King Boosts New Stimulus Package to £300bn

Generali

Rinoa wrote: »

Further confirmation that Banks will be allowed to run down reserves.

http://www.thisismoney.co.uk/money/markets/article-2163311/BoE-allow-UK-lenders-free-billions-cash-buffers-drag-economy-recession.html

This was always a crazy policy: the problem in most cases wasn't that reserves were too small it was that the assets they were held in turned out to have little or no value.

Now we'll see whether the problem with lending has been a lack of demand as well as a lack of supply. I suspect there has been a little of both.

HAMISH_MCTAVISH

Generali wrote: »

Now we'll see whether ....

No, I don't think we will.

The only way we'll see that is when competition returns to the market in a sufficient way that bank margins fall to historically normal levels instead of record highs, and lending criteria revert to something approaching normality.

This initiative is just not big enough to flood the mortgage lending market with so much liquidity that banks are forced to compete for our business again. And that level of competition is what is required to restore sensible lending levels to the economy.

Don't get me wrong, this could help in a fairly significant way if it works as the government intends, ie, if the banks don't sabotage things again and just use it to somehow boost their balance sheets. But it's not remotely big enough to restore lending to anywhere near the levels required to repair the damage caused by 5 years of a lending drought.

Generali

HAMISH_MCTAVISH wrote: »

No, I don't think we will.

The only way we'll see that is when competition returns to the market in a sufficient way that bank margins fall to historically normal levels instead of record highs, and lending criteria revert to something approaching normality.

It's a good point that you make. The Governments that were in power when the GFC hit were very keen to say that banks shouldn't be Too Big To Fail in future yet tried to solve the solvency problems by selling insolvent banks to solvent banks.

The result? A destruction of competition in the banking market coupled with a near collapse in shadow banking excluding pay check advances.

There is no way that bank margins will fall until more competition comes into the market. Given that 1 banking license has been granted in the UK since Queen Victoria died I wouldn't hold your breath if I were you!

michaels

We are (metrobank) and will see more new entrants such as Tesco but as economic text books tell us they will try not to erode the monopoly profits accruing to the cartel but merely try to take a small cut for themselves.

HAMISH_MCTAVISH

michaels wrote: »

as economic text books tell us they will try not to erode the monopoly profits accruing to the cartel but merely try to take a small cut for themselves.

Indeed.

There is simply no incentive for banks, yet, to lend three times as much at a third of the margin.

What we need to see is a return of healthy competition so that banks must reduce margins and increase volume to maintain market share.

In other words, banks should be begging consumers to borrow from them, rather than consumers begging for banks to lend.

sabretoothtigger

Competition would rise when BOE is not such a large section of the total market.

Every time government criticises free markets for their failure they ignore their own footprints. Even worse while going over the situation and making new laws and actions they trample in even greater interference creating an even bigger 'monster' of a problem


These things always remind me of (ironically?) ancient greek tales rather then convoluted high finance its just human error and hubris

So with regard to reserves, the greatest danger would be the holding of government bonds as security. As banks already rely on money manipulated by central banks and fiscal policy maybe

Security to me would come from not relying on one thing.

But how many times do banks fall back on government, its a big flaw. Then government cannot live without banks, in europe thats seeming more obvious then here maybe

Thrugelmir

michaels wrote: »

We are (metrobank) and will see more new entrants such as Tesco but as economic text books tell us they will try not to erode the monopoly profits accruing to the cartel but merely try to take a small cut for themselves.

Marks and Spencer are joining the fray.

As with many business sectors. The phoenix rises from the ashes. As new entrants without the historic baggage are able to target profitable business.

Much of the old retail banking sector is in decline. Now that the heyday has passed.

ILW

HAMISH_MCTAVISH wrote: »

Indeed.

There is simply no incentive for banks, yet, to lend three times as much at a third of the margin.

What we need to see is a return of healthy competition so that banks must reduce margins and increase volume to maintain market share.

In other words, banks should be begging consumers to borrow from them, rather than consumers begging for banks to lend.

I would suspect that bank margins will fall when rates rise back to more normal levels.

Thrugelmir

ILW wrote: »

I would suspect that bank margins will fall when rates rise back to more normal levels.

and both banks and their customers are in a far healthier financial state.

HAMISH_MCTAVISH

ILW wrote: »

I would suspect that bank margins will fall when rates rise back to more normal levels.

Rates will rise back to more normal levels when bank margins have fallen.... A subtle but important difference.

In order for the economy to recover enough to allow for raising base rates, there must first be a recovery in the volume of lending.

Which won't happen until more significantly more competition is restored to the lending markets, triggering both falls in margin and relaxing of lending criteria.

Only then will base rates rise in any meaningful way.