That nef banking report

I have been sent a copy!

Opening line:

Public sector support for the banking sector amounts to at least £1.2 trillion committed, equivalent to 85 per cent of GDP – the highest level of any comparable economy.

Someone should tell the Irish, eh? They\’d simply love to have a problem that was only 85% of GDP.

A very fun statistic:

But it should be remembered that £25 billion is…(…)…three times the value added of the agriculture, hunting, forestry and fishing industries.

Yup. That whole growing food, the landscape, the environment thingie is anout half a percent (yes, 0.5%) of our economy. not something people tell us all that often, is it?

Hmm, they do seem to get a little confused about money creation:

By way of a highly simplified illustration, if a bank makes a loan of £1,000, it adds an asset of £1,000 to its balance sheet representing the amount it will be repaid by the customer. It also credits the customer’s current account with the same amount effectively creating £1,000 of new electronic money.8,9

Well, no. You can argue, by way of illustration, that the banking system as a whole does this, constrained by fractional reserves and interest rates, but you cannot argue that an individual bank does this.

For if this is the way it happened then what need would a bank have of depositors? Of the wholesale markets? Northern Rock would not have gone bust and what the hell is LIBOR all about?

Through history the emergence of banking has been accompanied by great reductions in the rate of interest; reductions that, in turn, permit economic activity to flourish and societies to prosper.15 Therefore, it is important to emphasise that the system of fractional reserve banking has been a significant driver of economic development,

Abolutely true however:

but to be successful it requires at least three conditions to hold true:

Banks select economically useful enterprises, and financially sound individuals, to lend to, and do not create excessive credit for speculation and activities that do not add to GDP.

That\’s true of any system of allocating absolutely anything. And we might have some interesting arguments about what is \”excessive\” as well. As to no credit for activities which do not increase GDP….erm, actually you know, we\’re just fine and dandy with lending to activities which reduce it.

No, really, we are. Couple both working, one stops working to have and suckle a babbie, borrows money against future income in order to do so. GDP has fallen as a result of that stopping of work and the loan from the bank is aiding that stopping of work and falling GDP.

We\’re just real happy with a banking system that is able to finance such falls in GDP. So their statement is really much too broad.

There is no sudden loss of confidence that leads to customers trying to withdraw all their money at once, which is of course impossible as only a fraction of their deposits actually exist in the form of cash.

Sure, the big whole in fractional reserve banking. What deposit insurance is for.

The system operates so that control over the rate of interest is maintained

Nope. Nonsense in fact. At the very short term the government (or central bank) can and does control the rate of interest. In the long term it\’s set by the market, not controlled at all. I have a feeling that this is going to be where their recommendations fall over later.

Ah, here we go, never takes long with these people. Cart before horse stuff:

Once it became clear that the underlying loans were unlikely to get repaid, a tidal wave of concern swept through the financial system, leaving banks too fearful to lend to one another. Northern Rock was the first UK casualty, running aground in September 2007 and finally being rescued by the public lifeboats in February 2008. House prices around the world began to slide as they could no longer be propped up with easy credit.

No, you see, US house prices began to fall in 2006. It was the falling house prices which led to the concerns about whether the loans would be repaid and thus the falling CDO prices and the wholesale runs on the banks. An important difference I submit.

The investment required over the next ten years in green infrastructure has been estimated at £550 billion.23 Can a largely unchanged banking industry deliver on this investment requirement, and given its track record over the past decade can we entrust the credit allocation to vital industrial sectors of the future entirely to commercial banks?

Ooooh, that\’s an easy question to answer.

No, of course not. That\’s why we\’ve got equity markets, bond markets, commercial paper markets, eurobond markets….well, you get the picture. We\’re in an Anglo-Saxon style capitalist economy here guys, not a Rhineland. We quite deliberately do not depend upon the commercial banks to fund all of the economy, we use a mix and match method.

One number I got from Ritchie\’s last report (under the Finance for the Future rubric) was that the London stock markets raised, for companies listed upon them, some £80 billion of new capital last year.

You see? We don\’t depend upon just the commercial banks to finance things.

The fallacy that banks are middlemen between depositors and borrowers is commonly repeated, especially by those in the financial sector. As nef has argued on many occasions, banks instigate lending; they are not constrained by deposits.

Oh dearie me. If they\’re not constrained by deposits then why do they bother to have them at all?

On securitisation:

The processes are such that it is highly complex to even ascertain where associated securities ended up. Presumably some related risk has gone to pension funds; though it is possible that some assets simply go round and round the banking system. These matters demand more investigation.

No, we know what happened. What should have been sold on out of the banking system once securitised stayed in hte banking system as those toxic assets. Thus the banks fell over when the value of those toxic assets fell. We\’re all very clear on this: securitise and distribute is just fine, securitise and hold ain\’t.

