Category: Blog

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.

My theme for many weeks has been simple – the authorities should fight deflation, not inflation. recession is the new enemy, just as inflaiton and excess credit was the enemy two years ago. Every word and aciton of government and regulators should be examined with this in view. So how are they doing?

In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes.

The UK authorities are giving a very mixed performance judged by these simple standards.

They have kept interest rates far too high for too long. They should cut them to 2% today, which would still leave scope for further cuts if the economy does not respond well. Market rates are well above the indicated rate and will remain so. That’s all the more reason to cut the indicated rate, to relieve some of the pressure. If interest rates remain too high more people and companies will default on their payments, leaving banks in a weaker position and savers worried about the security of their funds.

They are now supplying large amounts of liquidity, which is good. Previous attempts to withdraw liquidity from markets have been disruptive. They need to supply as much as it takes for as long as it takes, ensuring the taxpayer is protected by taking proper security for the loans.

The authorities have made too many statements and allowed too many stories to escape that undermine confidence. If they think any bank needs more capital, they should sort that out in private with the bank concerned. We should know nothing about it until the bank announces to the market how it is raising the money, when the problem is largely solved.

Douglas Craswell MP and Daniel Hannan MEP have produced an interesting book enttitled “The Plan. Twelve months to renew Britain” I recommend it to anyone who wants to see democracy restored and people empowered in these islands.

The Plan includes a proposal for a big repeal Bill, to get governemnt off our backs in those many areas where it has strayed without good reason. The authors want us to reassert Parliamentary sovereignty by clarifying the power of Westminster vis a vis Brussels. They want to legislate to make every school independent, to give schools, parents and pupils more freedoms. They want to transfer more power to local government, and more power to families and private institutions.

It is gripping material , and well worth a read.

Click here to go to the book’s website and purchase a copy.

I have opposed bank nationalisation in any circumstances, and have asked authorities to work with the banks to recapitalise themselves through private money rather than public. I find it bizarre that Mr Paulson is going to require US banks to take public share capital when some of them have not asked for it and do not need it.He himself expresses his distaste for the policy. He should follow his instincts.

A bank can boost its capital in many ways. It can raise new share capital from existing shareholders or from new shareholders. It can sell assets or businesses accumulated within these large groups. It could pay its high earners a lot less for a year or two to keep more of the cash. It can cut its dividend payments to shareholders. It can reduce the numbers of employees, sell branches, increase the amount of fee earning business it does or otherwise boost its profits and cashflow. I do not believe for one moment that the banks of the world have done all these things as much as they might where they need stronger balance sheets.

In the UK it is unclear why the government wants to allow the merger of Lloyds with HBOS. That just adds more risk to taxpayers, as Lloyds could go it alone like Barclays without the merger. It is unclear how much of the extra capital proposed for RBS and HBOS is now a regulatory requirement, and why the regulatory requirement should suddenly have increased. If ever there were a time for the government and Regulator to be working quietly behind the scenes with these two banks to ask them to raise more capital through any of the ways open to them over a realistic time period, this was it.

At a time when governments are correctly preaching to banks that they should not borrow too much and be overextended, they should be ensuring that governments themselves do not become similarly overextended and over borrowed. There are limits to what the US and UK taxpayers can afford. Giving banks too easy an access to public money is not a good idea. What we need is tough regulation, in private , to get the weaker banks into shape. If some of them need loans and gurantees to tide them over until they have raised more money privately, so be it. That is what a Central Bank is for , as lender of last resort. The taxpayer should always take full security for loans, and charge a fee for guarantees. That would be a much better way forward than requiring all main banks to take taxpayers money, or encouraging mergers which then leave a large bank that needs taxpayer support.

To many people the bank share purchases by the government is the last straw. They see it this way: the government takes money off us in taxes, gives the money to the banks, who then might lend some of it back to us for interest and a fee if we are lucky.

Yesterday in Parliament I pointed out to the Chancellor that the 3 banks he is considering buying shares in have combined balance sheets of £3 trillion. Yes, £3 trillion. That’s twice our national income for the year, and five times our annual tax revenue.

I urged the Chancellor to try to get more private capital into these banks, to cut the risks of the taxpayer. If the taxpayer is to stand behind £3 trillion of bank assets, it puts us at great risk. If the assets turn out to be worth just 1% less than the current value, that loses the taxpayer their share of £30 billion of loss.

As readers of this site will know, I have supported the proposal to put more cash into the markets. That certainly worked yesterday. I have supported the proposal to lend more money for longer to the banks to tide them over, as long as the taxpayer is given full protection with proper security for the loans. I also support the efforts made to increase the banks capital from the private sector, and am glad that 5 of the 8 banks concerned now have more than enough capital or can raise it privately.

