MSE News: Chancellor confirms bank plans to ring-fence savings

steady__eddie

Being a natural cynic, I can't help thinking that when it does happen, we are going to be charged for the convenience of having a bank account. We are already but at least the charges should be more transparent.

AdmiralX

MSE_Guy wrote: »

"Banks are to be required to split their retail operations from risk-taking arms to prevent a repeat of the 2008 crash

Thanks for this, sorry to be myself ignoramus, I undestand the first bit is the hygenic one:cool:; but what is the "risk taking thing":(? is it the toxic mortgage slice? what are they going to do with this lot and these banks after after they are sectioned? Does any body think it is going to be securitized and sold again? where?

GeorgeHowell

ashleypride wrote: »

http://www.positivemoney.org.uk/ has some good easy to understand videos on how the banks create money.

Here is another explanation, more sophisticated and explanatory but still comprehensible to the layman :-
http://goo.gl/ZDLjU

All of this is nothing new -- it's been the case since time immemorial. Without the banks creating credit in this way the market-driven economy and business world could not function. What changed has been the attitude toward risk in terms of providing the credit. This in turn was driven by the bonus culture and the targets culture such that loaning out large amounts became an end in itself. In large part bankers changed from being 'my word is my bond' gentlemen to being irresponsible, short-termist wide-boys driven solely by greed and ego.

alunharford

Ken68 wrote: »

No doubt there is a reason for the delay until 2015.
Does anyone know why it couldn't be done gradually, say, starting today.

Call me an ignorant investment banker, but I don't really see what it gains us.

HSBC and their like are forced to become bank holding companies instead of banks, set up a bank as their subsidiary and move all their clients over to the new company. That creates huge quantities of work for lawyers (it'll take the lawyers 3 years to draw up all the contracts) but I fail to see how tweaking a few corporate structures protects us from having an economy where nobody produces anything and more than half of the voters believe the government's job is to keep houses prices (and hence the cost of living, and hence the cost of labour) as high as possible.

rb10

alunharford wrote: »

Call me an ignorant investment banker, but I don't really see what it gains us.

Take the HBOS failure of 2008.

Their retail brands (Halifax, BOS etc) were hugely successful, and very profitable. But the performance of the BOS Commercial lending portfolio nearly brought down the whole bank.

Had HBOS retail been ring-fenced, then the losses made by BOS Commercial would not have affected Halifax at all. The retail side of the business could have continued as one of the strongest brands on the high street.

A similar story is true of RBS.

It's more than just 'tweaking a few corporate structures'. It's completely overhauling it. Your savings are no longer exposed to the risky investments that are made by many of the big banks.

alunharford

rb10 wrote: »

Had HBOS retail been ring-fenced, then the losses made by BOS Commercial would not have affected Halifax at all. The retail side of the business could have continued as one of the strongest brands on the high street.

A similar story is true of RBS.

It's more than just 'tweaking a few corporate structures'. It's completely overhauling it. Your savings are no longer exposed to the risky investments that are made by many of the big banks.

My understanding is that those commercial loans (as well as pretty much everything else that went bad - basically all loans except to other financial institutions) would be part of the 'ring-fenced' bank (section 3.38 of the report).

GeorgeHowell

alunharford wrote: »

My understanding is that those commercial loans (as well as pretty much everything else that went bad - basically all loans except to other financial institutions) would be part of the 'ring-fenced' bank (section 3.38 of the report).

That is essentially true. Everything else would be ring-fenced from the over-complex and often recklessly risky financial instruments traded between financial institutions. This should prevent the domino effect of bank collapses which can occur if one or more major banks goes under. The normal risks from personal and commercial lending would still exist, but other regulations and changes of practice should prevent recurrence of the recent problems -- for example the tighter conditions for mortgages which we saw in the news yesterday.

Given all of that, a bank which continues to act like most of them did before the crunch would likely go bust, and would be allowed to. It's deposit holders being compensated by FSCS up to £85,000. The 'too big to fail' syndrome would be a thing of the past. It would be in the interests of banks' own shareholders and directors not to allow employees to act recklessly, because there would be no bail-outs and they could easily lose everything. That's why the banks are trying to fight these reforms -- they don't want the taxpayer-underwritten gravy-train to come to an end.

alunharford

GeorgeHowell wrote: »

That is essentially true. Everything else would be ring-fenced from the over-complex and often recklessly risky financial instruments traded between financial institutions. This should prevent the domino effect of bank collapses which can occur if one or more major banks goes under.

Personally, I have no issue with investment banks trading complex products with financial services companies (just as I have no issue with electronics companies trading complex products with each other). I'd challenge anybody to name a complex product traded frequently that shouldn't exist. Even securitised mortgages aren't inherently a bad thing (despite getting the blame for 'bringing down the economy') - the issue is that the retail banks bought into the 'property prices can never fall' mentality and used them to gain massive leverage - that's just shoddy risk management.

As far as I'm concerned, the issue with the current market is that some investment banks choose to take a position (instead of simply market-making) and the retail banks are encouraged to take massive positions on UK property as a bet (rather than a hedge) because the people in question have been brought up around terms like 'the property ladder' (ie. the doctrine that says that house price inflation will always exceed wage inflation).

If you want to protect savers' deposits then a far better (and much simpler) solution would be to say that if a bank goes bust then any assets it has (including those that would currently be netted off against liabilities) are used to pay back the deposits of protected savers. No government money is then involved and other financial institutions would be discouraged from trading with dodgy banks (they wouldn't just be able to rely on the government bailing out their debtors).

GeorgeHowell

alunharford wrote: »

If you want to protect savers' deposits then a far better (and much simpler) solution would be to say that if a bank goes bust then any assets it has (including those that would currently be netted off against liabilities) are used to pay back the deposits of protected savers. No government money is then involved and other financial institutions would be discouraged from trading with dodgy banks (they wouldn't just be able to rely on the government bailing out their debtors).

That is effectively what is being proposed. The side of the bank connected with personal and business deposits would be ringed-fenced such that it's net assets could not be used to settle liabilities arising from the speculative investment arena. Without such ring-fencing there would be no clear-cut definition of what net assets did, or did not, exist to protect deposits.