I do wish people would understand this

In its Financial Stability Report (FSR), the Bank revealed that the big four lenders – RBS, Lloyds, Barclays and HSBC – may need to take £15bn of extra provisions on consumer loans and European debt, “a further £4bn-£10bn” to cover fines and customer compensation, and “between £5bn and £35bn” to meet regulatory risk standards.

You can\’t raise capital requirements and also at the same time get the banks lending to support the economy.

This is simply one of those either or things.

You want to make them safer? Fine, do so: but the cost will be lower lending.

You want more lending? Fine: but you\’ve got to be more forgiving on capital levels if you do.

6 comments on “I do wish people would understand this

  1. This simple demonstrates the lunacy which is the response to the financial crisis. Leaders are desperate for “growth” as that is the only way they can get thier deficits under control. A bit more growth would lead to income and profits growth and increase tax revenue.

    At the same time they are piling layer upon layer of regulation on the private sector all of which increases costs and acts as a drag on growth.

    We living in this fantasy parallel universe where the internal markets directorate at the EU which is supposed to make the single market work more effectively and make business easier to do is running around making sure that no one can actually get any business done.

    Until we get back to a sensible level of regulation stagnation is our future.

  2. Yes, but this is right up there with “banks need to make mortgages easier and cheaper to get and houses need to come down in price.”

    I also question “banks should be lending to more businesses, but they must be responsible and only lend to good risks”; although that’s presumably not quite as either/or.

  3. Tim, You are dead right to say that safety and lending are inversely related. Advocates of full reserve banking (like me) actually make a virtue of that apparent problem. We advocate making banks 100% safe (which in turn means an end to the VAST subsidies that private banks get). And as to the reduced lending and consequential deflationary effect, that is easily dealt with by having the government / central bank machine print and spend money into the economy.

    The net result is that everyone has more cash and thus needs to borrow less (cue even more obscene lobbying by banksters than normal). But the banking industry has expanded a whapping TEN FOLD relative to GDP over the last thirty years, so a slight reduction in the size of that bloated, subsidised industry would do no harm at all.

  4. The idea is that shareholders cough up another £50billion in share capital while receiving no dividends while the government encourage banks to keep lending. To do this the prudent minority have to cut spending by £50billion – that is more than 3% of GDP which is enough on its own to tip the UK into recession, defeating the purpose of the exercise.

  5. Ralph,

    The Positive Money proposals do not make banks 100% safe. They make current accounts 100% safe, that is all. All other deposits with banks are at risk – with no insurance, not even on a voluntary basis (though it seems to me that making voluntary deposit insurance available for at-risk time deposits would be sensible – chargeable to the depositor, of course). Those deposits would be lent out, and a proportion of the loans made would of course default – that happens all the time. More importantly, though, banks themselves would be at risk too, and there would be no taxpayer bailout. So if there were catastrophic loan losses as in 2007/8, banks would fail and at-risk depositors would lose most or all of their money. That is considerably LESS safe than the present system, where at-risk depositors are bailed out by taxpayers. It may be a better system, but 100% safe it certainly isn’t.

    Regarding the printing and spending of money into the economy, I wonder how government would decide on what to spend this new money. Maybe in future we will all have to apply to the Treasury for grants to buy houses or expand businesses.

  6. Government can print all the money it wants. Right up until it cannot afford to buy the ink and paper.

    Government can of course borrow money – end up like the US perhaps. Is that a good thing?

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