Monday, 5 October 2009

Politicised FSA to 'fix' bond markets for Brown.

It seems clear from recent speeches by Adair Turner, about socially useless banks and the curse of bank bonus' that we have someone of the Left in charge of the FSA. And why not, it has been Labour principle to fill the country with Quangocrat placemen to ensure the policy of the Labour party is enforced everywhere and at every level.

The news today is not unexpected, but shows in its true light both the desperation of the Government, the failure of regulation previously and the guarantee of a double dip recession.

This is all quite good for one small announcement. That the FSA will require Banks to hold only Government bonds at tier one capital, no other instruments. Let's ask a rhetorical question, would you rather have bonds invested in UK Gilts or say, Vodafone or BP in the current and future expected climate. Quite.

Instead, banks will be forced to hold UK Gilts, which gets the treasury out of its QE hole by screwing the banks returns. This may sound like a good plan for avoiding bankruptcy but is really just fixing the markets. It also shows how in the past the FSA had little graps on what was and was not tier one capital, now they are going further than necessary to make up for past laxness.

Finally, this imposition on the banks will reduce greatly their returns say by up to 200 basis points being conservative. This is £12 billion of profits not earned to help fix their balance sheets, so enforcing a slower return to the private sector for the banks. Of course to make up this loss they will increase their borrowing rates and this is how we get to a double dip recession. The banks care about trying to stay solvent, if it screws their customers then so be it - it is their duty to their shareholders (which for 2 of them in the UK, means us as taxpayers).

So the result of the change is that the cost of banking to you and I is increased, whilst the cost to the Government is lowered. That is the proposed market fix. Sounds great does it not?

18 comments:

Blue Eyes said...

So the FSA is saying that HMG is the only institution which is not at risk of default? Is QE not default by hyperinflation?

CityUnslicker said...

to be fair, HMG and other Governments.

We'll have to see where QE leads us!

Anonymous said...

This is where QE will lead us

Blue Eyes said...

Won't the top-rated companies now suffer a huge sell-off in their bonds and shares and find it very hard to raise finance?

mutleythedog said...

I think that my visionary solution proposed long ago - i.e cancel all debts - is coming closer. After all most debts won't be worth collecting if hyperinflation strikes!

Steven_L said...

Does this mean they can't count deposits at the BofE as tier 1 capital then?

Mark Wadsworth said...

What Stephen_L says.

Isn't this just QE in reverse? Banks will withdraw 'cash' from their accounts with the BoE and buy back the bonds that they previously sold to the BoE (which is how those 'cash' balances arose in the first place)?

Steven_L said...

"... and buy back the bonds ..." (Marc Waddswerth)

Or shiny new bonds?

measured said...

This move is intended to head off hyperinflation as it helps ensure the B of E has buyers for its gilts. I understand the B of E is now charging banks for the privilege of having cash deposits with it.

The banks are bleating though. They doth protest too loudly. Of course their returns on assets are going to decline if balancesheets are less geared. Their fear must be bad debts which is why considerable amounts of corporate loans restructuring (nice fees) is taking place. Bank shares having bounced so strongly will not the place to be next year unless they have strong overseas earnings.

Both Lord Myners and Lord Turner criticise the banks to please their political masters and must be viewed a turncoats. The blame lies with Gordon who never appreciated what the risks were of rapidly expanding the financial services sector.

measured said...

{I couldn't scroll through my comment on my iPhone to correct it. Still you get the gist, CU. Bearish about the UK but bullish about other major economies with the FSA doing its best to prop us up and rein us back. Someone should tell them it's too late.}

CityUnslicker said...

SL/Mark - Cash is also a tier one asset so that is not hte play.

measured - I wholehaertedly agree, this is fixing the game for Uk gilts. I am amazed in the media coverage I have read this morning it appears nowhere. All I suspect becuase these 'rules' don't comeinto play for a year or two. media types don't see how long the QE overhang will last - all those bonds have to be sold back to the market sometime!

measured said...

Finally, there is enough competition between banks and building societies to keep bank charges down.....well, for those customers and corporates who remain solvent. This isn't better than public spending cuts though. :-(

Blue Eyes said...

Mutley have you been watching Fight Club??

Tom Powdrill said...

Adair Turner said his views were close to those of Ken Clarke in his book Just Capital. He might have changed his views since (though notably he backed the Tobin Tax idea in the book too), but I think he's basically pretty centrist.

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