Monday 2 August 2010

Banks' Argument Cuts Both Ways

A couple of weeks ago we spotted some fairly concerted bank lobbying, which gives the appearance they feel that with a bit of luck they may get away scot-free. Pesto reckons developments on Basel III gives credence to this, and the soi-disant stress tests didn't exactly prove stressful. Osborne heckles a bit from the sidelines on lending and bonuses, but his Bank Levy didn't cause them much distress.

The banks have come up with a one-liner that serves for several purposes: don't make us hold more capital against risk, because then we won't be able to - indeed we can't - provide the lending you want, to get the economy going. Woe, and thrice woe to your recovery !

They and their proxies need to tread carefully on this because, instead of being taken as an argument for backing down on higher risk-capitalisation requirements, it can be flipped on its head and given as a reason for breaking up the banks; so that retail banks would no longer be allowed to run speculative trading operations. CU’s insider told him this was to be Coalition policy, and the Government's Programme states:

we will establish an independent commission to investigate the complex issue of separating retail and investment banking

Pure trading-houses can be allowed to be as under-capitalised as they (or their stakeholders and counterparties) feel they can get away with - caveat emptor. And the debate on capitalisation for retail banks boils down primarily (though not entirely) to credit risk, an altogether narrower issue than when speculative exposure to general market risk is part of the mix.

All the lobbying on this strongly suggests there is cross-subsidy going on between retail and spec operations, the prop-trading getting a free ride on the capital of the retail ops. Too much hubris and this particular free lunch may be taken away when the commission reports next year. If there is one thing that will keep the less-than-ebullient Vince Cable in his post, it is to have the chance to be the one to do just this.



Anonymous said...

"Tap dancing on our balance sheet" was how my boss described the newly arrived derivatives team at the mega bank where I worked years ago.

Mark Wadsworth said...

Nah, the banks and George Osborne are heading in a different direction.

Once the general public has been duped into believing that the only way to keep the economy going is lending to small businesses (which could be achieve far more simply by cutting taxes and red tape), they will have the perfect excuse to extend and pretend the bail outs, credit guarantee scheme and special liquidity scheme etc, in order to keep the house price bubble inflated.

All this suddent concern for small businesses is just a fig leaf. Something else they could do is leave the EU, of course.

Bill Quango MP said...

MW: It does matter though.
4.5% over base or a 5% charge on borrowing, which is not profit, just bridging, is just about acceptable.

Once the BOE rate goes up and rates move to say 6-7% then many SME's go under. The rate is not based on any ability to pay, only necessity to borrow. Its not even the VAT con of the difference between in and out cash. Its just a cost on total cash.

Banks are pushing invoice financing. At even higher rates .. over 11% so I hear.
Thats shocking for a near guaranteed payback loan.

In contrast the TAX payable reduces as the profits go down.

As for red tape. Couldn't disagree. Was with some other business bods and all had the same story about the online only NI end of year.
At BQ industries one person worked a few hours solely to prevent a £100 fine being issued for non payment of £1.21 in overdue NI, that wasn't even due, but was a data error.
Many, many people had a very similar story.
The system seems to have been designed by people who never use a computer. And the 'safeguards,' that are almost certainly added at governments insistence, make accessing even your own account a major chore.
{passwords valid for 30 days..have to be obtained by post from HMG. I ask you..a 30 day password.WTF? This is deadline payroll that can only be run every 30 days. My government work user password, for something else, expires every 30 days but allows the user to reset it, if the right starting combo is known.}

Anonymous said...

If they government had the courage it should separate money lending from investment banking.

Steven_L said...

"Once the BOE rate goes up and rates move to say 6-7% then many SME's go under."

My next door neighbour bought his house in 2007 and pays around 6% interest. If rates rise a couple of % he goes under too.

How did we end up like this? Addicted to 0.5% base rates and the printing press?

It'll just be just like Japan, 200% debt/GDP and a decade of stagnation here we come.

NuLab sold us the dream that we would never have to have a recession or high interest rates again.

We've abolished the reality of 'boom and bust' in favour of inhabiting Gordon's fantasy land, where money is just an illusion and the government will make sure the sun keeps shining.

Bill Quango MP said...

Steven L.

The difference is banks were lending business at 1.5 -2.5% over base. 1.5% was a rate available for no track record, no accounts, new ventures. Secured on home usually.

That give a 5-7% in the good times {pre bank bust}

Now - When rates move to more normal 3 - 5% levels business will be paying 9-10% if nothing changes.

Homebuyers will still be hit, but not as hard.

Bill Quango MP said...

Sorry SL.
I just reread that. Your neighbour is paying 6% NOW ? At 0.5% Base ?

Postbank. Its the only way. Government can set its own rate of 2% and add 1-3% over base.
The big banks fall into line all lose all the business. {its about as likely as UK leaving the EU, which would first be necessary for the scenario to work, re competition and state advantage rules to be ignored.}

Steven_L said...

He's in neg-eq, so no one will touch him bar Bank of Mum and Dad.

When rates move to more normal 3 - 5%

3% is not a normal rate, it is a low rate, but we're so screwed that even 3% would probably kill the economy now. The endgame cometh.

Old BE said...

Rates are relative. 3% would have been "low" a few years ago and now it would be seen as "high". There is no natural level for rates. Supply and demand of money, innit. There is no natural price for a loaf of bread either.

Even at 6% it is probably still cheaper to have a 100% mortgage than to rent. We don't hear people complaining about "going under" because rent inflation is sky high. Rates will rise if inflation sticks at a high level.

Negative equity only matters if you have to sell in a hurry. If the interest is feasible then why worry?

BlackRaven said...

"Even at 6% it is probably still cheaper to have a 100% mortgage than to rent."
WHAT? you think rental yields are north of 6%????

Old BE said...

Well I know what rents are like where I live compared to how much I pay in mortgage interest ;-)

BlackRaven said...

The highest rental yields are generally on new build flats, but I think you'll struggle to find yields north of 6%, and definitely not for a house.

What part of the country do you live in?

My flat is currently yielding 3.76% or more precisely my Landlady's flat. Yet she's still smug thinking she's sitting on a goldmine.

It doesn't add up... said...

Separate Retail Banking - safe as houses! Which means bound to collapse like a Fannie Mae.

You can't really deal with this until you disentangle the MBS and CDOs and CDS from the trading room, and see the property bubble deflated, and likewise for sovereign bonds and government debt problems. The cross-linkage is too great. You might be able to float a couple of commodity traders, or even a boutique merchant bank, but that's about it.