Banking threat?

talexuser

What's to prevent the shareholders and bondholders not having enough to cover the losses? Some Basel figure of 2.5 or 6% of liquidity? I still think the crunch was so bad and the consequences still not worked through as long as we don't know how QE unwinds long term, that we need a form of Glass-Steagall back... it seemed to work fine for 50 years or so.

Archi_Bald

If they haven't, the company goes bust.

jamesd

talexuser wrote: »

What's to prevent the shareholders and bondholders not having enough to cover the losses?

What losses would those be after all of the equity and all borrowing that the company has done has been wiped out?

It is possible for the obligations to be higher than all of the equity and all of the money that has been lent to the bank by corporate bond holders when it has contracts that are leveraged. Sad for those counterparties who won't end up getting paid when the holding company is made bankrupt. This still doesn't affect the deposits because that portion gets moved to a new holding company anyway. It's the parent that goes bust, not the deposit part.

talexuser wrote: »

Some Basel figure of 2.5 or 6% of liquidity?

One Basel III figure is 60% by 2015 and 100% by 2019. That's based on 30 days anticipated need in a crisis. That number is the total of high quality liquid assets divided by the net 30 days money outflow, all of which must be either cash or exchangeable for cash from the central bank and also able to be sold during a crisis. If that runs out then the more dramatic things could end up happening to the holding company. Or the central bank could use other measures instead.

The more dramatic things are the sort of thing that happened with Northern Rock. It had outstanding short term - months to a few years - borrowing that needed to be refinanced regularly. When the bond markets stopped working it was unable to do that. For a while it could pay the bonds that became due for repayment but eventually it ran out of liquid assets and the government took over. The changes let the regulators force even unwilling bank heads to have the business split up so that the deposit holding operating company that does the current account and mortgage payment collecting just carries on working.

talexuser wrote: »

I still think the crunch was so bad and the consequences still not worked through as long as we don't know how QE unwinds long term, that we need a form of Glass-Steagall back... it seemed to work fine for 50 years or so.

We already have a split but it's now inside the bank, between the holding company and the deposit taking company. It's worth noticing what is happening to the investment banking sub-companies of the big UK banks, though, to observe that they are being greatly reduced in size in general.

puk999

Thrugelmir wrote: »

Banking as we are know it is undergoing fundamental change. All the knocks that the banks are getting will ultimately result in the loss of free current account banking. As what gets taken away will have to be replaced.

Can't banks use the money in the current accounts to lend out to others, make a profit, and cover the cost of operating the accounts?

If we're on the verge of losing free current accounts, how come I'm being paid by the banks (e.g. TSB 5%) to put my money in their free current account?

Thrugelmir

Glen_Clark wrote: »

What about this one;
"A generation ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn". - George Osborne ,The Times Feb 23 2006

This is a far better list. Wasn't Brown's mantra prudence?

Year after year, the message was the same:

May 20, 1997, speech by the chancellor to the CBI: Exploiting the British genius – the key to long-term economic success:
"Stability is necessary for our future economic success. The British economy of the future must be built not on the shifting sands of boom and bust, but on the bedrock of prudent and wise economic management for the long term. It is only these firm foundations that we can raise Britain's underlying economic performance."

April 28 1998, speech by the chancellor to the British American business council in London:
"Now it is true to say in Britain that the last forty years has been characterised by stop go, boom bust, instability in economic policy. And so I can tell you that the first objective of the new government has been the determination to ensure monetary and fiscal stability, in place of stop go, and to do so in an economy far more open than the sheltered national economics of the past."

June 10 1999, speech by the chancellor at Mansion House:
"The way forward is for governments to consciously pursue monetary and fiscal stability through setting clear objectives, establishing proper rules, and requiring openness and transparency - the new rules of the game. Particularly important for a Britain which has been more subject than most economies to the instability of boom-bust cycles and constantly changing policies.

Indeed, the economy of 1997 was set to repeat the same cycle of boom and bust that had been seen over the past 20 years. There were strong inflationary pressures in the system. Consumer spending was growing at an unsustainable rate and inflation was set to rise sharply above target; there was a large structural deficit on the public finances. Public sector net borrowing stood at £28 billion.

