of the Joint UK Plan for Helmand from December 2005, released to the BBC by the Foreign Office reveals:
"The state is largely absent in Helmand, providing little by way of security, infrastructure or public services."
Joint mission
Instead, Helmand's economy was based largely on heroin production - it provided up to half the global supply.
Continue reading the main story
2005 HELMAND PLAN
Profound challenges were identified in the report.
The current governor, chief of police and director of education are illiterate. 70% of the population is estimated to be illiterate.
The dominance of opium fuels a growing internal addiction problem and pervades public life through the influence it buys. Many prominent public figures are alleged to be involved in the trade, including those charged with suppressing it. The chief of the counter-narcotics police in Helmand has 20 staff and two ageing vehicles to cover a province three times the size of Wales with a population of more than one million.
The police force is widely thought to undermine the safety of the population rather than secure it. Reform of the police, perceived by the population as untrained, uneducated, unprofessional, drug-taking and corrupt…will require years to compete.
Provincial government in Helmand is dominated by patronage networks, tribal affiliation and alleged links to the narcotics trade. Interlocutors in the provincial capital of Lashkar Gah complain about the corruption of key government officials and the sale of government land for private gain.
The security situation is perceived to have deteriorated over the last six months. The insurgency has been targeting government officials and Coalition forces. There is collusion between insurgents and narcotics traders. Illegally armed groups proliferate, particularly in inaccessible regions. Afghanistan's porous borders with Pakistan and Iran enable relatively unhindered transit through Helmand of insurgents and drug traffickers alike."
As a result, much of the province was controlled by warring drugs gangs and corruption reached practically every part of the administration.
Helmand was to be a joint military-civilian mission to extend the authority of Afghan President Hamid Karzai.
Protected by troops, civilians would build up the economy and the justice and education systems. The idea was to win the hearts and minds of ordinary Afghans away from the Taliban who were setting up their own shadow local administrations.
But after an initial assessment of the task, the planners returned to London in December 2005 and told Whitehall officials that their vision for Helmand was "not achievable in three years".
We were told that "was not an acceptable conclusion," said Minna Jarvenpaa, the governance adviser to the mission and a member of the planning team.
The vision in Whitehall was for levels of governance, growth in the economy and security occurring "without substantial security support from the international community" - a goal that is still a long way from being realised even today.
When the planners said they did not yet know enough about Helmand to put together a workable plan, a senior member of the secret intelligence service (MI6) is reported to have responded: "We know all we need to know".
Intelligence failure
In fact, the Joint UK Plan for Helmand shows precisely the reverse - in particular just how little was known about the complex dynamics of Helmand's tribal, criminal, religious and political factions.
And the military intelligence assessment failed to anticipate the scale or speed of the violent response from Taliban and other anti-British forces.
But the military momentum was unstoppable. Britain was going to Helmand, come what may.
323 British servicemen and women have so far been killed in Helmand
Because the mission was about reconstruction, only around 800 soldiers of the 3,300 deployment were "bayonets" - or fighters. The rest were mainly admin and logisticians.
So the mission was to be limited to a central area of Helmand around the capital Lashkar Gar and would slowly build out.
Except, that ambition was derailed almost from the start.
The report had highlighted a deteriorating security situation with attacks on government officials and coalition forces and collusion between insurgents and narcotics traders.
From the moment British troops arrived, Helmand's new governor, Mohammed Daoud, warned that his authority was being undermined by gunmen in the north of the province.
He urged Britain to deal with them by setting up extra bases.
Despite an initial judgment that even one extra base was "unsustainable", the military bowed to political pressure and by late June four additional bases had been established in Now Zad, Musa Qala, Kajaki and Sangin.
Saturday, June 18
British savers face the prospect of losing some of their desposits in a UK bank for the first time in over a decade.
small number of savers who had more than £85,000 on deposit with Southsea Mortgages could lose the money after the lender was yesterday forced into insolvency by the authorities.