Whatever the precise picture, it is clear that the UK has devoted a greater share of its national income to rescuing the financial sector than all other countries.

Cough, Ireland, cough….

Pages 35 through 37 are really weird. They\’ve been complaining so far that banks were handing out money to all and sundry for houses that they couldn\’t afford. Now they\’re complaining that, with falling house prices and rising unemployment, banks aren\’t lending as much as they used to to people who can\’t afford to buy houses. What?

Page 45 we start to see Ritchie. Yup, banks should be making equity investments in small businesses, and, guess what? You will only get tax relief on your ISA if that money is also invested in new businesses. Yup, you, with your £8k a year, have to become a venture capitalist.

The UK has 197 bank branches per million inhabitants (including building societies). This compares with over 500 branches per million inhabitants in Germany and 1010 branches per million inhabitants in Spain.47

Yup, they\’re complaining about this. That in a crowded country with expensive land, banks are efficient in their use of land.

And, when we find a branch that is still open, there are fewer people to deal with any queries we have. Figures from the British Bankers Association (BBA) show that in the five years from 2003, Abbey reduced its staff numbers by 12,897, Lloyds TSB cut 15,058 staff, and the Royal Bank of Scotland, 11,200. Since the BBA data was compiled, Lloyds TSB announced plans to make 11,000 more staff redundant and RBS announced plans for a similar number of cuts.48

They\’re complaining about this too. In a high wage country, they\’re complaining that banks are being efficient in their use of staff.

As to what they actually suggest should be done, well, it\’s the same old list. Mutuals, Post Office Bank, Robin Hood Tax….you get the picture.

Boring nonsense in short.

9 thoughts on “That nef banking report”

  1. I wonder if this: “banks instigate lending; they are not constrained by deposits”

    is a mangled version of this (true statement, afaik):

    http://d-squareddigest.blogspot.com/2010/02/probably-most-important-thing-you-wont.html

    the word ‘constrained’ being a bit ambiguous – I think D2’s point is that when the system is up and running, they finance lending ex-post so are not constrained by needed cash in advance … but they soon would be constrained if they become unable to rely on obtaining financing after the fact.

    and, as far as I can see, pointing out that banks can fund marginal lending after the fact, is a very long way from refuting the idea that banks acts as intermediaries between savers and borrowers… you can be an intermediary if you find the borrower first and saver later.

  2. Oh, whole load of leftish twoddle.
    I suggest if they ever got near to implementing any of this we implement a popular democratic response involving a wall & some rifles.
    Worked in Russia

  3. That report paragraph about money creation is just absurd. It’s as if double-entry bookkeeping had never been invented, or didn’t apply to banks.

  4. some possible small points in their defense:

    the process of securitization introduces new principal-agent problems, too great a distance between originator and final buyer filled with agents facing incentives not to rock the boat etc. etc.

    also, I like idea of mutual funds where even us with our £8000k can be amalgamated into VCs – Kotolikoff’s idea

  5. It’s a bit odd that a body with the word ‘economic’ in its title should get the basic maths of deposit multiplication in an FRB system so wrong. But since you report that Dickhead Murphy had a hand in the report’s creation we should be unsurprised that it’s a farrago of witless horseshit.

  6. are they actually claiming to have foreseen an imminent second collapse of the banking system and state bailout?

    R Murphy was on LC claiming that cutting the deficit would cause the banks to collapse.

  7. Wouldn’t want to have money in a bank that was funding hundreds of billions of green infrastructure.

    That may mean putting it in the Banks of China, Singapore, Abu Dabi or Northern Cyprus.

  8. What Martin A said (the bank gains an asset of £1k, in the form of a debtor, and a liability of £1k, in the form of a creditor; and vice versa (sort of) in the customer’s account).

    But the real point is that the bank is taking a risk that the customer can’t repay the loan; which is what it gets paid the interest for. And if the bank is stupid enough to lose too much money by taking unwise risks, then it should go to the wall, just like the customer goes bankrupt if the way it uses the money borrowed in an unprofitable manner. Simples.

    The bank bailouts are a deliberate distortion of the efficient operation of the market, introduced by economically illiterate politicians – never forget.

  9. dsquared is absolutely correct. Tim, I recently read your exchange with Duncan re Post Keynesian views of saving and investment and I’m not sure that you have the story right either.

    “Fractional reserve system” does not describe modern banking. The UK BoE itself operates with no system reserve requirements. None! Which is weird, but at least now we can explain all the unconstrained bank lending and hyperinflation, eh wot.

    Reserves are not a constraint on lending. Reserves are a bank asset, like loans. They are supplied by the govt to ensure the functioning of the payments and settlement system, and to support the targeted policy rate on overnight funds.

    Capital and regulations constrain lending.

    Banks really do create “money” ex nihilo, subject to those constraints. When people talk about changes in the money supply, that’s what they mean—changes in bank created money.

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