The elastic balance sheet of the Bank of England

HSBC, a typical large regulated bank, in 2007 had a balance sheet showing total liabilities of $2,354 billion. Shareholders had put up $5.9 billion in capital, and had accumulated total share capital and reserves of $128 billion. In other words, the bank was able to gear itself at around 20 times its shareholders capital. That left it comfortably within the Regulator’s limits on how far a bank can gear up its capital to lend and spend.

There is today another well known UK bank whose shareholders put up just £15 million, with total shareholders funds of £2.3 bn at end February 2008, which on December 4th 2008 had total liabilities of £259 billion. In other words it was able to gear itself more than 110 times its shareholders total capital.

That bank is the Bank of England. It is true the assets of the Bank of England are on the whole lower risk than those of commercial banks. It is also true that the government and state stand fully behind it. Last week was down a bit on the 4 December level. It does go to show, however, that they are not just thinking about quantitative easing. I wonder how much further they are prepared to go in expanding the Bank’s balance sheet?

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9 Comments

  1. Acorn
    Posted December 20, 2008 at 1:30 pm | Permalink

    As you have mentioned HSBC, it reminds me that not so long ago there was a particular shareholder who was criticising that bank for being over cautious and not doing its best for shareholder returns. He has gone away now, I wonder why?

    It looks like it will be down to you JR to keep us informed on Treasury and BoE activity. I understand the government wants to keep this sort of data to itself – Banking Bill.

    BTW. (For the nerds on this site)
    In reply to one of your readers (private e-mail); but may be of interest to Redwoodians. If you want to see the contribution that wind is making to our electricity see following. Keep in mind that this is only the HV connected stuff that is metered by NG (1288MW). The other current 1900MW is embedded at distribution level voltages. There is about 16,000MW more currently under construction; been consented; in scoping / planning. Let’s hope for steady winds.

    http://www.bmreports.com/bsp/bsp_home.htm

    If you want the gas version http://www.nationalgrid.com/uk/Gas/Data/EFD/

  2. Michael, Islington
    Posted December 20, 2008 at 3:05 pm | Permalink

    Great post. Keep the ideas short and simple. It’s a killer.

    As one commentator said today on Radio 4: “The government is now operating its own Ponzi scheme”.

  3. Brian Tomkinson
    Posted December 20, 2008 at 3:24 pm | Permalink

    Two thoughts occur to me:

    1. No one in authority knows what they are doing and are just panicking on a daily basis.

    2. The authorities do have a plan to establish a new system of capitalism but are not prepared to say so because of the consequences to the majority.

    The outcome in both cases seems to be economic impoverishment for the bulk of the population which will last for at least a generation.

  4. Daniel White
    Posted December 20, 2008 at 5:09 pm | Permalink

    For some months now I have been in correspondence with friends of mine in the medical sector who worry about the emotional effect on ordinary people of all this indebtedness.

    One of the things I tell them is that the present kind of capitalism is no longer capable of sustaining itself in any form whatsoever and governments are panic led into solutions which only defer even greater problems for future generations.

    Is there any chance of money itself being redefined? Surely we can do better as a race than base our progress on a highly elaborate system of IOU’s. Admittedly a genuinely clean slate would diffuse and negate entrenched power as we know it, but the world is going to reach a point where that is the only viable alternative to complete anarchic madness!

    This would be genuine progress as mankind does not need the IOU as the only driver behind the means of production.

  5. mikestallard
    Posted December 20, 2008 at 10:17 pm | Permalink

    Do you know what? I have never had it so good!
    Prices are dropping fast. I include petrol.
    I live in a house for which I do not pay rent and from which I have no intention of moving. My children (grown up) are all safely tucked away out of the country – except for my eldest son who has nearly paid off his mortgage.
    I seems likely that, if house prices remain the same, that my grandchildren will actually be able to afford a house.
    OK, in a recent bank revue, this week, we have lost a couple of hundred pounds on the family savings, but we trust (fingers crossed) that this will return over the long term.
    My tiny pension is enough to live off if we are very careful.
    My neighbours and friends don’t seem to be in trouble much either.
    Trouble, just at the moment, seems to be for other people.
    Touch wood.

    • APL
      Posted December 21, 2008 at 3:28 pm | Permalink

      Mikestallard: “Trouble, just at the moment, seems to be for other people.”

      Good luck Sir, long may your fortuitous situation continue.

      But one other thing you say is I think important, you are able to live off your modest income, if you are careful.

      That, I think is an art a lot of people will need to learn. And why taxes, not least the council tax will become ever more despised.

  6. Gareth
    Posted December 20, 2008 at 11:44 pm | Permalink

    The BoE secret lending scheme is actively delaying the regular operation of interbank lending.

    Why borrow off some dodgy high street bank when you can borrow off The Bank?* Vastly increasing the size of the SLS further delayed the necessary shakedown in interbank lending.

    It’s a simple enough point few seem to be making.

    * Why borrow at all? Especially if you’re adequately capitalised going forward (as, er, HBOS, BnB, Northern Rock, Lloyds TSV and RBS were reckoned to be…).

    Can someone provide a bit of historical context or point me in the direction of some? Eg the size of interbank lending (as opposed to LIBOR rates which seem to be a pre-occupation of many) before CDOs and CDSs took off. The re-mortgage merry go round has come to a halt so the mortgage market is shrinking to pre-boom levels. Interbank lending was vitally important to the securitised mortgage industry, but was it as important to more normal banking operations?

  7. Adrian Peirson
    Posted December 21, 2008 at 1:08 am | Permalink

    People out there are buying into Gold and Silver, what they don’t realise is that the Banksters have for many years been selling more Gold and Silver certificates than the amount of Gold and Silver they hold in storage.
    IE they are overselling Gold and Silver Certificates.

    Is this not fraud, and if it is, why is Fractional reserve banking not fraud too.

    Maybe it isn’t fraud, maybe I should fire up my printer and start selling dozens, or hundreds of Gold certificates against this Gold ring I’m wearing.

  8. Adrian Peirson
    Posted December 21, 2008 at 1:54 am | Permalink

    Abolish the Private Bank of England and set up a Peoples bank which works for Society not the other way round.

    Ron Paul calling for the Fed to be abolished.
    http://www.rense.com/general83/paulab.htm

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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