We hear this morning that the Chancellor intends to take action to prevent a future government bail out of banks. He will have many supporters for his aim.
We learn that his chosen method is to require the large banks to ring fence their UK domestic deposit taking and lending activities. The Regulators could watch their solvency and liquidity more easily, and ask for them to be spun off if other parts of a bank get into financial trouble. The implication is there would be no bail out for the rest, if the trading, investment banking and overseas banking got into trouble.
As the one MP who advised the last government not to bail out the large conglomerate banks I have no problem with that. I then argued that they should have forced the banks in trouble to sell off their investment and overseas banking arms, and lent sufficient cash to the smaller domestic banks against what security they could take so depositors did not lose out. It appears that we are now moving to such a solution for any such future disaster.
The Chancellor should also remember that the last crash reflected bad central banking and regulation. We do not need primarily to change the commercial banks, but to change the way we regulate, conmtrol and act as a lender of last resort. The last crisis resulted from being too lax in 2005-7 and being too tight in 2007-8. It flowed from wrong interest rates, wrong cash and capital ratios, and above all from leaving money markets starved of money at a crucial time which was bound to bring certain banks down. The speech should talk to the authorities as well as to the commercial banks if it going to address the big issue.
Public money should not be put at risk by buying shares in damaged banks. No bank should be too big to fail. In 2008 they could have insisted on asset sales, cost cutting and other means of generating cash to avoid the need to put taxpayers at risk. The Coalition government should move quickly to return the banks to the private sector, as we have discusssed before. Livinjg wills for large banks is part of the answer. Better central banking is the other part.
The Chancellor could also up date us on how his growth strategy is going, and what he thinks of the squeeze the current inflation rate is causing.
June 15, 2011
Agreed – but are the people doing the regulation up to the job, not too close to the banks and not acting, as is usual with regulators, in the self interests of expanding the bank regulation industry.
It is for the government to ensure this happens – the regulators will probably not do it.
June 15, 2011
Just in case anyone doubted where the BBC stand on the issue – on PM yesterday (about 5.25) Dr. Mary Bousted, General Secretary of the Association of Teachers and Lecturers, was given several airtime minutes for a pure advert for their forthcoming teachers strike. This in protest against proposed pension changes.
No one questioned her at all on the relative advantage of state sector pay or pensions (circa 43%) or asked her anything other than questions helpful to her message. Something like “Why should people earning far less than your members and often with no pension provision at all, pay yet more tax for this purpose?”.
This would have been a welcome change but rather unlikely we all know where the BBC stands on virtually every issue.
June 15, 2011
Good to see unemployment down – just imagine what the private sector could do without the ball and chain of Cameron’s big state, non-functional banks and absurd over regulation of everything holding them all back.
June 15, 2011
You have lot to learn Lifelogic.
When the banks where under regulated you would have screamed blue murder had any regulation been introduced. Now you say their is to much regulation except for banking which is now to regulated, but not enough. Many companies especially building who were telling the banks how much money they wanted and when they got it went bust. Not because of to much regulation or tax or health and safety. That’s for sure. The banks went bust because of a lack of regulation not because of to much, then tried to blame everyone else. Your church was wrong.
If you applied this to wages and safety were would it go for the average person? I’ll tell you where. Minimum wage with minimum safety and maximum profit for the employers who would still want more for less whilst telling everyone there is to much tax and regulation. Or boring everyone in the pub how poor they are.
Interesting to see how your Logic would apply to airline maintenance schedules. Which is no doubt over regulated and mainly pointless. Taking this to its ‘logical’ conclusion maybe whatever happens happens? As long as it does not happen to you that is. The basis of all Tory ideology.
June 17, 2011
What is wrong in all your cases is human nature which is greedy and needs self control. And lots of people are swindled and cheated all the time. It isn’t just Tories, you know.
Milovan Djilas, in the then Yugoslavia, was one of the first to notice that when Socialism comes, a new class emerges – the nomenklatura and the bureaucracy.
If you look carefully, you can see that it has emerged in Socialist Europe too.
And there is, I believe, just a little bit in our own country too.
June 15, 2011
Chinese walls will amount to self regulation won’t it .
That would seem an extremely high price to pay for trying to persuade the banks to remain headquartered in London .
