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The Friday Five: why banks are causing a panic

'It's an ugly picture,' says Mervyn King, governor of the Bank of England, speaking about the alarming state of the banking crisis.

 
The Friday Five: why banks are causing a panic

1. Things are worse than we thought

To quote Meryvn King: ‘it’s an ugly picture’.

The UK is back in recession as we know, but in an exceptionally grim annual Mansion House speech last night the Bank of England governor warned that conditions have deteriorated even further since the inflation report only four weeks ago, with ‘weakening business surveys, a downward revision to measured output and further slowing in economies overseas’.

A slowdown in China, India and other ‘previously buoyant emerging economies’ such as Brazil, meanwhile, is adding to the gloomy outlook.

The problem is, explained Andrew Tyrie, chairman of the Treasury Select Committee, the British economy cannot fully recover until banks recover and begin lending more at reasonable rates.   

2. The eurozone crisis is escalating

The impact of the escalating euro-area crisis on our banking system has our economy's leaders seriously concerned.

The rise in banking costs since the crisis intensified last year highlights the exposure of our major banks to periphery economies, King warned.

‘Any significant re-denomination of their currencies, or a default on domestic debts, would, both directly, and as a result for all our economies, put a dent in the capital position of our banks,’ he said. ‘As a result, investors demand a higher premium on loans to banks, pushing up the cost of borrowing for home-owners and businesses.’ 

The crisis has also created a ‘large black cloud of uncertainty’ – making it near impossible to quantify the risks of five or 10-year investments.  

All eyes are now on the Greek elections this weekend, while Spain continues to battle to avoid a full-scale sovereign bailout.

3. Banks aren't lending

Before the financial crisis credit was too easily available, now the opposite is true, said King.  

Data from the Bank of England shows that lending to small and medium-sized businesses – which he described as the ‘backbone of our economy’ – has fallen consistently since mid-2009.  

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17 comments so far. Why not have your say?

RL

Jun 15, 2012 at 17:34

Can anyone comment on why they don't just recapitalise the banks. £10bn new capital would increase their lending power by at least 10x that.

They could use this as a stick to force those who aren't lending to accept new capital.

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Keith Snell

Jun 15, 2012 at 17:49

RL I doubt recapitalising banks at the tax payers expense would be politically acceptable which ever party was in power so for that reason it is a non starter.

Neither do I see how further lending to SMEs to use the jargon term would be welcomed by the banks unless the government finds some way of guaranteeing the loans, a government credit guarantee scheme is known tried and tested for exports, so I see no reason why it could not be adopted for UK trade.To this more limited extent the tax payer would be exposed.

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Pilgrim

Jun 15, 2012 at 18:40

The present incumbents at the BoE are nearing the end of their tour of duty and clearly want to leave office with things looking good. It will be for the next Guvernor to repair the mess.

There is no objective evidence that QE has provided any real stimulus to the economy, having been focussed on replacing treasury debt with BoE debt. The latest manouvres, although not as yet fully described, have the potential to be as futile as QE.

See the thoughts of the BoE as outlined by Charlie Bucket of the Chocolate Factory, (no sorry, slapped wrist! Charlie Bean and the Bank of England) on http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech573.pdf .

In this speech Charlie hypothesizes on the situation of pension providers to an audience of real pension providers who are only too well aware of their dire situation and over dependence on UK sovereign debt which is forced on them by the regulator.

In this speech he explains the operation of QE and the thinking behind its conduct.

The speech needs reading with a discerning eye. It sets out to justify QE. The evidence presented in it is inconclusive. The distortion to the operation of pension funds is considerable. The downside, frightening. See

"the impact of QE on yields should ultimately reverse when the economic environment improves and we start to sell the gilts back to the market in order to withdraw"

and "So, in conclusion, while there are reasons to expect yields to return towards historically more normal levels at some stage, it is difficult to know when that will be and how quickly it will occur".

When this happens the present elevated price of Gilts will collapse and pension scheme values will be decimated.

In other words this is a little sunshine now to be followed by a thunderstorm tomorrow, a Ponzi scheme, and not a very good one at that.

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snoekie

Jun 15, 2012 at 19:38

Whilst I am sure that the aforementioned businesses would like to expand, in the present climate they would rather pull their horns in, rather than risk the personal assets of the owners.

Now if the government was truly interested in assisting these businesses they would establish funeral pyres (many of them) of many restrictive regulations, from here and abroad, done by the anti business lobby, lefties, as well as a true reduction of the civil service, and no 'handsome' payoffs that is currently the practice and then rehiring the lame ducks as consultants. Let the remainder take up the slack, they have had it too easy for a long, long time.

Don't just reduce salaries of the poor performers, remove the salary altogether. Necessity is the mother of all invention!

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Alan Tonks

Jun 15, 2012 at 19:53

I say why not get all the counterfeiters in the world to give you a hand, to save the banks Merv.

Then the directors can give themselves massive bonuses, whilst charging high interest rates to the public.

Then release all the lunatics out of the asylums, put them in the government and the banks. Then and only then will we see some sanity return.

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jeremy hunt

Jun 15, 2012 at 20:45

Rate cuts ,Tax holidays, for overseas companys setting up manufacturing in uk

Low pound lowers cost of set up and good export possibilities.

Would be better use of 100bn . At least we would see a bang for our buck.

Employee tax an NI goes up and multiplier starts to work

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jeremy hunt

Jun 15, 2012 at 20:46

Not the Minister!

