This week the Bank of England published figures to show just how its balance sheet has changed between 2008-9 and 2009-10. Its balance sheet has been swollen to a massive £223 billion, supported by just £4.2billion of shares and shareholder reserves. It is 50 times leveraged.
Its loans to banks have been cut dramatically by £124 billion. At the same time its gilt purchase scheme means effectively it has lent £200 billion to the government. Commercial banks now deposit £170 billion with the Bank of England, up from just £42 billion a year earlier.
In other words, over the last year there has been a huge swing at the Bank of England from financing the private sector banks to financing the government. The commercial banks as part of the regulatory drive to get them to hold much more cash and capital relative to their loans have changed their positions at the Bank dramatically in a way which makes them safer but also in a way which means much less money available for the UK private sector. No wonder the economy scarcely grew.
At RBS in 2009 the balance sheet was cut from £2.2 trillion to £1.5 trillion. In the first quarter of 2010, recently reported, the balance sheet did grow a little, from £1.522 trillion to £1.582 trillion. The increase came in derivatives. Loans to the private sector were static. On a risk weighted basis they stayed around £140 billion, or about 10% of UK GDP.
The policy of the last government and the RBS management was to cut their balance sheet by another £300 billion during 2010.
We need a more vigorous private sector recovery. This needs better balance in the amount of credit extended to the private sector relative to the public sector. Even RBS now has a Core Tier One Capital Ratio of 10.6% (including the effect of the Asset protection Scheme). Its leverage is well down on the high peak levels of 2007-8. The banking regulators need to allow the banks to finance a faster recovery.