I am close enough to the public mood to know bank mangers are far from popular. I understand enough economics to know bank managers by the decisions they have to make in the weeks ahead are going to make themselves even more unpopular.
Someone, however, does have to tell this government that bullying the banks, threatening them with legal actions and more nationalisation, is the not the way to work us out of this banking crisis. Indeed, this government needs to understand that it is in the glasshouse with the bankers, so throwing boulders at them is an especially dangerous pastime. Like it or not, the future of this Labour government is now heavily hitched to what the bankers do next. So far no amount of hectoring, and no amount of money promised in one form or another, has been enough to unblock the banking credit arteries.
Instead of grandstanding and getting cross, the government needs to ask itself why? What went wrong over the last decade, and how can they now fix it? For be in no doubt, this is not just a story of greedy senior bankers who overdid the lending in the good times. This is also a story of monetary policy lurching from boom to bust, interest rates kept too low for too long and then kept too high for too long, banking capital rules which were too lax, now supplanted by rules made much tougher at the very point where banks are finding it difficult to lend anyway! We have lurched from boom to bust in every aspect of banking and monetary control.
We all want the banks to work better, and for some more credit to flow in the private sector again. That means revisiting the huge £487 billion pound package of guarantees, loans and share capital the government announced in early October. Too little of the loans and guarantees have been used, whilst the taxpayer is about to be put on massive risk at share prices well above current market valuations.
The main parts of the package, the short term loans and guarantees, were a good idea. They have not been employed enough, implying there is something wrong with the pricing and the terms. The government should discuss with banks what they do need, and renegotiate the package in a way sensible to both sides.
At the same time the government needs to revisit the issue of banking capital. They wanted far too little in shareholder funds in the good times. Northern Rock Directors were famously discussing how they get down to the low levels required by the new regulations just a few weeks before the run on their bank!
Now they are arguably wanting too much too soon. Of course over time they need to get the banks to increase their reserves. There are many ways to do that by cost cutting and more revenue. This can be supplemented by some choice from of asset and business sales, lower dividend payments, seeking more private capital and cancelling the annual bonus for a year or two. The regulator should have short and longer term targets for more capital for all the banks, agreed with them in private. Where a bank is currently on low capital the regulator should take a close and running interest in progress in rebuilding it. In the meantime it should be reaffirmed that the Bank of England, as the banks’ banker stands behind all the leading banks, and will make whatever money available to them they need in the form of short term loans against proper security
This government has both demanded that banks have much more capital relative to their lending than they needed to have a year ago, and demanded that they lend more! The two are contradictory positions. The easiest way for the banks to hit the new more prudent capital targets is to lend less and charge more.
The taxpayer capital is both too much for comfort for the taxpayer to afford, and too little to solve the banking crisis. The banks could lose further large sums with another round of write offs from their loan books as more companies and people find it difficult to repay. The government should do more due diligence on how good the different loan books are before buying. The banks the government is buying shares in have a balance sheets of more than £3 trillion. If things went wrong and they lost another 1% of their assets overall, that would lose us most of the defence budget. Once nationalised, the bill is sent to the taxpayers.
So government. please stop playing politics with the banks, and start trying to manage the monetary and banking system properly. It has always been a government task to ensure stability of the system and to control the overall amount of lending. You have lurched from too loose to too tight. You are now asking the impossible of the banks, so try again. It is better to talk than to row. We need both banks and government to function properly., At the moment neither are.