BBA pushes for no ring-fencing - I think they are wrong

michaels

BBC Link

UK banks need to focus on lending and paying back taxpayers, and should not be distracted by more regulation, the head of the British Bankers' Association has said.


Angela Knight said regulatory change could undermine the recovery.

Basically the BBA are saying that regulatory change - like having to ring fence retail operations - will impact on banks ability to lend normally and 'finance the recovery'

However, surely if the banks are charging their investment banking arms the real cost of capital for the retail deposits then it will make no difference if they do it properly.

Thrugelmir

Profits on investment banking subsidises retail banking.

Retail banking is already suffering from loss of income (and therefore cross subsidy) from charges and PPI.

michaels

So for bank shareholders spinning off retail makes sense then!

purch

Profits on investment banking subsidises retail banking

Only if the Investment Banking division actually makes any money.

If the Investment Banks hadn't made huge losses, we wouldn't be in this mess in the first place.

Mr_Mumble

michaels wrote: »

However, surely if the banks are charging their investment banking arms the real cost of capital for the retail deposits then it will make no difference if they do it properly.

This assumption seems to be backwards. It's investment banking that provides capital for retail operations not vice-versa.

Deutsche Bank research via FT Alphaville: Whoops! Ring-fencing retail banks could backfire

There are not enough UK retail deposits to cover UK retail loans A common misperception in media coverage on UK banking is that retail deposits are used to fund ‘casino’ investment banking, leaving depositors vulnerable. However, deposits alone are not enough to fund UK retail banking itself. The pertinent figures are shown in Figure 25: UK Retail represents 17% of group RWAs, 36% of group loans, and 40% of group deposits at the three listed domestic banks, Barclays, LBG and RBS. The banks listed below have a £150bn loan/deposit gap. The only UK retail division fully funded by deposits is HSBC.

RWA = Risk Weighted Assets.

Thrugelmir

purch wrote: »

If the Investment Banks hadn't made huge losses, we wouldn't be in this mess in the first place.

B&B, NR and HBOS lost money on property loans both commercial and residential. Not investment banking.

First half year of 2011 RBS lost £1.9 billion in its real estate\property division. (Losses are global not purely UK ).

While its investment banking division contributed a £400 million profit.

So the muddy waters have yet to clear.

Joe_Bloggs

It appears that some of the RBS investment banking activity has attracted a few critics.
J_B.

michaels

How does investment banking provide capital?

Imagine a pure retail bank, £10m capital, takes in £100m deposits, borrows £90m on the money markets and makes loans of £200m - where is investment banking involved.

Of course said bank might be called Northern Crock but still doesn't mean that investment banks provide capital.

Mr_Mumble wrote: »

This assumption seems to be backwards. It's investment banking that provides capital for retail operations not vice-versa.

Deutsche Bank research via FT Alphaville: Whoops! Ring-fencing retail banks could backfire
RWA = Risk Weighted Assets.

Thrugelmir

michaels wrote: »

How does investment banking provide capital?

Imagine a pure retail bank, £10m capital, takes in £100m deposits, borrows £90m on the money markets and makes loans of £200m - where is investment banking involved.

A bank would struggle in the current climate to raise 45% of its required funding in the money markets.

pqrdef

Ring-fencing was just the unconsidered knee-jerk response to the "too big to fail" scenario. Protect the retail operation and the casino bank can be allowed to fail.

But of course the casino bank can't be allowed to fail, even if it doesn't have a retail arm. That's partly because it's hugely leveraged and it owes too many people too much money. The damage spreads too far.

But it's mostly because banks depend on confidence. The mere threat of bank failures stops the wheels turning. If you actually set a bank up to fail, it'll collapse straight away. Who will lend to a UK investment bank if the government says right, that's it, you're on your own now, no bail-outs? The continued existence of the big UK banks pretty much depends on people allowing themselves to believe that the government won't let them go under.

The worry is that the government is crass and incompetent enough to go ahead with this plan. The government's difficulty is that it can't even drop the plan without sending a message, in a situation where there is no right message to send. The government has to wriggle off the stake it's impaled itself on without saying yes or no to future bail-outs. I hope the Treasury's finest brains are on this one.

Loughton_Monkey

Well if the concept of 'Casino' subsidising Retail is correct [which I find hard to believe, but accept] then bring it on! They'll have to put up saving rates to attract a lot more cash! As a net saver, bring it on! Meanwhile, the mortage famine would get worse and mortgage rates would go up. Fine by me.