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joe stalin

Jun 16, 2012 at 10:05

As Mario Draghi said the meddling by Governments in the banking industry is not very helpful. Legislation is stifling the banks ability to get their houses back in order. The meddlers are fighting yesterday's battles and cannot sem to accept that things have moved on. By tying up the banks they are unable to react to sovereign issues now engulfing Europe. I have said this many times the time to legislate is after banks have rturned to profiabilty not before. furhermore if regulators wanted to do something useful then they should focus their efforts on regulating the CDS markets, HFT dark pools, which are corrupting the entre financial system and commodities trading. Push up margin requirements and or enforce delivery at the end of every option exipration for anyone other than legitimate exceptions such as airlines or shipping companies. Lastly haul the rating agencies in front of a court and lock them up along with Stanford and Madoff.

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Terminator

Jun 16, 2012 at 12:32

I'm afraid it is far more complicated than many of you think, the 'Great British Property Robbery' of 1997 -2003 , when prices where artificially raised a staggering 300% has caused so much funny money to be printed that it has created the 2 tier economy we have now. It was a travesty of monumentally epic proportions and it has never ever been addressed.

Mr King is as redundant as the financial system he operates in and can no longer influence.

Financial 'experts' in the city fail to realize that much of their business since 2003 has been with funny money, or maybe they do and don't care.

The fact remains that since then the 'economy' has dwindled to the point that 'money' is valued subjectively and its value differs from one person to the next.

A 'Fund manager' in Baker St prints himself $Bliions using a computer program, a banker in South London creates a £700 million fortune and carries on doing so.

This is an industry not commonly known for its intellectuals, yet contains some of the wealthiest people on the planet.

We have a so called government that is similarly and paradoxically non-intellectual yet staggering wealthy as individuals, one of whom regularly refers to a large portion of the population as 'the poor' the first time in living memory that a Prime Minister has done so.

No mention is ever made of creating jobs for any of these people, just as no mention is ever made of just how actually redundant and ineffectual their own jobs are.

Do not hold your breath for a solution from these people because they don t have one.

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Pilgrim

Jun 16, 2012 at 12:44

If the banks can park illiquid assets for a term with the BoE in exchange for cash, at what valuation does the exchange take place? Is this defined? Or will it just provide a means of transfering assets at book value, thus saving the banks from having to mark their asset valuations to market ? This would distort subsequent estimates of capital reserves.

Does anyone know?

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adrian101

Jun 16, 2012 at 12:49

So if nthe banks are doing so badly, why has RBS share price done so well this week?

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Pilgrim

Jun 16, 2012 at 12:54

Terminator. I agree with you in large measure. As you imply and an Aussie might put it, we are up s**t creek. Where can we find a paddle?

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Pilgrim

Jun 16, 2012 at 13:01

Adrian 101.

It couldn't be anything to do with HMG's majority ownership of RBS could it? In respect of my earlier question, perhaps BOE exchange loans could be used to improve RBS capital ratios?

Does anyone know?

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Bhavesh Sutaria

Jun 16, 2012 at 14:18

No money will be lent to businesses, no matter what they say, its just done to raise confidence & prevent the system failing.

The global giant overdraft debt bubble has shifted from bankrupt business & people to the banks. Banks lent against stupid principles. Governments will now have to step in & take the worst crap from the banks by these lending asset for cash schemes, to prevent banks & us failing.

Basically, its now payback time, slowly & surely. We, the people will pay this crap debt by increased taxes & dull economy for a generation.

Life carries on, Animal Farm style.... all folks are equal, but some more equal than others. Life never changes, just the superficials.

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snoekie

Jun 16, 2012 at 14:31

Good point Pilgrim, should not the 'assets' the BoE are lending against have at least a realistic value at par with what is being paid out?

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Jeremy Bosk

Jun 16, 2012 at 20:25

Snoekie

There is money available for lending but few businesses or consumers are willing to borrow. They have no confidence in the economy because the criminal lunatics running it have introduced policies designed to cause mass unemployment. They have cut capital expenditure, wrecking the construction industry. They have raised taxes on alcohol wrecking the hospitality industry. They have sacked public sector workers or made them believe that they will be next on the dole. I am sure that the thought of unemployed nurses, teachers and police sends you into orgasms of delight.

The fear that you and your friends have created is stopping consumers from spending. Which in turn is destroying businesses that depend on consumers. Seen any closed shops lately? Hear of any travel companies going bust lately? It is all because you and your friends get off on wrecking people's lives.

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ClothKap2

Jun 17, 2012 at 10:33

They missed out reason number 1: The bankers know very well, that by strangling the economy, they can become very rich indeed.

They've just had billions from ECB at 1%, now they've been offered billions more at .75%, and say they will only take if they can make even bigger margins than ever before AND if the taxpayer absolves them of all risks whatsoever.

The solution to our overal economic problems is actually quite simple to understand. Too many parasites on the economy. -Apart from the bankers, who are using their stranglhold on money to keep the rest of under control, we have at least half a million public sector workers whose role in life is to make it as hard as possible for anyone to be successful. many of them enforcing some of the new regulations brought in by Brown Blair at the rate of one every 20 minutes for thriteen years.

Business won't borrow money to invest because the banks charge rip off rates, and small business is bending over backward not to employ anyone new (especially women of child bearing age), in casr those new employees end up breaking the business, or they have to emply another person solely to keep the town hall and governement bureuacrats in their jobs for life with solid gold pensions that the private sector can only dream about since Gordon Brown ruined one of the best pensions industires in the world.

(It's bad enough being unpaid tax collectors and being fined for any minor failure to stick to the procedure to the letter.

All in all it suits the bank very nicely to have banking crisis after crisis. - If they were in so much trouble, they wouldn't pay bilions in bonuses, for what looks like abejct failure would they? This is all about the bankers taking out as much as they possibly can before it all collapses, leaving them very rich and the rest of us destitute.

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