We need to subdue the financial sector not be subdued by it .
June 15, 2011
Spot on. Clearing banks run by Investment Bankers.Chinese Walls will look quite secure by comparison.
June 15, 2011
The Chancellor may well speak… but I didn’t hear his statement telling the House of Commons about the outcome of his attendence in an official capacity at the Bilderberg Conference.
Perhaps you could find out when we will get that statement on the floor of the House?
When do we taxpayers get to know what was discussed in our name?
When do our elected representatives get to endorse or reject whatever the Bilderberg group decided amongst themselves, behind closed doors, at our expense?
June 15, 2011
When do our elected representatives get to endorse or reject whatever the Bilderberg group decided amongst themselves, behind closed doors, at our expense?
Pretty unlikely that will ever happen with Cameron-Heath in charge.
Reply: The Bilderberg group do not make decisions. Concentrate on what the EU, IMF and UK governemnts are doing. It’s all public.
June 15, 2011
Hidden in plain sight.
June 15, 2011
John
Having been a director of NM Rothschild merchant bank, you must have know about the Bilderburg group for years ,
why have you never mentioned any of the meetings that have been taking place for years ,
Was you ever invited ???
Reply: I have never attended a Bilderburg group meeting. I think you all miss the point. It is not a decision taking meeting. Watch what the EU and the Uk government are doing – they are the oens with the power.
June 16, 2011
Absolutely – but the people who attend this Bilderberg Conference are members of the EU, Royal Families, Banking concerns and alike and they have the power. It is worrying that there appears to be a News Black out every year – the News Media focussing on X-Factor contestants or sporting events.
Isn’t strange that when some of the most powerful organisations in the World get together – that no main stream news media would be interested? The BBC write off this interest as conspiratorial.
June 15, 2011
“The Coalition government should move quickly to return the banks to the private sector, as we have discusssed before.”
This is urgent. I have followed your excellent blog since its inception. Your line has been consistent all the way through. If only…….
Do you know what? I am getting sick and tired of being taken for granted. Yesterday a huge amount of money was announced for children in Africa getting a vital jab. It must have made the PM feel really great to give that amount of our money away.
In doing so he took away our own pleasure in giving. I want to choose my own charitable giving.
Eric Pickles is leaning on the local Councils. I thought that they were to be left alone to get on with it.
I am getting extremely restive.
June 15, 2011
The charity thing is spot on. I really feel like cancelling my monthly direct debit to the red cross. If the government feels I’m not to be trusted to make my own decisions then I should take them at their word.
Or worse, they feel as though I’m not doing enough so are forcing me (by proxy) to do donate what they feel is an acceptable amount of charitable giving then why should I contribute more than that?
June 15, 2011
I’ve already decided that I don’t intend to give anything in the future to charities operating outside the UK. It seems that the government is giving away a sum of about £500 per household in foreign aid, and as a pensioner this is far more that I feel that I can afford.
Any future donations will be to local small local charities which are largely run by volunteers.
June 15, 2011
On the subject of the cost of living, I hope he is paying attention to the latest report from the National Grid on the future cost of electricity. The on-line magazine The Register has a summary of the main findings and a link to the report. It does not make comfortable reading for anyone – unless you are one of those in receipt of the massive subsidies that contribute to this outcome.
The Register report is at http://www.theregister.co.uk/2011/06/14/national_grid_2020/
June 15, 2011
“We must all understand that we do not have a Conservative government, but a Coalition government, formed to carry out policies that are in the best interests of Britain at this time of unparalleled worldwide financial turmoil.” (sic)
John Redwood is a true conservative and his analyses of financial matters have been consistent, enlightened and logical. If his policies were implemented, they would bring financial prudence, growth and jobs to UK PLC. But He and other conservatives like him are not in Mr. Cameron’s coalition Government are they? Why?
Mike Stallard is feeling restless, so am I, and disenfranchised.
June 15, 2011
I have to agree, there is an increasing sense of ‘no-one to vote for’ given the pro EU, pro Green, pro war, massive borrowing, large state all the parties subscribe to.
Times they are a changing.
June 15, 2011
That’s great and all, but it ignores the fact that no investment bank failed in the last crash.
