I am close enough to the public mood to know bank mangers are far from popular. I understand enough economics to know bank managers by the decisions they have to make in the weeks ahead are going to make themselves even more unpopular.
Someone, however, does have to tell this government that bullying the banks, threatening them with legal actions and more nationalisation, is the not the way to work us out of this banking crisis. Indeed, this government needs to understand that it is in the glasshouse with the bankers, so throwing boulders at them is an especially dangerous pastime. Like it or not, the future of this Labour government is now heavily hitched to what the bankers do next. So far no amount of hectoring, and no amount of money promised in one form or another, has been enough to unblock the banking credit arteries.
Instead of grandstanding and getting cross, the government needs to ask itself why? What went wrong over the last decade, and how can they now fix it? For be in no doubt, this is not just a story of greedy senior bankers who overdid the lending in the good times. This is also a story of monetary policy lurching from boom to bust, interest rates kept too low for too long and then kept too high for too long, banking capital rules which were too lax, now supplanted by rules made much tougher at the very point where banks are finding it difficult to lend anyway! We have lurched from boom to bust in every aspect of banking and monetary control.
We all want the banks to work better, and for some more credit to flow in the private sector again. That means revisiting the huge £487 billion pound package of guarantees, loans and share capital the government announced in early October. Too little of the loans and guarantees have been used, whilst the taxpayer is about to be put on massive risk at share prices well above current market valuations.
The main parts of the package, the short term loans and guarantees, were a good idea. They have not been employed enough, implying there is something wrong with the pricing and the terms. The government should discuss with banks what they do need, and renegotiate the package in a way sensible to both sides.
At the same time the government needs to revisit the issue of banking capital. They wanted far too little in shareholder funds in the good times. Northern Rock Directors were famously discussing how they get down to the low levels required by the new regulations just a few weeks before the run on their bank!
Now they are arguably wanting too much too soon. Of course over time they need to get the banks to increase their reserves. There are many ways to do that by cost cutting and more revenue. This can be supplemented by some choice from of asset and business sales, lower dividend payments, seeking more private capital and cancelling the annual bonus for a year or two. The regulator should have short and longer term targets for more capital for all the banks, agreed with them in private. Where a bank is currently on low capital the regulator should take a close and running interest in progress in rebuilding it. In the meantime it should be reaffirmed that the Bank of England, as the banks’ banker stands behind all the leading banks, and will make whatever money available to them they need in the form of short term loans against proper security
This government has both demanded that banks have much more capital relative to their lending than they needed to have a year ago, and demanded that they lend more! The two are contradictory positions. The easiest way for the banks to hit the new more prudent capital targets is to lend less and charge more.
The taxpayer capital is both too much for comfort for the taxpayer to afford, and too little to solve the banking crisis. The banks could lose further large sums with another round of write offs from their loan books as more companies and people find it difficult to repay. The government should do more due diligence on how good the different loan books are before buying. The banks the government is buying shares in have a balance sheets of more than £3 trillion. If things went wrong and they lost another 1% of their assets overall, that would lose us most of the defence budget. Once nationalised, the bill is sent to the taxpayers.
So government. please stop playing politics with the banks, and start trying to manage the monetary and banking system properly. It has always been a government task to ensure stability of the system and to control the overall amount of lending. You have lurched from too loose to too tight. You are now asking the impossible of the banks, so try again. It is better to talk than to row. We need both banks and government to function properly., At the moment neither are.
November 27, 2008
[…] Quote of the Day: John Redwood on Bank Bullying […]
November 27, 2008
John
The most clearly argued analysis of the banking crisis and the choices available that I have read. Implementing your sensible recommendations requires abandoning party politicing and using real administrative competence. Unfortunately our "GREAT LEADER" knows only how to look for party advantage, and has a twelve year track record of ZERO administrative competence.
November 27, 2008
It's very simple.
Banks lend a multiple of their capital.
When they make loses it comes from capital.
That means they have lost the ability to lend, the multiple of their losses.
Unless they replenish their capital.
They have lost money, so lost capital
That's part 1.
Part 2, is that when the economy is bad their losses will rise.
That means they need lower the multiplier, or increase their capital.
1) It can be done with retaining profits.
2) It can be done with lowering losses.
3) It can be done with cutting costs.
4) It can be done by increasing profits by charging more
5) This can be done with injections of capital.
So what's the government doing.
On one hand, it's pumping some capital in. However, by saying its going to nationalise, no-one else will inject cash. Idiotic statement number 1.
Preference shares at 12%. That increases costs and means capital won't recover quickly. End result, it's not attractive to invest.
Forcing banks to lend to bad borrowers is what they mean when they say, start lending. They will also bleat about the rates. That means less profit, and the capital suffers from lack of profits, and more defaults.
They clearly don't know a thing about what they are doing.
November 27, 2008
John,
Sound analysis as usual. But surely there is another way to get the banks lending again, and that's by competition. Some of the millions the government is spending on buying the shares of failing banks could provide the capital for a new bank which, by definition, would have none of the bad debts and liabilities that threaten the solvency of the existing banks.
Let's call it the "Business Bank", funded initially with public money but also inviting capital from private/institututional investors. It should be managed by experienced bankers: there is a large crowd of high calibre people who would probably jump at the chance of joining a new bank. Some of these may have been retired early, not least because they disapproved of the hotshots and their manic leveraging that has brought our banking system to its knees. Others would probably be only too happy to jump ship from some of the existing banks.
It's vital that the dead hand of government bureaucracy is kept well away from interfering in the actual running of the bank, a couple of nominated directors on the BOD should suffice. The bank's remit would be to lend to business, particularly small businesses. Hence necessary lending and competition for the existing banks.
November 27, 2008
Thank you for answering the question that I didn't even have time to ask! I was delighted to see your excellent article in the Telegraph this morning – a shred of common sense at last!
The record of governments in this crisis has been lamentable.
It was the Clinton administration which, self righteously, insisted that the American banks lent to people who they knew could never,never repay. They encouraged, with legal threats, the banks to lend ridiculously at lower and lower rates.
The FSA behaved lamentably, all through.
Wasn't it the EU which imposed Basel's levels of capital on banks? Now Mr Sarkozy has offered a pittance in Euros which Angela Merkel has refused to pay for.
The British government has behaved like a lumbering tuba player – about three beats behind. Interest rates, as you have said all along, lagged tragically behind the music. When it came, the amount offered to the banks was, of course, in billions instead of trillions and, yes, there were secret strings attached which made Barclays refuse the offer.
Now there are threats of nationalisation which, of course, would mean ruining the tune entirely. Can you imagine a man who has absolutely no knowledge of finance at all (Mr Darling) taking the place of the Bank of England which has several hundred years' experience?
And guess who is going to have to pay for all this arrogance?
November 27, 2008
Let's call it the "Business Bank", funded initially with public money but also inviting capital from private/institututional investors.
Brown/Darling/Mandelson. We're going to nationalise the banks.
Would you please invest in them now, so we can get your money for nothing?
their manic leveraging that has brought our banking system to its knees.
So all this money put into the new bank won't be geared in any way what so ever?
Nick
November 27, 2008
The government's overwhelming need to control (everything and everybody) is matched by it's overwhelming denial of responsibility for the destructive, chaotic results of it's actions.