The Bank of England and Financial Services Authority put Southsea Mortgages into administration after deeming the bank to no longer be a going concern.
Most of the bank's 267 savers, who had a total of £7.4m on deposit, will get all their money back under from the Financial Services Compensation Scheme (FSCS).
However, 14 customers with more than £85,000 on deposit face losing any money over the maximum protected by the FSCS and will have to join other creditors to claim their losses back.
The potential loss of depositors' money marks the first time since the October 2000 collapse of London Trust Bank that British savers have lost money after the collapse of a UK bank.
Liquidity is drying up as British banks become cautious about the the finances of European banks exposed to the eurozone debt crisis.
Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a
seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.
While the funding position of UK banks is far stronger now than it was back in 2008, the banking systems of several other major European countries, including Spain, Germany and Italy, are showing increasing signs of weakness.
Analysts at UBS have warned that eurozone banks are “particularly exposed” having not done enough since the crisis to cut their reliance on the wholesale funding markets and remain acutely sensitive to the withdrawal of liquidity from the inter-bank market.
Simon Adamson, a banks analyst at CreditSights, said it was clear many eurozone banks had been having trouble funding themselves for several months.
“Clearly there are some banks that are finding it difficult to access markets. I think this is a long term sign of the way the markets are going,” he said.
Spanish banks have become the main focus of market concerns with the latest European Central Bank (ECB) figures showing that Spanish banks have been forced to increase their use of ECB lending facilities and borrowed a total of €58bn (£51bn) in May, up from €44bn in April.
“We have been amazed at the ability of Spanish banks to find ways to fund themselves, but it is clear they are running out of options,” said one senior analyst at a major investment bank.
Sunday, June 12
British pensioners are taking legal action against the Bank of Ireland at the High Court this week as anger and resentment grows over attempts to plunder their savings.
The US-based law firm Brown Rudnick will represent around 2,000 British pensioners and investors, who face losing between 80 per cent and all but the very tiniest of fractions of their investments in bonds issued by the old Bristol & West Building Society. The Bank of Ireland took over Bristol & West in 1997 and it has been one of the major strugglers during the country's acute financial crisis.
A 2.6bn euro (£2.33bn) liability management exercise (LME) – essentially a financial restructuring – was demanded by the Irish government, which has a 36 per cent stake in the bank. Part of the LME involves owners of the Bristol & West permanent interest bearing shares, or Pibs, worth £75m. These were typically used to supplement pensions, as they offered generous annual payouts of 13.375 per cent of whatever had been invested.
However, under the terms of the offer, investors have been offered just 20p in the pound of whatever savings they ploughed into the bonds, barely covering even one year's payout. If a Pibs-holder voted "no" and the LME is voted through, as is expected, they will receive just one penny for every £1,000 of savings that is tied up in the bonds.
Pibs-holders argue that this potentially punishes the "no" minority and that the correct legal jurisdiction to decide the legality of the move is England rather than Ireland, which is why they are taking the bank to the High Court.
Waseem Shakoor, who has a significant Pibs holding and is one of the leaders of the action, said: "This makes people who vote 'yes' oppress the minority and pretty much punish those who say 'no'. I would urge people to reach out to the lawyers."
He also warned that such a coercive scheme defies standard practice among Western economies. He argued: "I'm more likely to lend money to [The X-Factor act] Jedward than I am to lend to Ireland. People will vote with their feet and Ireland will become a pariah state in the European Union."
Mr Shakoor is one of only a handful of Pibs-owners who holds enough to benefit from the offer of a debt-for-equity swap, which would value their holdings at 40 per cent of their value. The overwhelming majority do not have significant enough money to even get this amount.
To make matters worse, many of the pensioners and any family that have inherited the bonds, have only until 22 June to accept. The 20 per cent offer decreases if the initial deadline is missed.