Northern Rock, HBOS and RBS were all primarily retail and UK based. Lloyds was more retail than investment and was pushed over the edge by being strong-armed into buying HBOS.
I’m in agreement that the failing banks should not have been bailed out (a debt for equity swap would have been far more appropriate — making shareholders and bondholders pay for the risk they took on rather than socialising risk and privatising reward). However, the idea that anything would have been different had the banks been split up is naive. It could well have been worse, with Barclays having no investment arm to cushion the blow to their retail arm.
June 15, 2011
Both Lehmans and Bear, Stearns effectively failed. They were both key sources of funds for many UK mortgage banks. Those failures explain why the BoE had to lend £319bn to banks under the Special Liquidity and Credit Guarantee Schemes (and more still that was kept secret). Retail banks were relying on wholesale funds, not on deposits from their retail customers.
June 15, 2011
So if retail banks rely on wholesale funding (I assume this comes partly from investment banks) and not from their retail depositers then what is the point of hiving off one half of the bank from the other? If we enter another crisis such as that in 2008 then won’t the markets dry up again and we’ll be in exactly the same position?
Surely any split will exacerbate any problems as these parts of the banks are the most profitable.
It’s all academic though, the one thing I know with absolute certainty is that the next crisis will be unforseen and come from a totally different origin from this one and the politicians and regulators will all be scratching their heads and frantically ‘learning lessons’ on how they can interfere better next time.
June 15, 2011
I agree that was so in the UK.
The investment bank that failed was Lehman in the USA, with, I believe, not a little help from its UK subsidiary. Lehman`s sin, like all the others was lending at too high a multiple on risky assets (something like 45x capital as I recall). It was also a company that rewarded its employees with deferred share options not cash bonuses so talk of short termism hardly applied to them. It was sheer greed.
June 15, 2011
“but it ignores the fact that no investment bank failed in the last crash.”
Prabably because they had to undertake transmogrification into conventional high street banks in order avail themselves of TARP funds. Have they opened any high street branches near you?
June 15, 2011
Yes indeed, I would very much like to hear Mr. Osborne’s views on why such high inflation is acceptable; why an MPC that has failed to meet its target for 51 of the last 60 months is still considered fit for purpose; why Mervyn King, arguably one of the principal authors of the 2008 financial crisis in Britain, is still in his job; and most importantly, why savers and pensioners are expected to bear the brunt of the financial pain when they were the people least responsible for the national financial crisis. Theft is still theft, Mr. Osborne, even if it is called state-sanctioned inflation, or negative real interest rates, or whatever else.
June 15, 2011
Whilst the full text of the speech has not yet been made public, the proposals look very much like half measures.
The banks, like any insolvent business should have been allowed to go down. The deposit “owners” (in law they are not of course) should have been protected by the state, not the banks themselves. The shareholders, and bondholders would have lost, but that is the risk they took. They certainly enjoyed the profits when they were (allegedly) being made.
June 15, 2011
Well that’s the british banks sorted, but according to Douglas Carswell we have just quietly slipped the IMF another £9.2 billion pounds to prop up the €uro.
Meantime, in the UK we can’t afford weekly bin collections!
What’s going on John?
Reply: Indeed – I expected having to put more money into the IMF, which is why I also said the IMF should refuse to advance so much money to Euroland.
June 15, 2011
When Nick Leeson broke Barings the Bank of England judged that there was no need for the state to intervene, because a) there was no risk that the collapse of Barings could bring about a collapse of the financial system, and b) there were no innocent retail depositors whose savings would be lost.
That was not the case with Northern Rock, but as I understand its failure was not down to speculative investment activities but to excessive reliance on short term borrowing on the money markets to finance its retail mortgage lending.
Similarly, as I recall, it was careless buy-to-let mortgage loans which brought down Bradford and Bingley, not speculation in derivatives or such like.
On the whole I suppose the proposed split is desirable – we can’t really have the situation where failed speculation by the investment arm of a bank could shut down its High Street branches overnight, with accounts frozen and savers’ deposits wiped out – but obviously it wouldn’t be a complete solution.
I still believe that retail deposit-takers should be required to take out commercial insurance to guarantee 100% of savers’ deposits, with the state only providing a final line of defence.
