Under new “liquidity” rules the main banks are going to have to lend loads of money to the government. Convenient that, for the government, at a time when it is short of a pound or three.
Does it make any sense for the banks? Does it help strengthen them and get them closer to be able to lend to others? No, of course not.
I realise banks are very unpopular. I understand that the idea that they need to make more profit is anathema to many bank haters. However, the simple truth is that if we want stronger banks that can lend money to individuals and companies that need it, we need more profitable banks.
Indeed, even bank haters would agree that where the state owns large banks, we could do without collosal losses on the scale we are growing used to. Most surely agree RBS and HBOS need to be more profitable. If they do not become profitable and build up their reserves, they will remain as public sector zombie banks, unable to play their proper role in the private sector economy and lend to those with good prospects.
If the banks were allowed to lend more at current lending rates, they could make good money. Their antennae are much better attuned to risk, and the shortage of bank lending means they can charge more for less risky loans. So far so good. It’s a necessary evil to get things going again.
However, the banks are being told that instead of lending their money they need to put a lot more into “liquidity” which means lending it to the government. They will be forced to do this on a large scale. They will have to lend at low rates of interest, making it unprofitable business bearing in mind the high costs of their capital these days. The banks, strapped for profit, will have to lend to the government at a loss if you take into account their cost of raising and servicing new capital.
That is not the way to strengthen the banks, or return them to health. That is a cheap way to finance the government deficit, at the expense of a dear way for the taxpayers to be running their banks. In the end taxpayers pay both lots of bills. So who do the government think they are fooling?