Shouldn’t our banks be helping the economic recovery and not hindering it?

The last 8 years or so have seen the development of the symbiotic nature of the relationship between governments and banks. Much of this has come about by the way that central banks have set monetary policy to help banks more than the real economy. We may have seen an example of that this week from the Bank of Japan which is worried about the impact of a -0.1% interest-rate on the Japanese banks and so decided to not ease again. There we have a problem as of course they have never really recovered in the lost decade period. Another version of the symbiotic relationship is the amount of sovereign or national debt banks hold especially in the Euro area. What could go wrong with giving sovereign bonds a zero risk rating? You will not be surprised to see who is leading this particular pack. From Bloomberg.

In Europe, the issue is particularly important in Italy, where domestic state debt accounts for 10.5 percent of banks’ total assets, well above the euro-area average of 4.2 percent.

Royal Bank of Scotland

Another example of the symbiotic relationship between governments and banks has been demonstrated this morning in the interim statement by Royal Bank of Scotland or RBS.

An attributable loss of £968 million included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the UK Government.

So we see that RBS has done its best to help bail out the UK Public Finances as Chancellor Osborne finds himself able to trouser nearly £1.2 billion of extra revenue. he is probably singing Dionne Warwick.

That’s what friends are for
For good times and bad times
I’ll be on your side forever more
That’s what friends are for

Of course the UK taxpayer bailed out RBS in 2008 and ended up owning 78.3% of RBS. They were let down then because for that money they could have insisted on 100% ownership but the establishment preferred to be able to claim that the bank had not been nationalised. More recently some of the shareholding has been sold but for a loss. Currently the share price is at 243 pence compared to the 407 pence that the government claims is a break-even level. So RBS got a bailout and this year the figures of Chancellor Osborne have got one. But the taxpayer seems to be staring at losses which of course are the opposite of the profit promised back in the day. From the then Chancellor Alistair Darling.

The taxpayer, therefore, will be fully rewarded for that investment………ensuring that the taxpayer is appropriately rewarded…….

In the same statement “fully” had morphed into “appropriately” and it has been on that declining journey ever since.

The Outlook

The official view on RBS ever since this has been on the lines of the outlook is bright. If anyone has actually believe that then they must by now have been very disappointed as bad news has followed bad news! These days banks produce a litany of different profit figures an issue I raised earlier on Morning Money on Share Radio but the sentence below sums the state of play up best I think.

Adjusted operating profit(4) of £440 million in Q1 2016 was down from £1,355 million in Q1 2015 primarily due to Capital Resolution and the IFRS volatility charge.

You might reasonably think that as we are three years into a boom that banks would be doing well especially as that boom has centred on boosting mortgage lending and house prices. Indeed one might reasonably expect the numbers below to be up rather than down.

UK Personal & Business Banking (UK PBB) adjusted operating profit of £531 million was £54 million, or 9%, lower than in Q1 2015.

Still one area is booming.

Buy-to-let new mortgage lending was £1.5 billion compared with £0.8 billion in Q1 2015

If we look at the impact of RBS on the UK economy we open in troubled fashion as we note the growth of buy-to-let. But surely after all the help its has received and the UK economic recovery RBS is fit to help us back? Well not by boosting employment.

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £189 million reduction in the first quarter.

And this.

Capital Resolution remains on track to reduce RWAs to around £30 billion by the end of 2016 following a £1.4 billion reduction in Q1 2016.

All these years later we have job losses and deleveraging as opposed to the brave new world promised. Oh and there continues to be something of a sword of damocles hanging over it as this tweet sent to me earlier indicates.

I’m optimistic about Today we launch our action against them 4 funding/counsel in place ( @efgbricklayer )

RBS has remained what we might call accident prone as it was caught up in the Panama Papers problem and this morning this emerged as well. From the Guardian.

RBS said the Swiss regulator, the Swiss Financial Market Supervisory Authority, had “opened enforcement proceedings against Coutts & Co Ltd (Coutts), a member of the RBS Group incorporated in Switzerland, with regard to certain client accounts held with Coutts”.

It feels like a bottomless pit does it not?

Monetary data should be good for banks

Our Martian economist might reasonably expect it to be boom time as he/she peruses this morning’s data release from the Bank of England. Let us start with mortgage lending.

Lending secured on dwellings increased by £7.4 billion in March, compared to the average of £3.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.7% and 3.4% respectively.

Quite a surge as we presumably see the impact of the higher Stamp Duty charge on Buy To Let purchases which is now in place but was not then. But if you really want to see numbers which are motoring take a look at this.

Consumer credit increased by £1.9 billion in March, compared to the average of £1.4 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.6% and 9.7% respectively.

If our banks cannot make money out of this when can they? That is a little ominous as we note lower mortgage approvals on the month as the Buy To Let surge fades away.


It too seems to be failing to do its bit for the UK economy. From Bloomberg.

