Wednesday 19 December 2012

A new source of funding from banks - a dangerous precedent?

As regular readers will know, there is not much love lost amongst the authors of this blog for the big oligopoly of Banks that Western countries find themselves lumbered with. They played a big role in pushing the leverage in 2003-2007 which has led to the depression which we are now only about half way through experiencing. More exasperating in the UK is the lack of punishment for the criminal behaviour of many of the former executives, as discussed ad nauseam.

However, Banks are businesses and like it or not they now lay at the dead centre of a capitalist economy, controlling the flow of money from savers to borrowers and, increasingly, from central governments. They have their own balance sheets, regulations and shareholders to report to.

Yet in fining UBS $1.6 billion, the Governments have found a new substantial source of revenue. After all in the US the money is going straight to the US Treasury and David Cameron has changed the game here to in order that the FSA does not become too rich. The money will go to the treasury, other banks too are going to settle soon, such as RBS - so there are more fines to come and collectively it could make a small dent in the deficit.

It's great politics too, bashing evil bankers and getting money back for ex-servicemen and schoolz'n'ospitals. There is not much incentive to stop the party, in fact they could beef up the regulatory powers and try and make this a regular thing.

In doing this, we further cripple an already busted market. banking is shrinking at a quick rate globally, volumes are low, transactions non-existent; RIF (Reduction in Force) is all the rage. In many ways this is good news, yea to smaller banks, but as an industry its a disaster and for Government to be extracting huge sums on top of new banking taxes already imposed, the push can be too much.

The economy can't recover if the transmission mechanism for money supply is broken. I doubt the Governments' can help themselves though when they see new sources of revenue with positive voter appreciation attached to it.


andrew said...

There are always issues as we go through a period of transition.

I really do hope peer to peer lenders like fundingcircle to properly take off. What worries me is the reaction if a business goes under.

Blue Eyes said...

The banks pay the fines using the cash that the government has printed to buy the government bonds it has just bought from the banks.

Might it be time to draw a line in the sand?

CityUnslicker said...

Andrew - I like funding circle but it is not going to sort lending for any large scale business. No one can raise tens of millions this way - its great for SME's and Entrepreneurs, but also they should have turned down the Government money.

BE - Quite.

Demetrius said...

The inability to see wood for trees comes to mind.

Lord Blagger said...

The problem is for each pound fined, that's 10 pounds of loans that get pulled.

Nick Drew said...

I know I am a broken record on this but GAOL is the answer not fines

Lord Blagger said...

Peer to peer lending unlike peer to peer shares selling, has a major issue.

Each pound lent direct, leads to 10 pounds off the money supply. Banks will pull loans as a consequence.

With shares, its not the case, it pulls the intermediary out of the loop, leading to lower costs allround

CityUnslicker said...

that is an interesting point Lord Blagger, had not thought of that angle.

Anonymous said...

I can't see any reason why 'vampire squid' banksters shouldn't disappear completely as they are obviously a net disbenefit.

Leverage upon leverage, shorting companies you are punting, flogging toxic assets, corrupt practices etc. etc. Who need it?

Honest businesses could surely manage fine with a financial services sector 10% of it's current size.

andrew said...

I do start to question what it is that we call 'money'

In the immediate sense, £1.88 buys me 4 tins of beans.

In another sense, if the FTSE goes up|down by W%, shareholders are richer|poorer by £X billion.
The thing is that that money was never printed (or burnt) by the BOE.
It is an illusion, but we all subscribe to it because in that other sense we need to eat, and so we behave differently depending on how much we percieve we have.

In a sense, I am discussing the boundary between beans (real money) and fractional reserve banking (not always real money).
The theory is that if I deposit £1 with a bank that keeps a 10% fractional reserve, then £10 of bank money is created.

The thing is that real people do not do that.
If it was really like that, we could all deposit £2000 each and this would generate £120Bn of new money and that would surely solve the liquidity crisis.
That sounds a bit like QE to me.

When you give £1 to someone else as a loan, that person may well put the money in a bank and so increase the money supply by £10.
On the other hand they may buy beans, or waste it.

My personal theory is that in the wider sense, money is not money, but is more an indicator of implied value.
Businesses grow in 'value' in a relative sense when whey apply their 'money' better than other businesses.
You very rarely actually sell the component parts of a business, so we very rarely know what it is 'really' worth and whilst selling a v. small part of the business has a v. small effect on the value, selling a large part does.
This is why I put 'value'.

I think the issues over the last few years are not because money was cheap, but because money was cheap and it was not spent wisely.

Timbo614 said...

@andrew - Close but for the cigar you need to realise that it has been proven that modern banks lend the money first then go and find the 10% reserves to back it up.

The trouble with paper money is that its "value" is in the hands of the issuer. They can devalue it (as has been happening) or simply "disappear it" by say.. joining the Euro :(

Gold, silver, beans, wood and lasting quality possessions on the other hand are always a form of money with value

DJK said...

@andrew: I have a problem with the meaning of money too. In the 1960s a Labour government fell because the balance of payments was adrift by £73 million; on Black Wednesday, 1992, the Conservative government spunked £3 billion trying to defend the pound. Today, the BofE has spend £200 billion in QE and HMG can happily borrow £1 trillion to maintain spending.

Clearly, a pound ain't what it once was.

Electro-Kevin said...

Classic comment, DJK.

But why does the £ still have such value in real terms ?

How come a can of Coke is ONLY 90 pence ?

andrew said...

@andrew .. it has been proven that modern banks lend the money first then go and find the 10% reserves to back it up.

If you could give me a link, that would be v. kind. It sounds wrong, but many things in finance that sound wrong actually turn out to be right.

hovis said...

EK - Surely the pound still has value as it is still leas worst of many things and enough people buy into the illusion, (or have little choice but to do so.) An example I was on a recent work trip to Turkey and someone had to pay in dollars which were perceived as higher vakue than TL despite Benny Bernake printing them at light speed.

dearieme said...

"they now lay": not eggsactly.