The nef\’s report on banking.

This is going to be fun, eh?

For they\’re starting off on exactly the right foot. What actually are the subsidies that the banking system gets?

Number 1 is the too big to fail subsidy. And yes, this is exactly correct, there is indeed such a subsidy, the eventual backstop that the government is not going to allow the entire banking system to collapse. That\’s what the bank levy is supposed to pay for, that insurance that depositors are getting.

In our view, the aggregate underlying value to UK banks is likely to be
more in the range of £30 billion (Baker & McArthur, see Table 1) than the
high experienced in 2009 of over £100 billion.

Ah, no.

What they\’ve done here is averaged the support given over the past three years over those three years. No no. This is like saying that the year your house burnt down you got a £200,000 subsidy from the insurance company. Which of course you didn\’t.

What we really want to know is how much did you pay for your insurance over the years and what was the payout?

We might want to move from house insurance to car actually: over a 50 year driving life you\’re likely to need to call on your car insurance once. Over a 50 year period it wouldn\’t at all surprise me that the financial system would need to call upon the government insurance policy.

But the same point stays: the payout on an insurance policy is not a subsidy to be calculated in just that year that you claim. There\’s only a subsidy if the costs of the premiums over the years/decades do not cover the payout.

Was there such a premium charged before? No. Should there have been? Yes. Will there be in hte future? Yes.

Our interesting question is therefore whether the premium has been set at the right rate for the long term: too low and we\’ve a subsidy there. No, I don\’t know the answer either (although the premium being charged, 0.075% of otherwise uninsured liabilities seems in line with what the FDIC charges in the US, rather above it actually) but that is the question we should be asking.

Number 2 is the gilts profits made from QE. Here at least they seem to be sensible. They\’ve not gone for the Ritchibollocks of thinking that all £200 billion went to the banks. Actually, they say that dealing margins were perhaps £200 million, which seems fair enough actually.

Number 3 is making the customer pay. That is, recapitalising by widening interest margins rather than by cutting pay, bonuses or dividends. And sadly, on this, they make a complete bollocks of it.

Using figures from Moneyfacts on the average rates offered for the
benchmark two year tracker mortgage since June 2007, we can see that
rates have fallen from 6 per cent to 3.5 per cent. But the Bank of England
base rate has fallen by much more – from 5.5 per cent to 0.5 per cent. We
calculate that the mortgage interest rate spread has therefore increased
from around 0.5 per cent to 3 per cent. As we argue above, some
readjustment in mortgage pricing was necessary, but even taking a
conservative view of long-term spreads as being around 2 per cent. The
increase to 3 per cent since the crash represents additional interest
revenue of around £1.6 billion per year from 2009 gross lending and a
further £1.5 billion per year from 2010 gross lending.

Sigh.

The cost to a bank of two year funds (which is what they need to finance a two year mortgage deal) is not the base rate: it\’s the two year funds rate. Which hasn\’t fallen in line with the base rate, for the further out the maturity of a deal, the more it is the market, not the Bank, which sets interest rates.

Indeed, this is the very point of QE which they mutter about above. Only QE, not changes in hte base rate, can move longer term interest rates. So I\’m afraid that they\’re conceptually wrong in their estimations of the interest rate spread.

And finally we come to the glory. Oh, come on, it wouldn\’t be an nef report without one piece of howling lunacy now, would it?

There is no doubt that the hidden subsidy to bank revenues that arises
from banks? ability to expand the money supply is substantial. This
„seignorage? benefit arises across the system as a whole and cannot be
calculated for individual banks, although it is logical to assume that the
larger a bank?s market share of lending, the larger the implicit subsidy.

Oops! No, the banks do not make seignorage profits from the creation of new money: no, not even from the creation of new credit.

What\’s happened here is that they\’ve disappeared up their own arseholes. One of their intellectual founders (dunno, might have eben a real founder as well) was a bloke called James Robertson. And he wrote a paper detailing how the banks do make such seignorage profits. It\’s here, although it used to be on the nef pages. And we went through his misunderstanding of the situation here.

He has, very sadly, got entirely confused between seignorage and what I would call the banking float. The profits he\’s identifying come not from the creation of new credit (which of course the banking system as a whole does, even if not banks individually) but from the fact that we all leave bits and pieces of money in non-interest bearing accounts.

Now, it may be that we don\’t leave much in such accounts. Individually that is. But crank through the average schmoe\’s monthly acounts. Earning perhaps £24,000 (I\’ll ignore PAYE for a moment) he\’s got £2,000 a month moving through his current account. Not saving much (as Brits don\’t very much) we\’ll just, for the moment, say that at the beginning of the month he\’s got £2,000 in there, at the end £0.

So, the average balance over the month is £1,000. And there\’s, what, 48 million adults? 50 million?

Great, so the banks get £50 billion in interest free money which, given the glories of fractional reserve banking, they bundle up into longer term loans which they then farm out to others at 5%, 10%, 29% on your credit card.

Actually, there\’s more than this in the system not being paid interest and that\’s where we get to their £20 billion a year of \”super profits\”. Do note though that this is gross, not net, margin. For out of this they\’ve got to run those \”free\” bank acounts that we all use. You know, \”free\”, paid for by the interest we don\’t receive on our individually piddling but in aggregate quite large sums.

Robertson (and thus the nef, and Anne Pettifor is another suspect) have gone completely argle bargle here. They are identifying as seignorage, the profits from credit or money creation, what is actually the creation of having a huge interest free float.

Well, quite, it wouldn\’t be an nef report if there wasn\’t at least one piece of howling lunacy in it, would there?

Such a pity: they did at least start out by asking the right question.

3 comments on “The nef\’s report on banking.

  1. I take your point about not comparing mortgage rate with base rate, but the difference between short term borrowing and lending rates is also much wider than previously.

    This would appear to be evidence that a cartel is in operation.

  2. 1. Banks paid zero for insurance inn the past, and will pay gov’mint calculated rate in the future. It won’t be a market rate, it will be a subsidised rate.

    Nef 1, Timmy 0

    2. You give Nef a bye on this one

    Nef 2, Timmy 0

    3. A 2 year tracker is a product that traces the base rate for 2 years, therefore if a bank charge 3.5% on it, it will repent 3% profit, as clearing banks can tap the state (errr sorry, I meant the BoE) for money at 0.5%. Any bank that hedges this month to month risk with 2 year cash deserves to go out of business.

    Nef 3, Timmy 0

    4. ‘Seniorage’. Ok, they’ve used the wrong term, but they are onto a winner here. Banks scoop up all those odds and sods up to 50 billion, and lend it all out. But, that’s not it. They lend it out, and what happens to that money? Does it all turn to stone? No, the guys who borrow it, spend it into the banking system again, where it globs up into lots of lovely pools that the banks can scoop up again into another big blob of lending/credit creation. And lend it out again. And again, and again, and again, and again. That’s the fractional reserve multiplier. And it’s of enormous benefit to the banks, all based on the guv’mint propping it all up.

    Nef 4, Timmy 0

    Oh dear, oh dear…… Letting the side down dear boy….

  3. By the way, on point 3, if you were talking about taking 2 year cash to align assets against liabilities, which given your prior comments on the desirability of ‘maturity transformation’ is not a given, then all they have to do is sell the 2 Year SONIA swap, and hey presto 3% locked in for 2 years, with no liquidity risk.

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