Err, yes?

In the last 25 years we have allowed banks to balloon in size. Until the 1970s, banks\’ assets as a percentage of UK GDP remained steady at approximately 50%. By 2006, after decades of deregulation, banks\’ assets as a percentage of UK GDP were more than 500%.

We\’ve abolished capital controls you know. Finance has gone international. And as it happens, the City has become the centre of those international financial markets.

You would have thought that someone bright enough to get into Goldman Sachs would have known that. Or perhaps being stupid enough to leave there to go to the new economics foundation explains it.

For example love, we really don\’t give a shit about the size of the assets of UK domiciled banks. We\’re completely uninterested in the question in fact.

We do care about their liabilities, this is true, but not their assets.

Think for a moment, if those assets were entirely financed by capital we wouldn\’t care at all, would we?

Quite, it\’s the liabilities which are important, not the assets.

15 comments on “Err, yes?

  1. What were bank assets as percentage of GDP back in 1900 when UK banks were financing the infrastructure of the Empire ?

  2. We are interested in their assets – since we are concerned a) that banks should have sufficient liquidity to meet day to day demands b) that assets should not have to be written off to an extent that capital is eroded.

  3. What H says – and Preig doesn’t seem to understand. We are interested in the quality of bank assets, not the size of their asset base. If bank assets are of good quality there is much less risk to bank liabilities – which as Tim points out affects us directly.

    The fact that UK bank liabilities dwarf GDP is worrying, but not the doom-laden scenario that Preig portrays. It should make us MUCH more interested in ensuring that banks are properly supervised as well as regulated. There has been abject failure in this area by both the FSA (HBOS, RBS, NR) and previously the Bank of England (BCCI, Barings). I don’t hold out a great deal of hope for the new supervisory regime, since it appears to be made up of the same players who fouled up the previous one. So Preig is right to be concerned, but not for the reasons she gives.

    Ringfencing is a complete waste of time. It only affects 3 UK banks anyway – HSBC, Barclays and RBS – as they are the only ones that combine retail and investment banking. And all it will do is allow retail operations to be rescued in the event of investment banking failure – or, if 2008 is anything to go by, vice versa. Oh, and it preserves the fiction that retail customers need to be protected from evil investment bankers using their funds to gamble on international casinos. And that’s what really annoys me about it. Retail customers DO need to be protected – from evil retail bankers using their funds to speculate on UK property. And NOTHING is being done about this.

  4. Tim, she “worked on the trading floor at Goldman Sachs”. I think you’ll find that wording tries to evade the fact that she had a short term and relatively junior position and was then culled in GS’s annualling dumping of the bottom performing 10%.

  5. What Recusant said. The bio noticeably doesn’t say she worked *as a trader* or *for Goldman Sachs*. All sorts of people work on a trading floor… temps, IT contractors, you name it.

    … But if you look at the NEF’s site it says she was an interest-rate-swap-salesman.

  6. @Fr Co
    You saying that investment banks don’t also overinvest in property?I thought the whole shebang went West when Lehman’s bet the bank on a housing development in sunny Bakersfield just as the US property bubble was coming off the boil.
    The motley crew of land taxers of all political hues and none have been carping on for a decade that the banks have built their mortgage books on the bubble of land values but no one has taken the blind bit of notice.Frederick Harrison , doyen of land taxers, predicted to the month when the whole lot would collapse but gets scant recognition for his prescience.

  7. Surely the quality of the assets does matter rather a lot, especially with a fractional reserve banking system of the sort we have these days.

    DBC, it was not so much “overinvestment” in property that caused the problem, as underpricing of the risks associated with such property (hence the madness of zero-collateral loans, sub-prime lending, etc), made possible by a world of very low interest rates, etc.

  8. DBC

    I didn’t say any such thing. But all except one of the 2008 bank failures in the UK were caused by property speculation in RETAIL banking. And the other one (RBS) lost millions on questionable and possibly fraudulent sub-prime mortgage origination in the US. From a UK perspective, therefore, the main risk to depositors would appear to be retail lending, not investment banking.

    Funny how we look across the pond to America, see what happens there and assume it applies equally to us. It doesn’t. Our banking model is VERY different from America’s. We are much less dependent on investment banking and our retail sector is considerably more developed (and our investment banking sector much less so). What applies State-side simply does not apply here.

  9. If they’re going to come running to us saying “Help! Help! Mr Taxpayer! We cocked up but we’re Too Big To Fail!”, then surely both their assets and their liabilities are things we should care about.