June 15, 2011
The seeds of the last crisis were sown long before 2005, by which time house prices had already risen dangerously fast and far. Over-aggressive stimulus with low interest rates following 9/11 was the obvious policy mistake by the BoE.
Sorting out the banks will require a plan to deal with their real problems, rather than continuing to pretend they don’t exist. In the retail sector, that means acknowledging that the stock of mortgage lending should be reduced, and house prices allowed to become affordable. International losses on lending to support property and other bubbles and social spending not fundable through local taxation will also need to be worked through. I don’t see the plans for tackling these problems.
June 15, 2011
Mortgage lending is already very low, due to the much harsher terms and costs. Property prices remain high in London, the SE, SW and other desirable areas because of 1) a shortage of family homes, 2) the numerous effects of mass immigration, and 3) the largescale purchasing by overseas investors, owing to lwo value of GBP, openness of the UK market and nil penalties for squeezing out indigenous purchasers.
June 15, 2011
Chinese curtains, thick walls, thin walls? What is required is a semi-permiable membrane that prevents cash moving from retail into the Investment arm and ‘assets which are practically as good as if not better than cash’ moving the other way. In general the Investment arm should be able to provide services for customers of the retail bank and vice-versa, but the balance sheets should have no overlap; if possible, at the group level, only profits/losses from trading would be held. If the investment arm ran out of cash, it would need for the group to hold a rights, or the investment arm to sell bonds redeemable only through the investment arm. There should be no dfficulties with the Investment arm funding the retail arm (in that unlikely event).
June 15, 2011
Legally, how does this work ? I run a company. I have to have external arrangements for ringfencing – bank guarantees, escrow accounts,.. I cannot internally ring fence, somehow overriding the seniority of debt.
June 15, 2011
The most robust solution would have been to annually bring down the ratios of 1st tier capital to loan ratios by one so that over time they come as close to parity as possible. This would have taken 20 years but would prevent speculation in the meantime as each annual point drop would need to be squeezed out of the current assets.
This should, in a reasonable business model, demand that the more secure loan assets are kept while the highly profitable but riskier deals are jettisoned. It may also force evaluation of the books more closely than mark to market.
A solution such as this would also allow government to control money supply and inflation rather than investment banks.
June 15, 2011
Bank finance and the way they operate is way beyond my pay scale, but it is clear we need to do something to try and avoid such a crash ever happening again, which needs taxpayer support on the scale as had been the case recently.
I am all for self regulation where possible, but the banks proved to everyone, that self control is not for them, they appear to have abused their position, and overspent on loans they they did not qualify with any sort of sensible risk, and had too fewer reserves to call upon when those micky mouse loans/investments turned sour.
I am sure there will be much discussion between now and the introduction of any forthcoming regulations, but it is clear we should be careful not to put our Banks at too much disadvantage against world competition.
We do not want to chuck the baby out with the bath water, we just simply need to make sure the temperature is correct and the water clean.
June 15, 2011
Well he had better pull his finger out before Greece defaults.
What I find incredible is that the Government and Protestors are facing each other across the baracades. But the baracades do not represent the default. BOTH parties are the wrong side of the economic line. The Greek Government cannot afford their debt and want to hang on in (for EU funding) – but could cut beyond the bone and sel assets and meet their debts. The protestors dont want to cut enough to call it even to call it a shave !! So the pictures show confrontation – but the confrontation is about how NOT to cut deep enough.
So what will happen when the bonds get marked as (SD) STandard Default by the Credit Agencies. The banks will have to sell them (as they are no longer good assets) and look to their Credit Default Swaps (CDS) to cover their losses.
BUT if the EU Commitee of the International Swap Dealers Association (ISDA) (who look after CDS defaults) decide Greece isnt a CDS default – then this puts the rating agencies and the insurance buyers at a head on collision with the ISDA and the CDS sellers – (who incidentally are also banks and they sit on the ISDA EU commitee).
So what if the ISDA doesnt declare a default event. What we have then is a case of “insurance misselling” – on a massive scale by the banks, in the regions of trillions of dollars. Im sure hedge funds and pension managers will be reaching for their lawyers. The whole CDS market could (suffer-ed) over night in one huge legal feud. This would lock up the bond market on a global scale – the cost of Government borrow would rocket. In my view this would be worse than a default event.