Many of the pensioners are unlikely to have a broker to help them and might not even know where the original certificates are located, so there are fears that the elderly and infirm could miss the deadline.
Liz Cameron discovered on Friday that her £3,000 of Pibs, bequeathed to her by her late parents, was under threat. She said that she relied on the £400 annual payment to pay her heating bills, and are even more vital now as she has recently been made redundant.
"My parents left us these to help us through," she fumed. "They would be absolutely devastated to find their legacy has been stolen by the Irish."
Louise Verrill, a partner at Brown Rudnick's London office, said: "The firm recognises the special circumstances of the widows, orphans and pensioners which relate to this coercive scheme, which is oppressive."
John Hemming, the Liberal Democrat MP who used parliamentary privilege to reveal that Ryan Giggs was the footballer behind the recent superinjunction, is a leading Pibs-holder and part of the campaign. The group intends to write to the Irish government to condemn its "lack of common decency and fair play".
However, the Prime Minister, Enda Kenny, was elected earlier this year on a platform to make sure difficult economic decisions were taken in order to end the country's financial crisis, which saw Ireland bailed out by the EU and the International Monetary Fund.
A spokesman for the Bank of Ireland said: "In the context of the €2.6bn liability management exercise, the treatment of the Bank of Ireland 13.375 per cent Perpetual Undated Bond is consistent with that of other subordinated debt instruments:
"A) an offer is made to exchange into equity at 40 per cent plus accrued interest, while an offer is made to exchange into cash at 20 per cent excluding accrued interest.
"B) while – for European Prospectus Directive reasons – the equity exchange at 40 per cent is not open to bond investors with holdings converting to less than ¤50,000, should they choose to do so, such investors are free to sell those bonds to larger investors who can participate in the equity exchange.
"C) all bonds under the offer are covered by English law which is standard for most capital bonds."
Investigation after Indian crime reporter killed
Authorities in the Indian city of Mumbai have promised a full investigation after a prominent newspaper crime reporter was killed in a drive-by shooting near his home.
Jyotirmoy Dey, who wrote extensively about gangland activities in the country's financial and entertainment capital for the daily tabloid Mid-day, was gunned down in broad daylight in a northern suburb on Saturday afternoon.
Four gunmen on two motorbikes shot him four times at point-blank range and sped off, police said. Dey, 56, was taken to hospital but was declared dead on arrival.
Mumbai Police chief Arup Patnaik said the shooting, which has shocked the city's media fraternity, was a professional hit by organised crime gangs.
The domestic Press Trust of India news agency quoted an unnamed senior police officer as saying that the so-called "oil mafia" may have been behind the killing.
"The journalist had extensively written a number of news reports on the oil mafia, which may have triggered them to eliminate him," he added.
The "oil mafia" are racketeers who steal subsidised kerosene from tankers to dilute higher-priced petrol with it and undercut the market with the resulting blend.
In January, a senior civil official in Maharashtra state, of which Mumbai is the capital, was burnt to death after uncovering evidence of the practice.
Mid-day said that the reporter, who wrote under the byline "J Dey", had covered crime in Mumbai for the last 22 years and was the publication's investigations editor.
He had previously worked for titles including the Indian Express and the Hindustan Times -- both English-language dailies -- and was the author of two books on Mumbai's underworld.
Mid-day editor Sachin Kalbag wrote in the newspaper on Sunday that Dey was an honest reporter of great integrity.
"It is evident that Dey was a victim of his fearless journalism," he said.
But he warned against speculation about the motive of the attack.
Journalists in Mumbai are planning a protest march in the city on Monday, calling on the state government for greater protection.
They claim that Maharashtra home minister R.R. Patil should resign or be sacked, as Dey had told him recently about alleged links between local police and the underworld but he did nothing.
The Mumbai Press Club said Dey's death "underlines the increasing threat investigative journalists are being subjected to by powerful political and business interests indulging in illegal acts".