  10. @Fr Co
    Not sure this things-are-different-over- there argument stacks up.You admit that it all unravelled because of sub-prime mortgage selling in the USA ,but people only started to panic majorly when Lehman’s (an investment bank) went down and the US Gov refused to bail it out.This seems to have led everybody in British banking to panic about the American CDO’s on their own books and the possibility that everybody else was stuck with similarly worthless commercial paper.So an American
    disaster involving an investment bank did affect us.
    Also we had Barings which should have warned people that investment banks could easily go bust.
    @ JP Your argument could easily lead to that Thatcherite stupidity when she said you could n’t increase the money supply because it would only lead to house price inflation.The trick is surely to have plenty of cheap money but no HPI.The answer is another set of letters which I’m sure you know.

  11. DBC

    People panicking here because of things happening over there doesn’t mean that the issues over there and the issues here are the same. They aren’t.

    Northern Rock initially needed emergency funds from the BoE because interbank lending froze after the collapse of Bear Sterns. But its eventual nationalisation five months later was because it was insolvent due to its OWN subprime mortgage lending, not because it had invested in CDOs, CDS or any other type of fancy instrument. Bradford and Bingley collapsed because the bottom fell out of the UK buy-to-let market – no investment banking involved at all. HBOS went down because of dodgy commercial lending combined with a dose of the Northern Rock disease. Once more, no investment banking involved.

    RBS failed primarily because of a disastrous acquisition, but it was sailing very close to the wind in just about every area of its operations, including retail banking, and was bound to fail on something. It is probably fair to say that the problems in global investment banking did cause the collapse of RBS, but only because it was so vulnerable and so poorly managed. It could be argued that the American investment banking collapse did us a favour in exposing the mess that was RBS.

    Yes, we have had ONE investment bank failure – in 1995. But we did not have an investment banking collapse in 2008. We had a retail banking collapse. You, like most people, are buying into the myth that because the global investment banking system nearly collapsed due to excessive risk and fraud in US mortgage origination and securitization, it must have been investment banking in the UK that caused the failure of our retail banks. No it wasn’t. It was their awful management.

  12. @Fr Co
    Actually I’m not buying into this myth at all.I fully concur with your statement that the UK problem stems from retail banks using their funds to speculate on property.Land taxers have been saying the same for years (see above). I only mentioned the investment
    banks because they cannot be exempted from criticism entirely.

  13. DBC

    Banks of all types behaved recklessly. My point though is that investment banks are unfairly blamed in the UK for what was primarily a retail banking problem, though admittedly triggered by a global investment banking failure. Because media and politicians in the UK have focused on the problems in global investment banking instead of looking closer to home, they have come up with “solutions” such as ring fencing that address the wrong problem and will therefore be ineffective.

    The ring fencing idea was an attempt to create in the UK an equivalent of the US’s Glass-Steagall act, which arguably stabilised their fragmented banking system for a long time. But a Glass-Steagall separation is almost meaningless here, since we don’t have an extensive investment banking sector, we don’t routinely securitize retail loans and we have no equivalent of the American GSE. Only three banks will be subject to ring-fencing, and one of those (RBS) is being forced to scale down its investment banking activities anyway.

    We’ve wasted a lot of time and public money on pointless ideas based upon how the US system works, instead of addressing the real problems in the UK banking system. Hence my snarl about people looking across the pond for solutions.

  14. You evidently have a thing about investment banks here and in the USA and the irrelevance of ringfencing in the UK which I would happily agree with.
    However the main problem is ,we both agree, UK retail banks using their funds to speculate on property. What would you propose for stopping that? N.B. Land taxers posit a tax on land value,
    the most volatile element in property prices, so any speculative uplift in land prices would trigger a nasty tax liability.Banks and everybody else would be forced to find something else rather than land-based investment as a store of value or hedge against inflation.

  15. DBC

    You probably won’t see this, but I’ll say it anyway. Anyone who thinks there is a simple answer to the issues in UK banking is barking.

    There may indeed be merits to a land value tax. There are also considerable downsides, such as the problem of taxing ownership of illiquid assets when the owner doesn’t have much in the way of income. Personally I don’t think a land value tax is the panacea that some would like to believe.

    What is really needed is in boring, detailed, systemic analysis of how the system works and where the risk points are, and what appropriate measures can be applied at those points to mitigate specific risks. That’s systems thinking. There isn’t enough of it around, because it isn’t glamorous and it doesn’t grab headlines. But it’s practical and effective.

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