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?