Some good news for a change

This morning the endless leaks and speculative stories about the banks and their capital continue up to the deadline for the announcements. It is far from helpful, and not a good way to conduct such sensitive negotiations and reconstructions.

The good news is that one of our main banks, rumoured to need public money to strengthen its balance sheet, is now rumoured to be be able to raise what money it needs in the normal way from shareholders and the markets.

Let us hope more of our banks want to stay independent and take the obvious actions they need to take to do so.

You would have thought all the banks needing more capital would start by asking their existing shareholders for more, and seeking money from the markets. Not paying dividends for a year or two might in some cases be sufficient without having to ask for more capital, as the dividends have been large. Certainly, a bank short of capital should adjust its dividend policy to its new straightened circumstances before seeking taxpayer gold.

It would be helpful to hear from the Regulator. How much extra capital does the Regulator think banks need in current circumstances? Whilst I am all in favour of the Regulator acting behind the scenes without leaks and rumours in the cases of individual banks, I would favour a public statement about the overall ratios the banks have been achieving, and about any move by the Regulator at this stage to demand larger capital cushions against future losses.

Those who want widespread bank nationalisation cannot have not looked at the numbers involved. Just four of our banks have combined liabilities in excess of £ 5 trillion, compared with UK public spending of around £0.6 trillion, and UK total income and output of around £1.5 trillion. The nationalisation of Northern Rock was a very bad deal for the taxpayer, preventing that bank from making new mortgages for competition law reasons and forcing the taxpayer to pay for the run down of the institution.

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8 Comments

  1. Matthew
    Posted October 13, 2008 at 9:21 am | Permalink

    I don't think the figures you give on bank liability, public spending and GDP are entirely the whole story. The banks also have assets, and you have to look at it over a number of years. What's important is whether the government/state/nation can cover the funding gap.

    Willem Buiter looks at the numbers here.
    http://blogs.ft.com/maverecon/2008/10/are-the-fis

    One problem for the UK is that its banks have a lot of foreign currency liability, which as we saw in the case of Iceland is hard for a government to deal with without debasing the currency (and even then not necessarily possible). This will always be a problem for a small country with its own currency – the UK is not that small a country so hopefully it will be OK.

    Reply: The funding gap can increase – or decrease – as the riskiness of the assets changes. It is dangerous for a state to take on liabilities well in excess of national income, in case the assets fall away, leaving too large a loss relative to naitonal income and taxable capacity.

  2. Kit
    Posted October 13, 2008 at 9:41 am | Permalink

    RBS and HBOS should have been left to die. Life as the living dead under Labour rule will be cruel. How long before demands are made for union representation on the board? More women and ethnic minority in senior management? Solar powered dealing desks?

  3. Nicholas Hallam
    Posted October 13, 2008 at 9:41 am | Permalink

    John,

    Robert Pesto is saying that part of the deal with RBS, HBOS and Lloyds TSB is a commitment to "maintain lending to homeowners and small businesses at the levels of 2007".

    Will they come under pressure, then, to grant loans that they should prudently avoid?

    I'm sure I must be missing something, and wonder if you can help.

    Nicholas Hallam

    • Matthew
      Posted October 13, 2008 at 10:03 am | Permalink

      Nicholas – the devil will be in the detail, but 'at the levels' does not mean in individual cases but as a whole, and I think John will say this is exactly what he has been arguing for with respect to Northern Rock.

  4. Matthew
    Posted October 13, 2008 at 10:02 am | Permalink

    Reply: The funding gap can increase – or decrease – as the riskiness of the assets changes. It is dangerous for a state to take on liabilities well in excess of national income, in case the assets fall away, leaving too large a loss relative to naitonal income and taxable capacity.

    Of course, but I don't think you woud argue the assets are worthless, and so what really matters is the difference between the assets and liabilities and over what time that would need to be covered. We're not talking about whether it is desirable, you are arguing that it is impossible, and I'm not sure you have made your case with the numbers you present

    Reply: I am not saying it is impossible. I am saying the taxpayer should not put at too much risk. The very large numbers mean if it does go wrong it will be very painful for taxpayers if we end up owning these banks.

  5. Johnny Norfolk
    Posted October 13, 2008 at 4:02 pm | Permalink

    Labour are trying to turn what they have caused into an oppotunity to take over the banks. The day of reconing will still have to come.

    They just want to totaly run our lives and turn us into slaves.

  6. mikestallard
    Posted October 13, 2008 at 8:37 pm | Permalink

    Coal – the railways – heavy industry – motor cars – the arms industry.
    All these have been taken over once they failed into the arms of the government.
    And where are they now?
    The government simply is not capable of running things it does not understand.
    You, John, are rare – you have actually worked in the finance industry.
    Gordon Brown, the Chancellor, Mr Darling, Peter Mandelson have not.
    If the future of the banks is anything like those pictures we saw of the inside of the Treasury recently, or if all the details of the cards suddenly go missing, I am quite sure nobody will be surprised.
    And now that they are dealing in trillions, as you say, instead of billions, which they are splashing round like champagne at a car rally, we taxpayers look to be out for a bashing which will last a long time.

  7. T. England
    Posted October 15, 2008 at 7:43 am | Permalink

    I believe were doing this bail out all wrong! As in, it just shouldn’t happen!
    By doing this bail out we are basically, as far as I can tell, just trying to keep the status quo, even down to getting CREDIT flowing again, why?
    Apart from the obvious, what has Britain got left?!

    We don’t manufacture much any more because British people want too much money to work, or to live on or something! & so people over seas now do all that type of work for us, we don’t grow much anymore because that can be produced over seas much cheaper than we could here & so we have acres of fields out there not doing anything & the people that could work those fields are sitting at home claiming benefits, I could go on & on but the point I’m trying to make is that as much as I love capitalism, it’s not working for us!

    As a country we seem to have become weak & indebted to all & sundry, now we are told we have to GAMBLE money that the government apparently has stashed away, to help people out who have let us down just so they can make more money out of us with goodness knows how much of it going over seas! Something’s wrong! Very wrong!
    How am I supposed to look at this all?
    When I go to work it’s for a foreign owned company & when I come home at night I switch on power that is owned by a foreign company & when I phone to complain about the company I’m put though a foreign helpline & when I go out to buy some goods they are grown or made over seas, ok! You get the point, so am I some kind of protectionist person just because I want to see as much as possible of the above done in house? Nope! Just some bloke who wants to feel like all I do in Britain is for my fellow Britain’s, my neighbours & friends, am I being too simple here?

    This bail out isn’t just about banks saving face is it? Aren’t countries leaders saying to each other, look we have money? We can just buy up banks!
    BIG DEAL!
    We still have people on the poverty line in modern day Britain, we have people working for a low wage because of the opportunities that they have to pay for by being a member of the EU!
    Apparently we can pump Billions into failing banks but cant pay for the best of this & that for the people who put that money there in the first place that is being given on there behalf!
    What to do!?
    I know!
    DON’T give the money to the banks, just open a new bank & put billions into that & then open accounts with cash in for the people who’s banks don’t make it, Simple!

    Capitalism has become far too expensive & far to complicated, I say we opt out for a few years & do a good life! Yep! Trade in potatoes if need be! Open new factories with money not credit & then put in people who will work for a fair wage that make products at a sensible value that sell for what it’s worth, I’ll stop here! Coming over all simple again!

    A new form of capitalism is needed not the resurrection of the old one!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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