"Scores of incidents of journalists being beaten or threatened by politicians and local mafia have been brought to the fore in recent weeks and months," it said in a statement.
Maharashtra chief minister Prithviraj Chavan has said he was "extremely disturbed" to hear of the killing.
"(The) media plays an important role in democracy and efforts to terrorise (them) will be foiled," he added, vowing that the killers would face "stringent action".
"All steps would be taken to ensure that journalists are able to perform their duty without fear."
India, the world's largest democracy, has a vibrant English and vernacular language media, with journalists enjoying a high reputation among readers and the authorities.
Attempts to stifle free speech and attacks on journalists are relatively rare.
The Committee to Protect Journalists said that 27 journalists have been killed in India since 1992. Most victims were print reporters covering politics, business and corruption.
In November 2008, a correspondent for the Hindi-language daily Hindustan who wrote about crime and corruption was shot dead by three men on motorbikes in the northern state of Bihar.
Wednesday, June 8
Obama administration's war on foreign tax havens is intensifying as investigators process a windfall of information about international bankers and their U.S. account holders.
Details gleamed from American taxpayers who came in from the cold to declare their secret offshore booty have already produced indictments.
South Florida criminal tax attorneys expect a number of international bankers to be charged for courting wealthy Americans to hide their capital in foreign shell companies that fed money to secret accounts in Switzerland, Liechtenstein and elsewhere.
"Without question they are looking at foreign bankers who came into the U.S. to meet with people, to accept deposits, to give them cash," said Martin Press, a criminal tax attorney and a Gunster partner in Fort Lauderdale, Fla. "They came in on tourist visas and met people around swimming pools wearing Hawaiian shirts to avoid detection."
Internal Revenue Service Commissioner Doug Shulman ended a speech in February announcing a new amnesty program with this thought:
"We have been getting better and better at detecting offshore accounts. Therefore, the risk of being caught is increasing," he said. "We now have a number of other banks under investigation based on information we received from our first round of disclosures and from other sources. Tax secrecy continues to erode."
Two foreign bankers have been charged this year in South Florida: Renzo Gadola and Christos Bagios, for activities at Switzerland's UBS. Four former Swiss bankers with Credit-Suisse were charged in Virginia in February.
Federal prosecutors would like these bankers to join Bradley Birkenfeld, who is serving a two-year prison term after blowing the whistle on his former employer, UBS, for hiding assets from the IRS for Americans. Unfortunately for Birkenfeld, he was not as forthcoming about a California billionaire client, which may have jeopardized millions of dollars due to come his way under a whistleblower law.
END GAME
The bigger question remains. What is the end game for the Justice Department and the IRS in the wake of the $780 million deferred prosecution agreement with UBS and high-profile prosecutions such as the Fort Lauderdale trial of Mauricio Cohen Assor and Leon Cohen Levy? The father-and-son developers were convicted of hiding $150 million in offshore accounts and sentenced to 10 years in prison.
A new landscape is in play. Centuries-old Swiss banking secrecy has been shattered, UBS surrendered the names of about 4,500 U.S. account holders, and 15,000 Americans chilled by IRS warnings have reported their secret accounts.
Attorney Jeffrey Neiman, who prosecuted Birkenfeld and the Cohens before going into private practice in Miami, said the mass taxpayer disclosures handed prosecutors information about the criminal wrongdoing of Swiss banks, big and small.
That could set up a frustrating cycle of indictments against bankers who can never be extradited, he said.
"Given this environment, I think it is inevitable that the United States and Switzerland will reach a global resolution resolving criminal exposure for Swiss banks and bankers," Neiman said. "It is anyone's guess whether this resolution would include a large fine, the disclosure of names, the closing of accounts or some combination of the three."
Under the voluntary disclosure program, taxpayers could avoid criminal prosecution, but they had to say what institution and banker helped them set up their accounts.
Miami tax defense attorney Robert Panoff said this information has been entered into a database that has generated substantial leads.
