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Bonuses and bumper bank profits are back with a vengeance. That's good for banks and bankers but not for the rest of the economy. This week's half-year results for Barclays, HSBC and RBS are showing big improvements, with much of the profit occurring on the investment banking side. Barclays' pre-tax profits are up eight per cent, at £2.98 billion.
Bank share prices should strengthen on the back of these results. Champagne sales should boom as London bankers find an outlet for the City's expected
£4 billion bonus pool. Viewed in narrow terms and through the prism of normal times, profitable banks are good for the economy. They no longer appear to need more government money.
The notional value of the taxpayers' shares in RBS and Lloyds is heading upwards. Deleveraging, building up higher potential reserves, reducing exposure to risky borrowers: these are things the banks have been told to do and, nine months on from the height of the banking crisis, they have done them — and have better results to show for it.
But these are abnormal times and the broader view is different. Banks have achieved higher profitability by squeezing their personal and corporate borrowers with higher spreads on loans, tougher loan conditions and fatter fees. This is a case of robbing Peter to pay Paul.
Surveys from the Bank of England and the main business federations suggest a continued and serious constriction of credit. It is understandable that loan demand will fall in a recession. And it is just as understandable that banks should shy away from insolvent or potentially insolvent companies to protect the quality of their assets. But the surveys show that solvent companies with sound credit histories and good prospects are also being squeezed hard by the banks, despite lavish incentives, including taxpayer guarantees and the extra liquidity provided by “quantitative easing”.
Economic recovery and growth is thereby throttled, increasing the likelihood banks will acquire more bad assets as good companies are dragged down.
Individual banks act rationally to curb lending because the outlook is poor. But the outlook is poor in part because of a collective failure to lend. The banks are cutting off their noses to spite their faces. The bankers complain that it is not perversity or stupidity that makes them accumulate reserve capital and liquidity. They are being sent contradictory messages by the Government and the regulators: “Lend more but don't lend more.”
Although there is now a consensus that capital requirements should be counter-cyclical, they are being strengthened procyclically. And it makes absolutely no sense for public-sector banks to hoard capital since they are nationalised and cannot fail. Belatedly, through the feeble, arms-length, structures established by the Government — UKFI — the message is starting to get through and, with the welcome addition of lending by Chinese and Swedish banks, credit flows are beginning to match the needs of good borrowers. But this isn't enough.
Banks have to be made to support viable companies. This is one powerful reason why, together with the need for a lucrative disposal, the sell-off of the public stake in the banks — which must happen eventually — is a long-term project: 10 years rather than 10 months, as the
Government seems to have imagined. It is the underlying balance sheets of banks that matter more than a flurry of good profits figures. A solidly based recovery will improve them but a double-dip recession will drag them back into the mire.
The public should be especially wary of the attempts being made to offload banks' bad assets onto the taxpayer via the Asset Protection Scheme. This scandalously one-sided insurance plan involves the banks taking 10 per cent of any losses and the taxpayer the rest. I want this scheme stopped, or the banks' share of losses raised very substantially.
One striking feature of the banks' profits is the contribution of the investment banking operations, confirmed by the results today from Barclays Capital. Following in the wake of spectacular results from Goldman Sachs, we shall be told by Barclays, among others, that this is where the money is and that they should be left, unhindered, to mint it. It is also where the big bonuses are: hence the enthusiasm for colonising this market.
The market is, of course, less competitive now with the collapse of Lehmans and the takeover of Bear Stearns. And the fact remains that these currently profitable but risky “casino” operations of the big, interconnected UK banks are underwritten by taxpayers. The cross-party Treasury Select Committee has been commendably robust in insisting that, whatever short-term successes these banks can produce, they are too dangerous for taxpayers in their present form.
Radical restructuring, and perhaps, breaking up — they say — will be necessary. It's a view that I have endorsed for a long time. The crucial debate on bank policies and structures is in danger of being shunted into a siding to make way for an altogether less urgent and important issue: the bureaucratic architecture of regulation. The Tories have performed a serious disservice by making the abolition of the FSA their top priority. Great uncertainty is now being generated where certainty is required.