** An interesting point is the the CDS market is basically an optional insurance on bonds. Without the CDS market bond prices would rise to cover their risks. The CDS market allows Governments to borrow more cheaply – but they do put the whole banking sector in severe risk of collapse because the amount being insured is so much greater than any bank can withstand.
The Credit Rating Agencies – who have the legal power to declare a default and the ISDA EU commitee run by banks who might (cause financial difficulties for -ed) themselves by declaring a default will be at odds. So if we look at who these ISDA voting folks are …
On 30 March 2011 the voting members were …
Global Voting Dealers (for all regions):
Bank of America / Merrill Lynch
Barclays
Credit Suisse
Deutsche Bank AG
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
UBS
PLUS the Europe Voting Dealers:
BNP Paribas,
Societe Generale
Europe Consultative Dealer: Citibank
It has been reported that the French and German banks will suffer if Greece defaults. So if we look at the voting set up.
Credit Suisse, Deutsche Bank AG, UBS, BNP Paribas, and Societe Generale are the European banks who would suffer is they declare a default. Bank of America / Merrill Lynch, Barclays, Goldman Sachs, JPMorgan Chase Bank and Morgan Stanley are the banks who (could also lose -ed).
In otherwords the 5 Eu banks and 5 EU/US banks. A DEAD HEAT.
This creates a REAL dilema – for the ISDA association. They could ask CITI, who are non-voting consultants but there is nothing in the rule book about their power.
Anyway the point here is that its going to boil down a legal decision as there doesn’t seem to be the weight of numbers to support going against the Rating agencies. So I would put the advantage very favourably on the side of the ISDA calling a credit event. This will of course have a knock on effect on Ireland and Portugal who also SIMPLY cant afford to pay their debts and they will default soon after.
So the lesson of this is that even with regulators and agencies the system is complex and fraught with self-interest.
PS I would like to say the I still think CDSs are illegal under the 1774 Life Assurance Act (which covers defaults and other events)
http://en.wikipedia.org/wiki/Life_Assurance_Act_1774
Reply: CDSs are legal until proven otherwise, and no-one has brought a successful action under the Act you mention as far as I am aware.
June 15, 2011
We are always fighting the last war. The bankers must laugh at us. How about restitution for the 1.3trillion that they owe us? Any claw back on banker bonuses, any tax penalties , any sign of lending to business ? The bankers know that the politicians don’t have a clue what they do, and the politicians have a revolving door into bank employment. Eg. See (named senior ex politician) cushy directorship of a large investment bank. This is a squalid state of affairs and has nothing to do with democracy.
June 15, 2011
“It
flowed from wrong interest rates,
wrong cash and capital ratios, and
above all from leaving money markets
starved of money at a crucial time
which was bound to bring certain
banks down. ”
An inherent problem of debt based fiat fractional reserve banking, as sure as night follows day. But do you think that this may even be on the agenda to discuss ? Of course not ! This is the diry little secret of how the elite plunder the people. So we twaddle with pretending to regulate that which cannot be regulated. The only regulation that will work is abolition and that is not even on the table.
June 15, 2011
CBI says wind power is being hit by high taxation.
In todays Telegraph John Cridland of the CBI urged the Government to exempt industries such as cement and steel from the carbon price support tax as windmills use so much of both and might become uncompetetive to build.
You have to laugh don’t you!!
Ref: B5 The Telegrph Wed June 15th.
Direct quotes from the piece.
(One major construction company is now finding it will soon cost less to import its cement from Spain than to produce it in its own plant)
(We need 150 tonnes of cement for every megawatt of windpower.)
June 15, 2011
Lets see how the public swallow the subsequent bank charges. I will do my best and go to absurd lengths to make sure they get the least amount. This is going to be the next utility scam with prices starting off low and then set to whatever the market can bear. A toothless regulator and many apologists will be sure as night follows day.
June 16, 2011
Ring Fencing UK Banking is a step in the right direction but it still says to the Banks –
“if you mess up again – you know what’s going to happen – we WILL Bail you out again – so carry on as before”.
Is one billion pounds a good deal for the Tax Payer?
