How much capital do the banks need?

It would be helpful to have a positive statement from the authorities about banking capital. I assume all banks currently trading have enough capital. That after all is one of the main tasks of the Regulator, to ensure they do. It appears that recently the government has required banks to have more capital, leading to the discussions over whether taxpayers should put up some of this. It would be helpful to be told by how much the government has decided to lift the capital requirement at this juncture. It is an odd time to seek to increase capital ratios with a public dialogue implying the banks do not have enough capital, when we need to increase confidence in the banking system. If individual banks are thought by the regulator to need more capital in case of future losses, that should be done in strictest confidence.

I am distrubed to hear the government use its current support for the banks as part of its political argument with the SNP. The two main recipients of taxpayer cash for capital happen to be the Royal Bank of Scotland and Halifax Bank of Scotland. We are now being told by a triumphant government that the large sums proposed for these banks show why an indepednent Scotland would not work, because such sums would be too much for Scottish taxpayers’ pockets without the help of English taxpayers. As the Glenrothes by election hoves into view we can expect more of this sabre rattling rhetoric for the Union.

It is in the national interest for the government to go back to the commercial banks in private and seek to work out how they can meet higher capital standards without recourse to taxpayers funds. This may well include telling them firmly the taxpayer will not finance a bank merger. It is not good for taxpayers that this matter is now connected by some in politics to a Scottish by election.

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17 Comments

  1. Stuart Fairney
    Posted October 16, 2008 at 8:48 am | Permalink

    You highlight exactly the problem. Non-partisan commercial judgment goes out of the window whem banks are run by the state. Instead we have nonsense like Brown demanding no job-losses in Labour constituencies before by-elections.

    I might add the bailout is too much for this non-Scots taxpayer, and all 28 million of us if there is anyone left in the government who can do basic maths, (although judging by what Guido has to say about the schools minister today, that maybe an ambitious assumption). Presumably they just think "So what"

  2. Johnny Norfolk
    Posted October 16, 2008 at 8:58 am | Permalink

    Labour puts its party first and the country at best second. It always has and it shows it is true again. The market will decide if people like that or not. Brown is just fire fighting and there can be no confidence in him with what he has done over the past 11 years.

  3. Obnoxio The Clown
    Posted October 16, 2008 at 10:24 am | Permalink

    "I am distrubed to hear the government use its current support for the banks as part of its political argument with the SNP. The two main recipients of taxpayer cash for capital happen to be the Royal Bank of Scotland and Halifax Bank of Scotland. We are now being told by a triumphant government that the large sums proposed for these banks show why an indepednent Scotland would not work, because such sums would be too much for Scottish taxpayers’ pockets without the help of English taxpayers. As the Glenrothes by election hoves into view we can expect more of this sabre rattling rhetoric for the Union."

    Thanks John, I think you've just given me an aneurism.

  4. pp
    Posted October 16, 2008 at 10:43 am | Permalink

    John

    You are wrong about the government dealing with the banks in secret.

    As a citizen I should never be required to trust a politician.

    Are you aware that Brown now denies that he ever said that he had ended "boom and bust"? He aparantly claims that he said that he only claimed to have ended "tory boom and bust" – don't tell the public they must trust someone just because they are PM, let alone a minister, let alone an MP.

    If the government are allowed to work in secret then the whole bailout could have been concealed until we received the taxbill to pay off the massive extra borrowing. And you can be 100% sure that the first we would hear would be just *after* a general election.

    You may choose to trust particular politicians, but it should never be a requirement that the public have to.

    Secrecy in government is too often bad for it to be allowed – how a government can operate in such an open environment is a different challenge, but one that must be addressed.

    Reply: You misunderstand the point I am making. The government/regulator must discuss the adequacy of a bank's capital in secret. Once people know they are questioning it people lose confidence in the bank. Of course if they decide to do something, that has to be announced, and if it entails public money it has to be put to parliament for approval.

    • pp
      Posted October 16, 2008 at 1:24 pm | Permalink

      Thanks for your response – however it still involves secrecy.

      If capital adequacy is a key performance indicator for a bank, then all banks should publish these figures regularly (hourly, daily or whatever) for all to see.

      Every one can then take a view on them (shareholders, regulators, public and government) noone need be approached individually.

      And such transparency would help ensure that issues were picked up very early.

      No fear, no panic, no rumours, no secrecy, no manipulation (and no semi official leaks to the media…) – just facts – for everyone to do with them as they will.

      reply: All banks do publish their ratios with their regular figures. Of course it needs to be transparent. What shouldn be secret is any fear by the Regulator, as the fear might be unfounded.If there is a problem then it needs to be tackled openly and quickly.

  5. Neil Craig
    Posted October 16, 2008 at 11:17 am | Permalink

    On the C4 news last night there were "unofficial" reports that the government were avout to release the banks from their undertaking not to pay dividends till most of the money was paid back or for 5 years. This was being sold on the grounds that it would boost "confidence" in the share price & perhaps allow these banks to refinance themselves by a share issue.

    The cail out was only justifiable on the basis that it helpd the banks perform their role in lubricating economic activity. It is not the government's function to protect their shareholders & indeed it doesn't matter how low the share price is for the business to run. I regard the possibility they will be raising large amounts by a share issue in the next few years as extremely improbable & in any case if they not paying dividends don't need to unless banking is to be a very fadt growing industry – equally improbable.

    Finally if money is not paid in dividends it still remains as value in the bank. To demand dividends is merely short termism. Something which we have seen far to much of.

    I hope the opposition will help the government stiffen their backbones over such requests.