"The government has numerous pending investigations involving financial entities and individuals connected with those financial entities," he said.
Neiman said taxpayers could be called as witnesses against foreign bankers if prosecutors get ahold of them. "Calls are being made to attorneys who represent these taxpayers, asking for taxpayers to start producing records and sometimes being subjected to interviews by prosecutors and agents," he said.
STAYING ON THE SIDELINES
Will all this new information lead to another UBS-type showdown? Panoff doesn't think so.
He said banks got the message with UBS and the Cohens' trial last year. Unlike other tax haven defendants who reached plea deals, they presented their case to a jury, and their bank, HSBC, cooperated with prosecutors, providing taped conversations on efforts by Cohen Assor to hide assets in the Caribbean.
Some taxpayers with hidden accounts have decided to gamble and see if they get away with it. Others have allegedly tried to do an end-around the disclosure program by filing what are called quiet disclosures -- amended tax returns owning up to the hidden assets. They hope to avoid the 25 percent penalty on their highest undeclared foreign account balance and a 20 percent penalty on the taxes owed.
A second voluntary disclosure program has not brought in the record numbers of wayward taxpayers that the first program did, leaving the prospect of potentially prosecuting thousands.
"There are people still on the outside, saying 'I'm under the radar. I'm at a bank nobody has heard of. They are never going to get my name,'??" Neiman said. "I think those with offshore accounts need to know that the government does have at its disposal information at unprecedented levels on banks and bankers around the world who engage in this conduct."
Panoff added: "We are in the land of the recalcitrant now. That's what's left."
One recent case caught the attention of criminal tax defense attorneys. They said it showed that anything less than full disclosure won't be tolerated.
Michael Schiavo of Westford, Mass., was charged May 19 after he amended his tax returns to include some, but not all, offshore income from an HSBC account in Bermuda. Schiavo, a managing director at SCG Consulting Group, didn't partake in the voluntary disclosure program, instead making what is called a quiet disclosure.
"It was a clear shot fired over the bow," Panoff said.
It can be called the Birkenfeld rule. "You can't come partly in the door," Neiman said.
So how will the wealthy squirrel away money from the prying eyes of Uncle Sam now that European banks appear to be a closed door?
The Justice Department also is looking very hard at Israeli banks, sources said. Other banks also are of interest.
Josephine Bhasin of Huntington, N.Y., pleaded guilty in April to failing to disclose $8.3 million held in HSBC India.
While India is not usually thought of as a tax haven, a California federal judge in April granted a request by federal prosecutors to serve a "John Doe" summons on Indian banks seeking information on U.S. residents using accounts in India to evade U.S. tax obligations. The same type of summons was used against UBS in Miami federal court and helped bring the bank to the bargaining table.
Press said dual citizens also may try to deposit funds using a foreign passport to avoid new IRS reporting requirements that take effect in 2013.
"Whether people will apply for citizenship to another country to just avoid detection is certainly a possibility, but I would not recommend that," Press said.
Bank bonuses may have come from bail-out cash
Bosses of Britain's four major banks were grilled by the Treasury Committee today in a session which revealed that some money given to bail them out may have been spent on staff bonuses.
In an admission which will stun taxpayers, Royal Bank of Scotland (RBS) boss Stephen Hester said in response to a question from Conservative MP David Ruffley that he believed some of the bail-out cash may have been used to pay bonuses.
RBS, which made a loss of more than £1 billion last year, is 83%-owned by taxpayers. Hester's £7.7 million pay package was signed off by the government in April after it emerged that details of the additional £4.5 million potential shares windfall - on top of his £2 million annual bonus and £1.2 million salary for 2010 - had not originally been revealed under the Project Merlin remuneration agreement. RBS also admitted that 323 of its staff were paid almost £1 million each last year.
Narrow banking?
