The politics of bashing banks is good. They are widely blamed for the last collapse. The people who regulated them, and the Central Banks who set interest rates and rushed from boom to bust with the money supply have escaped much of the blame. Many of the commercial banks’ Directors and senior executives earned too much money for most people’s stomachs, and then had the temerity to carry on paying themselves bonuses after the crash. Some banks profits have roared back strongly after the losses of 2008-9, whilst taxpayers remain sandbagged by the worst debts.
Against such a mood and armed with such lopsided analysis it is popular for governments to demand controls on bonuses, taxes on profits, and require banks to hold more cash and capital. The first of these does not seem to work, the second will reduce banks cash flow as they try to rebuild their cash and capital positions, and the third will cut their lending.
The sad truth is, whether the politicians hate them or loathe them, we need the banks and we need them to finance a recovery. Some bloggers say they do not want more credit to be extended. I have to tell them, without more credit there will be little growth and fewer new jobs. Some critics say businesses do not want to borrow more money, because they do not enjoy the demand for their products. They should note just how strong growth is elsewhere in the world, and how there are already shortages of product at home in the UK early in the cycle. We do need UK business to make more here to susbtitute for imports,and to export to faster growing countries. That requires working capital and investment finance.
The world’s governments and regulators genuflect to the idea that they should switch from pro cyclical regulation to counter cyclical regulation. They now accept, looking back, that in the upswing in 2005-7 they reinforced the credit boom by relaxing controls, and in the downswing, 2007-9, they reinforced the fall by being tougher. So why can’t they now agree that this is still somewhere near the bottom of the cycle? Isn’t this the time to say we have done enough to rebuild the cash and capital of most banks? The UK Tier One ratios now average around 12%, well above the levels of 2006-7, and good enough for the first phase of the upswing.
The sad truth is governments have to allow banks to make more profit to rebuild their reserves and pay off past losses. It will not make either the banks or the governments popular, as people resent bank charges and interest rate premia. It is however essential to get a well financed recovery. If we had more competition in the UK banking the charges would be lower and the costs better controlled. A lack of sufficient competition leads to high bonuses and high salaries.
It’s time for regulators to say, job done for the time being. They should look again at the adequacy of cash and capital once we’ve had some growth.