  6. Mark Wadsworth
    Posted October 16, 2008 at 11:27 am | Permalink

    The banks have plenty enough capital, plus an inflow of £150 billion-odd each year from interest and capital repayments on existing mortgages and other lending.

    The total worst case losses from the UK housing crash will be in the order of £40 billion (3% of total UK household borrowing).

    The only problem is that banks are over leveraged, in other words, their shareholders' capital/retainted profits is too low and borrowing, in particular mortgage-backed securities etc is too high.

    The answer is blindingly obvious – and this was explained on Conservative Home* last week – do a debt for equity swap!!!

    If UK banks converted a few percent of their loan capital (maybe 0% in the case of HSBC, and possibly 20% in the case of N Rock or B & Bingley), then all this could be sorted out at a stroke without requiring a penny of taxpayers' money.

    Further, the numbers can be adjusted so that the market value of the new shares that bondholders recive is equal to the corresponding reduction in the market value of their bonds.

    (The whole credit default swap malarkey is a zero sum game, hedge funds will make huge profits or losses but banks will largely break even – see here. A debt-for-equity swap does not 'solve' this perceived problem, but then again neither does a taxpayer funded bail out)

    * I disagree with the ConHome article in one respect – I don't think banks should touch ordinary sight deposits, but that's just details.

  7. Eddy Holt
    Posted October 16, 2008 at 12:56 pm | Permalink

    It seems to me that, at present, City bonuses only have an upside. When profits are good, the payouts to the top players are obscene, and presumably trickle down in lesser form to the other employees. When the bottom falls out of the market the top brass may not get their huge bonuses but they are not the ones who lose their jobs and high salaries.
    The solution must be, first to restrict by law the amount of profit which is paid out in bonuses, to a fixed proportion of the total profit. Then when a loss is made, to have negative bonuses, so that the recipients of the good times are required to repay in proportion to their share of the previous profits. There will obviously have to be an element of retrospection in this law so that it is not possible to escape repayment by resigning the post.
    This will have the effect of restraining the gambling element of the financial sector as there will be a penalty for losing which does not seem to be present now.

  8. no one
    Posted October 16, 2008 at 1:16 pm | Permalink

    they need enough to pay me my account balance back when i decide i want it 🙂

  9. Rush-is-Right
    Posted October 16, 2008 at 3:26 pm | Permalink

    We are now being told by a triumphant government that the large sums proposed for these banks show why an indepednent Scotland would not work, because such sums would be too much for Scottish taxpayers’ pockets without the help of English taxpayers.

    Perhaps an independent Scotland would not have been dragged into such a mess in the first place?

  10. mikestallard
    Posted October 16, 2008 at 5:42 pm | Permalink

    We know, from a decade of Chancellorship, that Mr Brown likes to micro manage everything and that he is determined, above all, to improve the lot of the poor.
    Now he has nationalised several of the banks.
    Already politics are getting tied into the banking system at the Glenrothes by election, which we know he is taking very seriously.
    And today, to the scandal of the "You and Yours" programme this morning, the Telegraph has noticed that Northern Rock is being questioned by back benchers about the very many repossession orders.
    One thing which has surprised me is how very quickly the government is beginning to interfere in the banks which it now controls.

  11. giles
    Posted October 16, 2008 at 9:03 pm | Permalink

    Nice to have a post that doesn't say we need to slash interest rates. I agree with a lot of what you say John, but I don't understand why you continually say that cheap money is part of the solution.

    As far as I can see cheap money was a large part part of the problem. The .5 cut in interest rates only appears to have increased the banks profit margins as very few are passing it on.

    Are you moving away from this position?

  12. Bazman
    Posted October 16, 2008 at 11:09 pm | Permalink

    Markets first. Democracy second. Would Conservatives do it any other way? The piper calls the tune. Conservatives never forget this! Oh! You have!

  13. Tears for Tear 1
    Posted October 16, 2008 at 11:22 pm | Permalink

    According to the BBC news, on Monday, when stock markets were rising, Gordon Brown' s plan to save the world was working.

    Earlier this evening when stock markets were falling again, the BBC news was convinced that now the Bank rescue plans were failing. However at that point in time it appears that the plans were known as "the US and European" bank rescue plans.

    If we wanted a State Broadcaster we could fund the BBC direct from taxes, saving on the cost of raising the license fee, and at least then we'd know were we all stood.

  14. Jonathan Bryce
    Posted October 16, 2008 at 11:53 pm | Permalink

    Actually, I think the government has a good point here. Alex Salmond gave Iceland as an example of what Scotland would be like if it became independent, and I think it is actually a good comparison.

    Three of the big 5 banks in the UK are based in Scotland (including Lloyds although most HQ functions are carried out in London), and their assets are about 31 times bigger than Scotland's GDP.

    Just like in Iceland, there is no way an independent Scotland could support these three banks in times of trouble, and this would have grave repercussions, both in Edinburgh, and around the world where these banks operate.

  15. Tears for Tear 1
    Posted October 16, 2008 at 11:56 pm | Permalink

    The plan is on the whole well thought through (it was after all Standard Chartered's thinking NOT Gordon Browns)
    However it is floored because by requiring the banks to increase their target Tier1 it is pro-cyclical and builds on the procyclicality of the BIS ll regulations.
    The plan should instead have left target tier 1 unchanged and instead insisted on the banks using the new government capital to write down bad loans/bonds and forcing far more transparency and speed on the reporting of their accounts.

  16. Per Kurowski
    Posted October 18, 2008 at 6:32 pm | Permalink

    It is not that they have changed the rules. The minimum capital requirements for banks ordained by the central planners in Basel has imbedded in it that when the credit ratings go down they need to put up more capital sort of a infernal pro-cyclicality machine.

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    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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