Following these disposals, which include the sell-down of its 62 percent stake in Barclays Africa Group, McFarlane said the bank expected group full-time employees to reduce by around 50,000 people, resulting in a total headcount of 80,000 – almost half the staff employed at its peak.

Oh and this bit could have come straight out of an episode of Yes Prime Minister.

McFarlane said he had “a lot of sympathy” with the issue of high levels of banker compensation but that Barclays was not among the highest payers in the industry and the payouts were necessary to retain top staff.


Back in 2009 the then Chancellor Alistair Darling was reported in Hansard as saying this.

They will mean strong and safer banks that are better able to support the recovery,

Actually the story of the credit crunch was that we continued to support the banks via less explicit moves that were still bailouts. For example Quantitative Easing offered them profits on government bonds and similar assets. Then the summer of 2012 saw the Funding for Lending Scheme which gave quite a subsidy to both their mortgage books and mortgage lending. So the theme of us helping them continued rather than us getting much back.

Also I note that back in 2008/09 many of the moves were badged as being to help UK businesses via bank lending. So if we add in the FLS above it should be booming right? I will let readers make up their own minds after perusing this morning’s numbers.

Net lending – defined as gross lending less repayments – to large businesses was -£1.9 billion in March. Net lending to SMEs was £0.1 billion.

We appear to have copied Japan and our version of kicking the can has left us with a banking sector which the Cranberries provide a theme song to.

Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head
Zombie, zombie, zombie

Some of course seem to be even worse off. From the Financial Times

Contributions to Italy’s bank rescue fund undershoot

On The Radio



24 thoughts on “Shouldn’t our banks be helping the economic recovery and not hindering it?

  1. Shaun

    I’m afraid I see an inconsistency between your header and the narrative.

    Your narrative shows that the banks increased unsecured lending and lending on property and, as we are a debt based housing Ponzi economy now, they are doing their bit in splendid fashion.

    You also show that “useful” types of lending are, as ever, flat on the floor or in decline but there are two reasons why companies won’t borrow: they can’t or won’t.

    I suspect many can’t because they are too leveraged and we have an element of what Richard Koo calls a “balance sheet recession”.

    They won’t because they can’t see the opportunities in which case what price the “everything is awesome” meme”? After all we are awash with liquidity and with record low interest rates the incentives to borrow have never been higher.

    In any case I assume that in order for the banks to hit the Basle 3 capital requirements they will either have to pay lower dividends or deleverage by running down the loan book; the first is unattractive and the second appears to be happening anyway because of reluctance to borrow.

    • ‘In any case I assume that in order for the banks to hit the Basle 3 capital requirements they will either have to pay lower dividends or deleverage by running down the loan book;’

      You raise an interesting point Bob.Risk weightings for BTL mortgages are changing courtesy of Basel 3, not just as a result of the Chancellor’s tax changes but as part of a broader reassessment of risk.

      Which makes one wonder what will happen to the asset side of many bank balance sheets going forward.Surely they will have no option but to curtail BTL lending which in turn will impact the property market as the marginal buyers change(FTB’s may not step in until asset prices have dropped significantly).

      Add in the tax changes which mean that quite a few BTL portfolio’s will become loss making after full implementation of the tax changes in 2020(many will become loss making with partial implementation in 2017) and there does seem some headwinds for banks in terms of expanding balance sheets.

      It’s hard to see taxpayers making anything at all out of RBS.

      • Frankly Dutch I think we’ll have the next financial bust before Basle 3 has to be implemented and then we’ll be back to square one; in other words we’ll still have banks that are TBTF.

        • I’m with you Bob.If another banking crisis doesn’t get them,Basle 3 will.

          However,when Cypriot banks were bailed, they (the EU) said at the time it was a blueprint for future bail ins.

          When you’re as leveraged up as they are,there is just no easy way out.

          RBS is a case in point.I would question whether they’ve marked their assets to market in places like Northern Ireland.Then if we get another leg down here in property,it’ll make them even more insolvent than they probably already are.

          As Shaun posited,if banks can’t make money now,when are they going to.

    • Hi bobj

      “After all we are awash with liquidity …”

      by that I think you mean debt

      and eventually Terrans will figure out that Debt is not wealth, so think the Martians

      they could help us but of course at first they will have to destroy …


      The Banks: sworn enemies of Earth, possessing the ability to recreate an exact likeness of a well functionting economy.

      But first, they must destroy.

      Leading the fight, one man . His name: Shaun Richards

      • Fantastic Forbin made me laugh classic tv and a classic analogy..with Shaun in the lead role.
        Watched the entire intro and it was even more appropriate as the mystery so claim they are going to destroy the city of London.The politicians and their masters the Banksters will indeed destroy the financial city of London with their debt ridden paper Ponzi scheme.
        If you haven’t seen it check out on YouTube Dominic Frisby”s Debt Bomb to tune of Sex Bomb is terrific and sums the situation up in a an entertaining pop video.

