Guest post: Banks are Burning

You may find this surprising, even upsetting, but there are still some people, in 2009, who don't have a blog of their own. Imagine. Terrible. CF is always happy to help this poor beleagured minority. JonesTheSteam has guested here before, with this fine post, and now he has something to say about our banks.

Take it away, JonesTheSteam:....

 

I agree with every golden word CF writes on the subject of bonuses. The debate frustrates me, not just because it is crude political showboating. The flip side of politicians saying that bonuses should be lower and deferred/in shares is, logically, that bank profits should be higher. Why should that be desirable? Who does it serve if banks pay higher dividends? Only, perhaps, the government which recklessly shored up the banks with our money and would like to flog the shares on as soon as possible.

The real problem is that bank profits are too high. Companies are desperate for debt capital, you know, the stuff they need to grow or maybe just survive a downturn. In the good times the banks offered then debt at 6 times (or more) their annual cashflow at rate just above the bank rate. Now the renewals are coming round they are lucky to be offered 2 times cashflow at a huge spread to the bank rate. Imagine trying to plan your personal finances if your mortgage provider tried the same thing - not when you moved house, but right now. UK banks can do this because they have very little to lend (their assets, the stuff they lend against, have been greatly diminished by the recession) and because foreign banks have had to withdraw their capital from the UK. So the banks can be very picky and lend only on low risk on high margin.

We need the banks to lend more, to lend as much as possible to help reduce the effects of the recession. The bail-out has made clear that the banks are not regular businesses. To make their profits they depend on a guarantee from the state, from us. When the guarantee gets called on, like last year, it results in a disaster for us. So it seems obvious to me that the lending business should be tightly regulated. To get the name "bank", to be able to take deposits from the public with a guarantee from the government, you would have to able to only hold certain kinds of assets (ideally ones the directors of the banks understand - which was clearly not the case) and only loan a certain multiple of those assets (which was). Since the capital of the banks has been shown to be public capital and it provides a service to the economy, why not treat it like the assets of the regulated utilities and the railways and fix a maximum return on that capital. The "problem" of banks being too profitable would be fixed by forcing them to lower lending rates to bring the profits down and giving proper businesses access to the capital they need. Don't want to operate under this regime? Fine - don't be a bank, don't take deposits. Be a trading business, take risks on complex financial instruments, make a fortune or go bust - I don't care because you wont take the new, tightly regulated banks with you.

So, yes, let's separate banks from trading risk taking businesses. The Government did think about this and, wisely consulted experts. To chair the committee they chose Sir Win Bischoff, former Chairman of Citigroup. That would be the Citigroup which lost 90% of its share value owing, in part, to poor risk control. I'm all in favour of the principle that if you want to know how to stop buildings being set on fire you should consult an arsonist, but ideally a reformed arsonist and you probably want to ask a fireman too. Sir Win's committee did not conclude that banks should be separated from other activities - but then it did start the Executive Summary with the phrase

"UK International Financial Services – a centre of excellence working in partnership with the world"

You probably don't believe me so have a look at this document.

To summarise the report - "lets chuck some more petrol on the embers to see if we can get that blaze going again". The representative of the fire service was not available for comment.


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