The Treasury hearing was called to discuss their retail and investment businesses and to examine the proposals put forward by the independent commission on banking (ICB). It is also the first opportunity for MPs to question why Bank of England figures show leading banks have missed targets for lending to small firms.
Hester was joined at the session by Douglas Flint, the chairman of HSBC (HSBA), Bob Diamond, chief executive of Barclays (BARC) and Antonio Horta-Osorio, the new chief executive of Lloyds Banking Group (LLOY).
It followed a session of the Business Committee which was told by business secretary Vince Cable that the government is willing to take "further action with tax on banks" if they do not increase lending to small and medium-sized enterprises (SMEs).
He said lending levels to this group remained a 'serious problem', despite the four banks having signed up to the government's Project Merlin agreement to provide more credit for business.
The full report from the ICB - designed to avoid the 'too big to fail' situation - is due in September. It proposes greater separation between the retail and investment arms of banks but has not yet gone as far as suggesting that they should be split.
When questioned on this issue, Hester and Flint were apparently at odds, with the latter conceding that some kind of ringfence is necessary, while Hester said it would "increase some of the systemic risk and decreases ability of bank to withstand risk".
Horta-Osorio has already criticised the ICB's recommendation that a planned sale of 620 Lloyds' branches required to meet European Union state aid rules be increased to help boost UK competition.
Watchdog targets landbanking firm
Investors ploughed hundreds of thousands of pounds into plots of land that had little chance of being built on, the City watchdog has said.
Now the Financial Services Authority (FSA) has taken action against an unauthorised landbanking scheme which collected £3.9m from UK consumers.
But some victims are unlikely to get their funds back.
In the last year, the FSA has secured seven injunctions against unauthorised landbanks.
Action
The High Court has issued a winding-up order against Plott UK Ltd.
The business had been marketing plots of land as an investment opportunity. It promised investors a return of between 200% and 300% on their investment.
However, at least one of the sites was in a designated area of outstanding natural beauty, and so was highly unlikely to ever get planning permission to be built on.
Many customers invested a minimum of £10,000, with some investing hundreds of thousands of pounds. Plott collected £3.9m between May 2009 and April 2011, the FSA said.
The regulator was able to take action as Plott was operating an unauthorised collective investment scheme.
Freeze
Another operation, called European Property Investments UK Ltd, took over Plott's business once the FSA action against Plott began. It accumulated £639,000 in nearly two months from April.
In our experience operators of unauthorised land banking schemes do not work in isolation”
Tracey McDermott
FSA
The FSA was able to freeze £180,000 in the firm's account, but the rest was transferred out before the freezing order was obtained.
Meanwhile, the High Court issued an injunction that means the business will be breaking the law if it sells land or operates the collective investment scheme.
"Consumers are much better off not putting their money into these schemes since, by the time we can catch up with the operators, most of the money has disappeared and investors are left with land that has a value which simply does not reflect the money paid for it," said Tracey McDermott, of the FSA.
"In our experience, operators of unauthorised landbanking schemes do not work in isolation, they often work together and their schemes are evolving.
"Once the dust has settled, we hope to be able to repatriate remaining funds to customers of both companies, but it is likely that some people will not get any of their money back."
Investors are not covered by the Financial Services Compensation Scheme because the businesses were unauthorised.
U.K. bank chiefs Wednesday said ringfencing retail banks from investment banking activities could make banks riskier and hurt the economy,
U.K. bank chiefs Wednesday said ringfencing retail banks from investment banking activities could make banks riskier and hurt the economy, and even add to perceptions that the government would step in to help failing institutions.
In testimonies to U.K. lawmakers who are studying early proposals on banking reform from the government-appointed Independent Commission on Banking, Royal Bank of Scotland Group PLC (RBS) Chief Executive Stephen Hester said separating retail banking "increases some of the systemic risks and decreases the ability of banks to withstand the risks," and that stripping out these activities "would doubly support" existing perceptions among retail and small business customers that the government would bail out banks in times of crisis.