“Latest figures, published in October, show Northern Rock still owes £11.5billion, compared with £26.9billion in December 2007. ”
Isn’t that a loss of £10.5 billion
June 16, 2011
Are tax payers still liable for the debt created by Northern Rock?
Even after the sale?
There is approximatley a 20 billion pound Tax Payer loan sitting in the “bad” Bank section of Northern Rock, which tax payers are still liable for – or did George forget that?
June 16, 2011
“Northern Rock has been split in two since it was nationalised three years ago. The arm being prepared for sale is the “good bank”, Northern Rock plc, which has been stripped of the taxpayer loan used to prop it up and is funded by retail deposits. The £1.4bn of capital injected into the bank by the government last year is likely to be regarded as a starting point for any bids if the taxpayer is to break even on its investment.
But Treasury sources acknowledge that calculating whether a profit has been made on the sale will be more complex, as a taxpayer loan of about £20bn continues to sit inside the “bad” bank, which is a type of run-off vehicle for some of the mortgages sold by Northern Rock before it ran into difficulty.
There were suggestions that the price tag might be closer to £1bn.”
http://www.guardian.co.uk/business/2011/jun/15/northern-bank-for-sale
June 16, 2011
What price a Greek scenario shown on tv tonight FINALLY by bbc,couldn’t try and hide it any more as we can all watch Fox News,happening here.There are supposedly going to be more than a million on the streets soon trying to RING FENCE their pay/entitlements/perks,at the expense of private sector taxpayers,I have already had several heated arguments with acquaintances who work in the public sector and friends as well,those bonds are straining even after more than 40 years,especially when I use the word Parasite to describe someone
getting far more out of the public sector than a similar worker in the private sector.The ONE question none of them can answer is ‘What would happen if at the blink of an eye all private companies folded therefore NO MORE TAX receipts to fund EVERYTHING including their salaries /perks/and future pensions’ I get silence and when I persist and demand loudly an answer they go all childish stick their fingers in their ears and go LA LA LA .The only reason we have not come to blows is our advanced ages, when the supposedly sensible do this especially the ruling class, Athens of today happens,a catalyst could easily come about here,there is a NEW THEM AND US and it exists between the public sector
feather bedded and cushioned and the private sector working and paying the taxes to fund them. Beware I am rarely wrong in my prophesies my wife of more than 30 years says I have the word Prophet Tatooed on my forhead.
June 16, 2011
You are correct about Parasites – they exist in the Banking Sector – not in the Public Sector. Unless you count Northern Rock, RBS and Lloyds who are effectively Public Sector.
Well – congratulations ; let’s pit the Public Sector against the Private Sector shall we and that’ll solve everything.
I work in the Private sector myself. But I’m not believing all this rubbish about our woes being caused by the Public Sector.
The public sector didn’t gamble huge amounts in the derivatives markets and encourage every Tom, Dick and Harry to take out an unpayable Mortgage.
The Public sector provides essential services and makes a contribution to our lives. Tell the Police, Nurses, Doctors, Firemen etc that they don’t to their faces if you will.
Have you forgotten Libya – and how much money we’re dumping on that country in the forms of Bombs and Bullets. How many future enemies we are creating there?
Funny how there’s always plenty of money for Bailing out Banks and starting unwinnable Wars but never enough for Pensioners and Students, the sick and the Old.
Funny that – don’t you think?
You are having the wrong arguments with your acquaintances. You should be talking about our Financial System and that it is created by Banks, For Banks. Therein lies the problem. Money Created by Banks when it could be created by us.
June 16, 2011
You missed out mentioning debt for equity swaps.
June 16, 2011
Why do we need all these complicated regulations? All the government has to do is return the publicly owned banks to the private sector and announce that no further bailouts will be given under any circumstances. That means the taxpayer is only on the hook for guaranteeing current and savings accounts up to whatever limit is set. After that it’s down to shareholders to control their directors, which is as it should be. Where’s the difficulty?
June 16, 2011
The idea that we can regulate away systemic risk has been shown to be false throughout history. No system which allows economic growth, and therefore economic risk will be free from the risk of failure.
Ringfencing will make absolutely no difference to the risk in the system, or to the potential for bailouts. Creditors such as depositors will have their capital at risk, it matters not a jot whether its internally held at risk, or held at risk in another entity.