The Bank of England must, of course, have a central role in overseeing systemic risk. But its Governor, Mervyn King, should be careful what he wishes for from the Tories. Another expensive banking crisis, with the Bank of England in charge of bank supervision, would kill off the Bank's independence.
This is a potential takeover with the most lethal of poison pills. But bonuses will grab the headlines. Nothing appears to have been learned about incentive structures that create excessive risk.
It's back to business as usual in the City, with the Government and the FSA flapping about in helpless embarrassment.
At least Treasury minister Lord Myners has taken up the proposal I have been making: that all high pay and bonuses should be fully declared, as is the case at present only for directors.
Unfortunately, the Government seems to have lost the will to live, let alone reform the banks.
Reader views (6)
Goldman Sack of Cash, Barclays and HSBC profits in a time of recession...Now how could that be.?...Well it seems that the technology of microsecond dealing along with microselling and microbuying is the answer...
Superfast computing, networking and High Speed Trading is the new game in town and if you are ahead of the game you can make lots of money by controlling the market.
Basically it is cheating...Heads I win, tails you lose....Just as casinos never loose.
So the best bet is, if you are in with the in crowd, you are a winner. But if you are not part of this new technological game, stay well away from the stock market otherwise you could loose lots...Wait and see the next crash.
The fear now is that the pension schemes will be slow to react and could continue loosing out and also the large bailed out banks and building societies will no longer be part of the in crowd and they will also loose out, resulting in massive public support from the tax payer...Question is how much more cash/ financial support can the government provide to prop up the loosers?...By then I fear that there will be a massive flight of capital from the UK by the "in crowd".
- Ian, Inverurie, Aberdeenshire., 05/08/2009 18:19
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Vince - as is frequently pointed out - you do talk sense about the economy; so why aren't the LibDems further ahead in the polls?
I would respectfully suggest that your party's refusal to categorically reject any 'pact' with Labour is only damaging your electoral prospects.
Labour are toxic - and they are almost universally hated (& that isn't too strong a word for it) by the majority of people in this country.
If Nick Clegg and you both came out and said that the LibDems would NEVER, under any circumstances, enter into an alliance with Labour to keep them in power, then I think you might find that the LibDem popularity would soar and would put them as the second party and relegate Labour into a rump in third place; that's assuming that they don't simply cease to exist after the GE.
We live in hope!
- Silent Hunter, Stirling, Scotland, 03/08/2009 15:23
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I also note that that if the Banks are found to have been persecuting their long-suffering personal customers with unfair penalty payments they intend to drag out the process with more legal delays in order to avoid paying back the money. This will lead to more people losing their homes.
- O Letwine, Acton England, 03/08/2009 14:58
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Bottom line, banks and financial institutions were deemed too big or too interconnected to fail. That was last October. We have lost Lehman, Merrill and Bear plus seen various mergers along the way. We now have fewer banks and financial institutions which presumably make them even more interconnected and thus FAR to big to fail....the net result of this past year has been an ever increasing centralisation of banking power.
Remember all your insurance companies and pension funds hadge their assets and liabilities in the market. With fewer counterparties with which to trade, spreads have widened. That means those pension funds are not getting such fine prices as in the past and hence their returns will not be as great contributing to lower pensions down the road for all of us.
- Tobias Nyc, new york, usa, 03/08/2009 12:57
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I agree entirely with Les. -Every time I see this man quoted, or hear him speak, he hits the nail right on the head, -and also seems more informed than most other politicians!
- Tony H., Cumbernauld Scotland, 03/08/2009 12:13
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This man is the only politician who seems to care about anything other than himself. We need him running the country not Labour or the Conservatives who seem only concerned with point scoring off each other and blaming the woes of the country on each other. Damm them all!
- Les, uk, 03/08/2009 10:09
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