So we put in place a wholly new long term framework of monetary and fiscal policy based on:

* first, clear objectives: price stability through a pre-announced inflation target - a symmetrical target - and sustainable public finances through tough fiscal rules: the golden rule that requires that over the cycle we balance the current budget, and the sustainable investment rule requires that, as we borrow for investment, debt is held to a prudent and stable level;

* second, well understood rules: a new system of monetary policy-making, at the heart of which is the independence of the Bank of England, and its open letter system, and an equivalent and equally important set of fiscal procedures legally enshrined in the code for fiscal stability; and

* third, transparency in policy-making: an open system of decision-making in monetary policy through the publication of minutes, a system of voting and full reporting to parliament; and in fiscal policy the same openness and disclosure with key fiscal assumptions independently audited."

April 5 2000, Speech by Gordon Brown to the British Chamber of Commerce national conference:
"In a global marketplace with its increased insecurities and indeed often volatility and instability national economic stability is at a premium, the precondition for all we can achieve, and no nation can secure the high levels of sustainable investment it needs without both monetary and fiscal stability together.

And it was to avoid the historic British problem - the violence of the repeated boom and bust cycles of the past - that we established the new monetary framework based on consistent rules - the symmetrical inflation target; settled well understood procedures - Bank independence; and openness and transparency. And side by side with it and as important, a new fiscal discipline with, again, clear and consistent rules - the golden rule for public spending; well understood procedures - our fiscal responsibility legislation; and a new openness and transparency…

My vision is of a Britain where there is not stop go and boom bust but economic stability; a Britain which is business-friendly, and where there is enterprise, opportunity for all; a Britain which rewards the innovator and risk-taker and encourages a new generation of entrepreneurs, a Britain which because opportunity is open to all is enterprising and fair."

June 20 2001, chancellor's speech at Mansion House
"Every time in recent decades when the British economy has started to grow, Governments of both parties have taken short-term decisions which too often have created unsustainable consumer booms, let the economy get out of control and sacrificed monetary and fiscal prudence. And everyone here will remember how quickly and easily boom turned to bust in the early nineties.

So Britain did need a wholly new monetary and fiscal framework that went beyond the crude Keynesian fine tuning of the fifties and sixties and the crude monetarism of the seventies and eighties and, instead, offered a modern British route to stability."

March 28 2002, speech to the TGWU conference, Manufacturing matters
"With Bank of England independence, tough decisions on inflation, new fiscal rules, and hard public spending controls, we today in our country have economic stability not boom and bust, the lowest inflation in Europe, and long term interest rates - essential for businesses planning to borrow and invest - lower than for thirty five years.

So while many have claimed Britain was worst placed of any to withstand the global slowdown, the OECD and IMF have both shown that Britain last year had the highest growth of any of the G7 countries.

So nothing we do will put at risk the fundamental stability on which manufacturing depends.

There will be no return to the short-term lurches in policy that would put long-term stability at risk.

No relaxing our fiscal disciplines as some would like."

November 18, 2003, speech to the CBI national conference
"But, for the first time in fifty years, Britain has not only avoided recession but has continued to grow in quarter after quarter, year after year, in all six years of our government since 1997.

Remember the old days, what was called the British problem: stop go, boom bust, unstable cycles…Britain the country usually first in, worst hit and last out of any world downturn; invariably hit by an inflation problem that prevented interest rates falling when they needed to come down; and usually then by wage inflation that could not be afforded and prevented you making long term investment.

So I want to explain to you today the policy we - and the Bank of England - will continue to pursue to ensure the British economy entrenches our new won and hard won stability and continues to grow – ensuring we take no risks with inflation or stability generally, or with the fiscal position."

April 21 2004, remarks at the British Chambers of Commerce annual conference:
"Now, by working together, we can see a Britain that has a new found and hard won stability with: the lowest inflation for thirty years; and the lowest interest rates for forty years; the lowest unemployment for a generation; and a Britain that is seen today as the most stable of all the major economies.

And it is important we understand how and why it is Britain – once the most stop go of economies - which has avoided the recessions that hit America, Germany, Japan, Italy and most other industrial economies during the world downturn of the last few years and has enjoyed sustained and sustainable growth.

So let me just explain the long term difficult decisions that had to be made and what I know we must also do to entrench that stability for the future."

September 13 2005, speech the Trades Union Congress annual conference
"And I also tell you straight – in the face of that global challenge from which there is no hiding place, no safe haven other than equipping ourselves better for our future – if we are to succeed there must be no return to the fiscal irresponsibility, the economic short termism, the inflationary pay deals and the old conflicts and disorder of the past; there can be no retreat from demanding efficiency and value for money as well as equity as we renew and reform public services; there is no future for a global trading nation like ours in trying to erect protectionist barriers with the rest of the world. And just as we need stability in inflation and interest rates, we need stability in our industry policy, stability in industrial relations, and stability in our trading relationships with the rest of the world, and we build this stability for a purpose: for it is the one sure route to full employment for our generation and to prosperity for all.

