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BBA pushes for no ring-fencing - I think they are wrong
Comments
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I don't think it helps any which way. In fact I doubt if the retail banking model is even viable. Captain Mainwaring is dead.
Currently, yes retail banking doesn't really make profit. But that's not to say it couldn't. Poor interest rates and charging for services such as debit cards (as they do in some countries already) can make it into a viable business. There are some banks around which don't even practise fractional reserve banking, so it is possible.
In fact many insurance companies operate in a similar manner to retail banks, they pay out more in claims than they receive, so in affect pay interest on premiums. They receive income from their investment returns on the float but have strict regulation in what they can invest in.
Not that I hope we get lumbered with all these charges.
To me the problem isn't really investment banking per se, its the huge leverage they use and stupid risk taking in search of profits that are dangerous. There are some banks around which have managed risk far better than others (e.g. HSBC) and shown that the banking model can work if its not abused.Faith, hope, charity, these three; but the greatest of these is charity.0 -
"Provides" capital was a poor use of words on my part, should have said "facilitates" capital raising.How does investment banking provide capital?
The bailouts were almost certainly because of worries of retail operations being hit (note: my use of operations not the businesses). However, it wasn't a reason for the crisis itself. Lehman was an investment bank that had no deposit taking ability, ditto Bear Sterns and Merrill Lynch. HBOS had very little in the way of investment banking nor did Washington Mutual or Northern Rock or Dunfermline, Bradford & Bingley, Cheshire, Derbyshire et al.The rationale behind splitting retail and investment banking is that the retail banks remain immune to the losses of the investment arms.
The whole 2008 crisis was because of the danger of retail arms shutting down and people/businesses not having access to their funds. The credit markets completely dried up because banks didnt have the funds to lend out anymore, the investment arms had caused them huge leveraged losses. ATM machines would have stop giving out cash. It would have been anarchy.
Whilst splitting off retail banks wont avert a crisis of this kind it at least lessens the effects and dangers.
The banks brought to their knees in 2007/8 were the mortgage loan providers themselves or investment banks who over-leveraged on those mortgage loans.
It would be nice to have retail and investment operations separate but it's a relatively minor problem for two reasons imho:
1. British banks don't themselves have big investment banking arms relative to overall operations (except for Barclays who acquired much of the business by buying up the remnants of Lehmans). RBS (afaik) still has the world's largest balance sheet but isn't amongst the ten largest investment banks nor is HSBC despite on some measures being the world's wealthiest bank. Lloyds doesn't reach the top 20 and is behind Rothschild.
2. You can put a framework in place for the functional takeover of retail operations if the investment arm gets into trouble and therefore avoiding the humungous costs to British borrowers and savers of ring-fencing retail. The US saw the collapse of two very large retail orientated banks in 2008 (Wachovia and Washington Mutual) yet operations were not interrupted with sales and assets allocated over a single weekend.
We're still unsure whether Basel III is going to be implemented. So, why all the effort put into trying to split retail and investment banks when there is far more that can be done in other areas? Politicians with ideological axes to grind are trying to build a regulatory skyscrapper with foundations made of jelly."The state is the great fiction by which everybody seeks to live at the expense of everybody else." -- Frederic Bastiat, 1848.0 -
The political fear of the empty ATM forced the government to do the right thing. Removing that fear gives them the option of doing the wrong thing. Not good.Whilst splitting off retail banks wont avert a crisis of this kind it at least lessens the effects and dangers."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
So far. But retail banks borrow short-term and lend long-term and are always at risk of depositors panicking and wanting all their money out at once.There are some banks around which have managed risk far better than others (e.g. HSBC) and shown that the banking model can work if its not abused.
More importantly, they lend on credit cards, dubious mortgages, and to small businesses, and then pretend that their deposit accounts are AAA. That kind of repackaging isn't new, but we don't believe in it any more.
The lenders are coming to realise that they've been taking too much of the risk of other people's speculation. Savers are looking at things like Zopa, where they have a clearer picture of the risks and aim for better rewards. If their money's going into property, may as well finance shared equity schemes and get a share of the gains, if they're going to be taking the risk anyway. And we aren't even too sure about gilts.
Retail banks used to trade on a reputation for caution and solidity, created by copious use of oak panelling if not much else. Safe as houses, some building societies liked to say - ROTFL. Now, we know their finances are as flimsy as their cheap and nasty furniture and their buggy websites. They trade on FSCS and the expectation of a bail-out.
We stick with them because they operate a payments system that's fairly convenient, mostly free, and works a lot of the time. But if they start charging us for it, that could change."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
The political fear of the empty ATM forced the government to do the right thing. Removing that fear gives them the option of doing the wrong thing. Not good.
You lost me a bit here. Are you saying that bailing out investment bankers and rich people with investments in bank shares and bonds is a good thing?0 -
I wish people wouldn't lump together shares and bonds, they're different animals.You lost me a bit here. Are you saying that bailing out investment bankers and rich people with investments in bank shares and bonds is a good thing?
Shareholders, well, one can't help wondering if some of them get out in time through out of hours trading. Those that don't, I doubt if they feel very bailed-out. Most of the equity hit is taken by pension funds and insurance companies.
But most of the lost money isn't share capital. Most of the loss goes elsewhere.
Bankers don't suffer at all. Their remuneration and severance packages are at the front of the queue. They don't even get disqualified from being directors of banks. The more times they get severed, the richer they get."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
It is high time that the banks were sorted out. They really do seem to live in a parallel universe, disconnected from the reality that the rest of us live in.
Most of their activities are financial speculation rather than increasing actual production/ economic activity and this really must change. All we've seen over the last 4 years are bailouts of the financial services sector but nothing for the real productive sector and that really needs to change as well.0 -
Pity we didn't just nationalise the lot of them.It is high time that the banks were sorted out."It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0 -
I wish people wouldn't lump together shares and bonds, they're different animals.
They are. Holders of which asset do you think should be bailed out?Shareholders, well, one can't help wondering if some of them get out in time through out of hours trading. Those that don't, I doubt if they feel very bailed-out. Most of the equity hit is taken by pension funds and insurance companies.
Pension funds and insurance companies hold shares. Who do you think owns shares? How can you sell shares out of hours? Private OTC sales are hardly a liquid market.But most of the lost money isn't share capital. Most of the loss goes elsewhere.
Where do you think the loss goes if not to the owners of equity?0 -
Shareholders borrow from bondholders, to get gearing. They take on an obligation to the bondholders.Holders of which asset do you think should be bailed out?
That's what I said.Pension funds and insurance companies hold shares.
A bank is capable of losing many times more than its share capital.Where do you think the loss goes if not to the owners of equity?"It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis0
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