That leaves us with RBS, HBOS, and Lloyds. When the government acted as midwife to the birth of a new mega bank through the merger of HBOS and Lloyds, that was to provide a private sector solution to their financing. Both now have access if they need it to public capital. The shareholders of both HBOS and Lloyds have to vote on the merger before it can happen, and have to vote their approval to seek new capital from the government. Some Lloyds shareholders may now take the view that it would be better not to merge, and that Lloyds could go it alone without government share capital.

Yesterday one bank announced it would cut its dividend, and raise more capital from existing shareholders. Its share price went up. RBS announced it would (subject to shareholder approval) raise capital from the government and its share price fell.

The government should do some more work on the capital raising part of its package, with a view to cutting the risks to the taxpayer and cutting the requirement for taxpayer funds. Banks have many ways they can use to increase their cash and their capital to lending ratio. They can cut their dividends to keep more of their profits. They can sell assets. They can reduce costs and retain more of their income as profit.They can reduce their lending activities. The meetings need to be reconvened to see how they can do more of these, to cut the burden on the taxpayer.

Three weeks ago the Regulator was happy with the capital adequacy of the major banks. It appears that in the last three weeks it has demanded more capital to support existing lending. It is more evidence that our regulators are tightening long after the credit bubble has exploded. They should have done that several years ago to choke off the growing bubble.

Yesterday the Lords finished off what we had started in the Commons – the attack on the government’s proposal to lock people up for 42 days without charge or trial. They did it in style. The government could not get many of its supporters to the vote, and faced a rebellion from amongst those who did attend. They went down to a huge defeat.

Many of us went to the Commons at 8.30 pm to hear the emergency statement of the Home Secretary on this flagship measure. For once she showed wisdom, and decided to abandon the measure in the anti terorism bill.

Unfortunately she did not do it with grace. A sensible Minister would have said she had listened carefully to the voices and votes in both Lords and Commons, and decided on reflection to accept the advice of Parliament. Instead we were hectored and told we were wrong. We were told she had prepared another bill to do the same thing, but instead of seeking to put it through the Commons she would place it in the Library.

People think more highly of Ministers who sometimes admit they were wrong, or at least bow gracefully to the views of others when they are strong and have a good case.

Let us hope that the Stock market will decide to get behind these banks, and offer more of the equity, to relieve the taxpayer.
It is good news that Barclays can go it alone. The shareholders of Lloyds and HBOS still have to make their decisions. In the meantime the aim should be to raise as much capital as possible from the private sector, with all concerned taking decisions and making statements with that in mind.

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.

Most of us have to accept we are going to lose from this financial crisis.

Here in the UK the financial losses are going to be large. All homeowners are going to lose a substantial part of the capital value of their home. Some homeowners will lose their home, as they give up the struggle to pay the mortgage. Anyone with shares held directly, or through an investment fund or through a pension fund has already lost a lot. People owning businesses will find it more difficult to make a good living in the year ahead, and the value of their business will fall.

To those bloggers who tell me this is a necessary and useful correction, I say there will be a lot of human misery on the back of this big reduction in wealth. It will lead directly – and quite quickly now – to more people losing their jobs, more businesses cancelling their expansion plans and to less money for charities and good works. It is a correction which has got out of control and will do too much damage.

The issue for the authorities is simply this. How big a crash do they want? The Central banks triggered all this, by first allowing an overexpansion of credit and debt, and then deciding they wanted to bring the borrowing party to an end. Now we need to know how much they want to cut total debt by? They have clearly decided on a crash slimming programme of borrowing- which may now be getting out of their control, so fierce are the deflationary forces they have unleashed. It would have been more sensible to start to correct the excess earlier and at a slower pace. Now we are doing it at break neck speed, markets need to get a feel for how much debt the authorities want to take out of the system, so that market participants can start to make some realistic calculations about how big and how profitable banks will be in the future.

I have seen one forecast that the US wll take around $1 trillion out of total private sector borrowing in this adjustment. Some of this will go through write off of debt that cannot be repaid, and some from repayments from solvent institutions and individuals. Maybe the UK authorities are trying to take around £200 billion out of UK private sector debt. If so it would be helpful to know, and banks could work out how best to do it on what time scale. If the authorites, seeing the damage too sharp a deflation causes, now want to see debt stabilised rather than reduced, then they need to slash interest rates and redouble their efforts to pump cash into the system. There is no point in slashing private sector debt, if to do so you simply transfer it to public sector debt and put the taxpayer on risk.

