Sir John Gieve’s interview with Robert Peston was very worrying. There should be no instant history from the participants fighting the banking crisis, as the problem is not yet resolved. Anything they say could damage confidence further. They need to give us the figures and make the official statements they need to make, but they should not wander off into risky analysis and self justification. When it’s over, when they write their memoirs they can do that.
Sir John wanted to get over the fact that in his view the UK banking crisis in the week before the re-capitalisation was severe. I guess he wanted us to know this, so that no-one would try to argue they had over reacted or made the problems worse. At one point he wisely said he would not mention individual banks, but comment on the system as a whole. He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment. Both these banks are open for business and should expect decorum and support from their Central bank.
So what was the nature of this crisis that the authorities suddenly decided they needed to tackle? There are 4 possibilities.
1. There was a run on the deposits, the disaster which brought Northern Rock down.
There was no visible run, although the authorities’ leaks were far from helpful in maintaining confidence. It is difficult to believe it was a prospective run on retail deposits that led to the action.
2. The authorities suddenly discovered the loans these banks had made were far worse than they thought, so they became fearful for their solvency without more capital injections.
There is no evidence that the authorities suddenly became more alarmed by the banks assets. Indeed, when I asked in the House if they were carrying out proper due diligence before buying the shares, I was told they were not, implying they were not especially worried by the then value ascribed to the assets they were buying on our behalf. They did not insist on any immediate additional write downs.
3. Certain banks were unable to gain access to money market funds in sufficient quantities which would force them to contract rapidly, too rapidly for comfort.
Sir John implied it was partly this. Why then didn’t the authorities get on with supplying the ample liquidity to money markets they have subsequently supplied through the Bank? That can explain the need to make the loans and guarantees available through the package, but does not explain the need for more capital and the sudden request of the regulator for higher ratios of share capital to loans. That would only have been a sensible thing to do if they were worried about 2 above.
4. The share prices of leading banks were falling.
Yes, that is true. However, a falling share price does not bring a bank down. RBS is just as able to trade with its share price around 45p today, as it was with its share price many times higher before the crunch. A low share price does not stop a bank doing anything, unless it reflects a general loss of confidence by depositors and other providers of cash.
Whatever the rights and wrongs of these four points, two points should be incontrovertible. Firstly, any sensitive discussions between banks, the Bank, the Chancellor and the Regulator should take place in confidence and in private. Bankers do not have to be invited in dramatically over a week-end to the Treasury through the front door. We live in an age of conference calls, emails, webcasts, working in normal working hours, and there are side entrances. There are not many top banks, so each one could have been sorted out individually. It does make it worse for the authorities to show how worried they are in public.
Secondly, any action should be based on revised figures that are as accurate and well based as possible. Confidence building in banks requires the banks and the regulators to put out credible information in a timely way. It is no good denying things have changed from the heady days, nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function. Working through this is about access to cash, and having the right amount of patience to minimise the losses on all the positions the banks have taken.
I do not believe they had just a week-end to save the world or the banks. Their actions increased the pressure to do something, and the leaks made action imperative, but that does not mean it was a good way to handle the situation. Nor do I believe they then in a single flash of the government cheque book solved the problem. The nationalised banks still have a cost level out of line with their earning potential, and probably more to write off. The sooner they recognise that reality and get on and sort it out the better. I see no reason why taxpayers should have to tip more money into these banks, when they are still employing too many people on high salaries and big bonuses, and still have a gap between what they charge and what it costs them.
As for Robert Peston, he was the recipient of information that should not have been released in that way. Some of the things he broke to the BBC audience looked like price sensitive information that should under the rules have been released to the Stock market as a formal announcement in the usual way, to be followed by all news outlets handling it at the same time. Whilst one can admire his journalist skills in getting hold of such a fount of stories, one is left to wonder who leaked the information, and for what possible reason? It is also curious that so far no Minister has made a big issue of the leaks in the way they did over immigration figures.