And at every time we must act to tackle the risks to stability and growth, risks that are today already reducing European growth rates to one per cent and raising European unemployment beyond twenty million, risks that now have risen from the doubling of world oil prices."

June 5 2006, speech the CBI president's dinner:
"Now, over the past few months I have been all over Britain and have seen British business succeeding in the global economy:

* a few days ago I welcomed the new Airbus A380 with its Rolls Royce engines to Heathrow Airport - the largest commercial airliner ever built - and a symbol of Britain and Europe's modern manufacturing strength, and capacity to compete and win in the high tech industries of the future;

* from Glasgow and Edinburgh, to Cardiff and Bristol, to Birmingham, Manchester, Liverpool, Newcastle, Leeds, I have visited city after city and seen each city thriving, growing, prospering - each one a demonstration of the vibrancy and dynamism of Britain's creative industries;

* and all over the country I have met young men and women with ideas for their own businesses, showing the entrepreneurial flair that I believe has led one distinguished body to speak of a step change in Britain's enterprise culture and is a sign of Britain's enterprise success.

These – and your success – convince me that despite all the challenges we face and how much more we know we have to do and continue to do to maintain our competitiveness, more than ever that Britain is well placed to be one of the great global success stories of this century."

May 5 2007, speech at the CBI annual dinner
"Exactly 10 years ago when I first spoke to you as Chancellor, the country had spent a whole era wrestling with inflation and volatility and quite frankly the havoc stop go visited on long term investment.

Thinking back to my words to you then, I set out my pledge to make stability the central pillar of my economic and business policy.

I was convinced that having the strength to take the long term decisions to ensure Britain's competitiveness meant developing a shared national purpose that economic stability came first.

Now tonight I am here speaking to you ten years on to say that we need to forge that same shared national purpose for the years ahead, this time to meet and master the new and even more profound challenges ahead - mastering the pace of change and the relentless competition we face from every part of the world in every area of our economy, now affecting every area of your business.

And building on our hard won stability, our mission now and for the years ahead is to make Britain the dynamic and competitive enterprise economy we all want it to be."

and who was a special (unelected) advisor all this time?

Ed Balls.

talexuser

I don't think anyone sane has actually said that Brown knew what he was doing, he obviously did not and that is a given. The fact that Balls is shadow chancellor is reason enough for Labour to be totally unelectable.


The point is that if Osbourne had been in charge he clearly would have followed the Irish route to insolvency instead, to much the same result. As for his actual performance, all you have to do is compare the debt reduction promises coming into office with how everything has had to be re-written since.

Thrugelmir

talexuser wrote: »

The point is that if Osbourne had been in charge he clearly would have followed the Irish route to insolvency instead, to much the same result. As for his actual performance, all you have to do is compare the debt reduction promises coming into office with how everything has had to be re-written since.

Who knows. It's on the public record that Blair\Brown were in disagreement about welfare spending as far back as 2005. Brown won and so the burden on the UK economy kept on getting larger right through to 2010/11.

Thrugelmir

puk999 wrote: »

Can't banks use the money in the current accounts to lend out to others, make a profit, and cover the cost of operating the accounts?

The answer to your point is the name, current accounts. Constantly moving balances that for the majority start high on pay day and reduce subsequently. Where's the money to lend?

puk999

Thrugelmir wrote: »

The answer to your point is the name, current accounts. Constantly moving balances that for the majority start high on pay day and reduce subsequently. Where's the money to lend?

The sum the money in all current accounts for a bank will be considerable. Current accounts are free at the moment. They've been free for as long as I remember. Does that not demonstrate how banks make a profit from current accounts? There's also overdraft charges, the ready client base to sell other products to (e.g. loans, mortgages, account "upgrades").

Current accounts are now paying interest. This doesn't appear to be a system on the edge of profitability. I understand some of these may be to lure new business, but they can still afford it.

I think the greater threat to free current accounts will be prolonged low interest rates, not the "knocks that the banks are getting".

planteria

talexuser wrote: »

I absolutely agree with that but don't think any hue of government would have been that much different in the run up to the crunch....

you might be right re. regulation/de-regulation, but there is no doubt that if that'd been 13 years of Tory government they'd have been far more prudent. Labour were buying votes with our money. we could really do with a long-term period of proper financial management.