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?