Meanwhile the UK is having one of its idiotic arguments about whether we need more or less regulation, as if this were the issue. I know of no serious commentator on money, credit and the economy who thinks the authorities should wash their hands of responsibility for controlling total money and credit in the system. The issue is not whether to do it, but how to do it. Clearly the method chosen in the last ten years, the so called independent Bank of England, did not work. Credit was not properly controlled on the way up, and is now imploding dangerously.Large amounts of new mortgage regulation did not regulate the main things that matter – how much credit is lent in total, and how much to each individual in relation to the home value and income.

We now need some guidance. I would suggest that now the problem is far too little credit is being extended. The nationalisation of one and a half mortgage banks has hit new lending badly, removing two important institutions from new lending altoegther and burdening taxpayers with big commitments. The uncertainty over banking capital has also frozen the private sector. Can’t the regulator make a reassuring statement, telling us in its view all the main banks have more than enough capital to get on with their jobs – or that they are about to raise more than enough? Can’t then the bankers use the government guarantees to start lending again?
The authorities tried to reduce debt too far too fast. They need to signal that is not now their intention. Concerted interest rate cuts on a big scale would help do that. It would also take some of the pressure off borrowers. To those that say this in unfair on savers, I say it is necessary for savers protection. As the Icelandic banks have shown, it does not help to offer savers a good rate of interest if the borrowers that pay the interest to the banks can’t afford it and the bank runs out of money to pay the savers.

Savers and borrowers are hitched together. Both are going to be worse off in this crunch. The issue is how can we find a level of interest rates, banking cash and capital which allows the system to functon sensibly again.

Last night I travelled to Hatfield to speak at a dinner. The roads were eerily emptier on a Friday night – a sign of things to come. I am grateful to the audience – and to all of you bloggers – for your thoughts on the crisis. I would like to comment on some of the most common responses.

“Too much deregulation caused this mess” – showing the eternal power of Labour spin. The extreme version blames Margaret Thatcher for this “crisis of capitalism”!
The great difficulties in banking have occured in the most regulated of industries. Regulation of banks and other financial institutions has expanded greatly in recent years. This is a failure of regulation as well as a failure of banking. It is not that we had too little regulation – we had the wrong type of regulation regulating the wrong things, allied to weak regulation of what matters, capital and liquidity.

“People like you called for deregulation, so you caused the problem”!
This is the fatuous BBC line. It ignores the fact that I issued warnings about the dangers of the Bank of England have too little power to regulate banks and other financial institutions. It also is a muddled proposal in its own terms, as an Opposition MP calling for something does not mean that something happens! I thought Labour was in government and calling the shots on how much regulation we needed.

“Banks should not be allowed to lend more than they get in deposits, so they would be stable.”
The run on the Rock which brought the Rock down shows that deposits are not a stable source of cash if confidence goes. There is a lot to be said for a model where a bank draws its money from a wide range of sources, to reduce risk.

“Banks should not borrow short and lend long”
Borrowing short and lending long is a normal banking approach to making money and helping the economy. Done in moderation it makes sense. The interest rate is usually higher for longer term loans than for short terms. Intelligent exploitation of this difference can earn a return for bank shareholders. Of course, taking it to extremes can jeopardise confidence. The problem in the summer of 2007 was the Central banks, especially the Bank of England, left markets so short of short term funds a crisis was likely.

“It’s not fair of you to call for lower interest rates – this means savers will be hit”
In this crisis we are all going to be hit. Savers can only enjoy high rates of interest if people and companies can afford to pay even higher rates of interest to borrow the money. If rates are too high too little money is borrowed, and too high a proportion of exisitng borrowings are not repaid. Savers and borrowers depend on each other. At the moment it is too difficult for borrowers, so the savings rates have to come down to prevent the system breaking down completely. I would have thought the experience in the Icelandic banks might start to show savers the dangers of wanting too high a rate of interest for current conditions.

“We should limit people to borrowing just 3 times their income again, as they used to do, when taking on a mortgage”
I agree banks and Regulators need to look again at how much they are prepared to lend against any individual property, and how big a multiple of income they will allow. Today, however, the problem is not limiting the amount banks will lend, but getting them to lend enough. This is a something for the future when banks do want to lend more. Many of us were warning against the extreme deals we saw being advertised in 2006-7 before the crunch.

“Nationalising the banks would sort all this out – why don’t they just do it?”
Transferring problems from the shareholders to the taxpayers sorts out nothing. The day after you still have the same underperforming loans and the same need for extra cash and capital. The banking sector is too big as a whole for the UK state to take on. Why should the UK taxpayer have to pick up the losses, when we did not enjoy the bumper years for banking profits and bonuses?