HSBC Holdings PLC (HBC) Chairman Douglas Flint said ringfencing might be necessary from a policy point of view, but that its effect on the real flow of credit to the economy should be the main driver in determining any implementation.
After a debilitating financial crisis that nearly brought down RBS and Lloyds Banking Group PLC (LYG), requiring hefty government bail-outs, the U.K. is looking for ways to make its banking system safer and more competitive. Last year, it created the ICB to come up with measures to achieve those aims. It outlined initial options in April, including higher capital requirements for U.K. retail banks and the ringfencing of many retail activities from riskier investment-banking operations.
Banks have accepted that some form of ringfencing is likely, but are lobbying to have a say on how lines are drawn. HSBC's Flint Wednesday said the bank submitted proposals to the Treasury committee and the ICB on how it thinks a ringfence should work.
The ICB will recommend a final package of measures in September, which the government will then decide whether to adopt or reject, in part or in whole.
Lloyds Banking Group CEO Antonio Horta-Osorio and Barclays PLC (BCS) CEO Bob Diamond are due to testify to the Treasury committee at 1500 GMT.
Business secretary Vince Cable has warned banks could see higher taxes if lending to small-to-medium-sized enterprises does not increase.
Mr Cable told MPs there was a "serious problem" with lending to businesses.
"The Chancellor and Prime Minister have made it clear that if we don't get results, they have said we should take further action with tax on banks," he told the Business Innovation and Skills Committee.
The bosses of Barclays, HSBC, Royal Bank of Scotland (RBS) and Lloyds Banking are facing the Treasury Select Committee amid pressure for a new tax on bankers' bonuses.
RBS boss Stephen Hester has admitted 'some taxpayers' money' paid bankers' bonuses this year.
He was responding to questions from the Treasury Select Committee over the failure of banks to hit lending targets agreed earlier this year.
He added that the Independent Commission on Banking's key proposal to ring-fence UK lenders' retail banking arms from their investment banks could increase systemic risk.
Mr Hester said: "I believe that creating a ring-fence increases somewhat the systemic risk and decreases the ability of banks to withstand the risk."
He added that the idea that banks are too big is a 'red herring'.
It is the first opportunity for MPs to grill them on why Bank of England figures show leading banks have missed targets for lending to small firms.
Earlier, Vince Cable told MPs there was a "serious problem" with lending to businesses.
"The Chancellor and Prime Minister have made it clear that if we don't get results, they have said we should take further action with tax on banks," he told the Business Innovation and Skills Committee.
Bob Diamond, Barclays; Antonio Horta-Osorio, Lloyds; Douglas Flint, HSBC; Stephen Hester, RBS;
The four signed up earlier this year to the Government's Project Merlin agreement to provide more credit for busioess.
The committee meetings come amid calls from shadow chancellor Ed Balls for a new £2bn tax on bankers' bonuses.
Stephen Hester and Bob Diamond, the respective chief executives of RBS and Barclays, will be among the quartet quizzed about sweeping changes proposed for their industry.
They are expected to tell the committee this afternoon that reforms suggested in the Independent Commission on Banking's (ICB) interim report will make banking more expensive for customers.
Taxpayer-owned Royal Bank of Scotland recently warned it would have to work "hard" to mitigate the additional costs of the proposed changes.
The ICB, which will publish its full report in September, wants greater separation between the retail operations of the banks and their investment arms, but it has stopped short of recommending splitting the banks up.
The Government commissioned the ICB report to review ways of avoiding "too big to fail" banks sparking another credit crisis, after the multi-billion pound taxpayer-funded rescues of both Lloyds and Royal Bank of Scotland.
One of the chiefs, Antonio Horta-Osorio, the new boss of Lloyds, has already criticised the ICB's recommendation that a planned sale of 620 branches to meet European Union state aid rules be increased to help boost UK competition.
The bankers may also be quizzed on their decision to cave in on the issue of payment protection insurance.
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