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.