Wednesday 15 June 2011

Osborne's Bank Farce

Well, at last tonight we are to hear what Osborne has been agitating for so long - a real change of terms for the UK clearing banks.

With a proposed split into subsidiarised retail and non-retail businesses. The devil is in the detail thougth and it will be interesting to see where SME loans etc get parked - at the moment it seems all Non-Retail business is fair game. This makes sense to barclays where for a while now barclays Capital has been absorbing the UK Corporate bank. After all, you may as well make all the non retail banking high risk if you have to split the company anyway.

There are three downsides to the proposed model:

1 - it is not an international agreement, and it needs to be. The UK is no doubt hoping others will follow in its footsteps, but maybe HSBC etc will tire of the Regulatory change and upsticks. Even trying for an international agreement was beyond the wit of our politicians
2 - By saying 'Casino or Non Casino' you push the banks into taking more risks on the Casino side to make up for lost profits on the retail side. Great, we have a higher risk system and likely it will be more leveraged to with the removal of customer deposits. Worse for some of the banks, the capital needed to be held will be so much higher that they will be forced to take high risk loans on to try and generate some returns.
3 - Retail banking was not that profitable anyway, so now these banks will have to do something to help offset the extra capital requirements and regulatory burdens - there is only one sucker who is going to pay for this.

Overall, we will have a safer banking sector, but it will come with both more (albeit non-systemic) risks and higher costs. As ever, a great example of Government in action.


Richard Manns said...

Assuming a half-efficient management of individual banks, of course the risk distribution would be less palatable to them.

As they've effectively dumped their risk on the tax-payer, and this is an attempt to dump it back, the fact that the banks will assume more risks and costs is the very aim of the regulation, since we know that we'll have to assume banks' risks again if we leave as is, because the chumps running the ECB are still underwriting sovereign defaults.

I'd argue that, given the systemic failure just incurred, costs will be smaller long-term: banks will ideally assume the risks of their own actions, as capitalism should be, so risk management should be more efficient.

As for HSBC, I hope they remain. We'll see. But "regulatory change" was going to happen; the only question was what.

Have I missed something? I'm not hot on economics, but I read your post and I thought, "Good, that's meant to happen."

CityUnslicker said...

Nothing wrong with that Richard. It will be a safer system - the lack of international co-ordination means we are taking a risk on the banks leaving though.

Plus, I do think there will be higher risks in the system; as you say, good! Less for the taxpayer - but that is not how it often works out. Lehmans was not a retail bank.

But my point re Government is that they can;t ever figure out a way to improve things so that consumers don't lose out - this is another case of that. The UK is being stuffed but State Corporatism.

Old BE said...

Retail banking not profitable? Lending rates: 7%, savings rates: 2%. If they can't make money in current circs then perhaps it is time for someone else to give it a go?

Personally I cannot wait until Tesco enters the retail banking market.

Sebastian Weetabix said...

So the Banksters might f*** off? Boo hoo. We might have an opportunity for a better balanced economy.

As things stand today, they enjoy a cosy oligopoly running retail banking (hear hear to BE's comments) & they get to privatise their profits & socialise their losses. They have damn near bankrupted the country. And personally I don't want my retail deposits to facilitate them playing in the derivative swap casino. The f***ers barely pay any tax here anyway.

Anonymous said...

Raise the flag, SW and BE.

We do not need these POS.

Anonymous said...

I think Osbourne is correct but I also agree with you CU it should have been on an international basis, none of that hush hush banking in well known secretive banking countries, and would the Yanks agree to it. Cross holding will cause a very tricky problem to sort out, also secret accouts held in various Tax light countries for incidence a certain account called Granite (that seems to have gone very quiet incidently)

CityUnslicker said...

BE - the rates offered reflect the cost of capital. Banks are not borrowing at 0%. With higher Tier One capital requirements, they need to hold more money - the deposits don't cover the lending (I agree, this is an issue, but one which is very hard to solve and can only be done over time). So they borrow to make up the difference and market rates are more like 3% - 4%. Look at the mutuals and the poor offers they can give, this is because the markets are now expecting much mroe return - banks are no longer seen as equivalent to money market lending.

Anonymous said...

Sadly this won't do much to alter the behaviour of the banksters.

I'd have legislated to cap the bonus pool at 10% of profits, which is the norm for business.

Clearly the excessive profits for the banksters came about by insider dealing, false markets, collusion, etc

Old BE said...

CU, I didn't save the cost of capital was zero, I said that the savings rates offered by the banks are shockingly low. If the cost of capital in the market is 3-4% why are the banks not willing to offer those kind of rates to savers??