      • Hi Forbin

        You are very kind although back in the day as a child I was a Captain Blue fan I think mostly because he drove the SPV. I remember my grandfather buying me one of the dinky car models of that.Little did I know that in my adult life another set of SPVs would appear! But enough of reminiscences as the obvious question is who is Captain Black in your episode?

    • Hi Bob J

      The Buy To Let environment is changing as these two tweets from today show.

      Stuart Gregory ‏@Mortgage_Stu 12h12 hours ago
      just to clarify, higher rental calculation from TMW means that Buy to Let Investors will be able to borrow LESS in future.

      Henry Pryor ‏@HenryPryor 9h9 hours ago
      NEWS Nationwide tightens lending criteria for buy-to-let landlords: Building society’s changes come as the Ba…

  2. ‘If our banks cannot make money out of this when can they?’

    ‘Barclays was not among the highest payers in the industry and the payouts were necessary to retain top staff.’

    • “Retain top staff” Bob Diamond a man who was lauded even after his close call with disaster when he lost the I’m stupider than you contest with Goodwin over ABN Amro…..later the halo slipped but not until after they had rewarded him with annual remuneration packages of £60m……..a nice little earner as Arthur Daley used to say

  3. The problem is that Banks who are still seen as public enemy number one are being regulated out of business – sooner or later our weasel politians will understand that a profitable banking sector is an essential component in a vibrant economy.

    • you’re barking up the wrong tree , mr woof.

      we dont and should not support casino banks ,

      high street banks do very well thank you

      the problem is since the Glass/Steagal Act was abolished we the tax payer have bailed them out with QE , etc ,etc

      seperate the two again and let the casinos go bust as they should in a free enterprise economy ( if you can find one these days)


    • Hi John Woof and welcome to my website

      One of the issues of the credit crunch era is that past concepts have changed quite a bit. One of them is banking profitability and the timescale we need to review it over. So what would you say a “profitable banking sector” is?

    • Which regulations do you see as a problem ?

      Frankly, I’d welcome the day our politicians understand that having a profitable banking sector is important – it will be the same day they cut their losses on the lame duck RBS

  4. Brilliant again today Shaun thank you.

    What happened to free market economics I still remember the mantra of the divisive Margaret Thatcher “We cannot prop up lame duck industries” …this clearly doesn’t apply to the bottomless pit that banking has become
    Our mining, shipbuilding ,steel ,textile,shipbuilding (an island that doesn’t,t build ships that used to build 60% of world tonnage annually) were not important they actually employed people and produced a product but they were deemed uneconomic.
    Yet we prop up an industry that creates millions of pounds out of thin air demands interest on the money it loaned out that it didn’t have in the first place,if you don’t make the payments it can seize assets yet it still can’t make a profit…this is mind blowing.

      • Sadly the sheeple have been ‘educated’ by the media propaganda apparatus that to sink yourself up to your neck in debt is normal.
        Operation financial repression…..fleecing the sheeple has been an outstanding success.
        There are no free markets everything is rigged
        This will not stop the economic Ponzi scheme crashing but you can be rest assured that those at the helm will be positioned to benefit when it all comes crashing down.
        They are not stupid they won’t go down with the economic ship.
        They will pick up at assets at pennies in the pound…..or a few ounces of gold.

    • A fair quote from Thatcher. Major let Barings sink and the world didn’t end. But Brown decided to rescue RBS – I wonder how much of that decision depended on Kirkcaldy constituency unemployment ?

  5. I don’t think banks should even be asked to help. They are businesses, not charities. Investment banks only help themselves and often rip the arse out of their customers. Cavaet emptor. Buyer beware. As things stand, the investment banking industry has excessive political influence. Many immoral & probably illegal practices are tolerated, either by regulatory inaction or incompetence.

    What does a failed investment bank do when it has blown itself up ? It rorts the taxpayer ….

    Now I ask about the investment bankers assertion “The taxpayer must bail us out or the economy will crash 1930s style” – The phrases “extortion” and “protection racket” come to mind.

    I suggest that we need to let the failed banks sink. The initial results will be painful, but out of this crisis we can expect a recovery. Just look at Iceland.

    • Hi ExpatInBG

      The problem is the size of the investment banks now. Our mistake was to follow the American model where financial organisations just grew and grew and led to TBTF. I started my career at Phillips and Drew a stockbrokers and they were limited on 2 fronts, firstly they were a partnership and secondly they were a broker. Then they would bought by UBS and the numbers had zeroes added. I remember an options company ( O’Connor’s) reverse taking over Swiss Bank and so on. The boys ( which then nearly everyone was) wanted bigger and bigger toys then rather ungratefully walked away when they broke them.

      The worst part is that it is a business we are good at in the UK…..But not on current terms.

      • So, “Big Bang” was a catastrophic error. At the time, I thought the huge conflicts of interest which were being created would eventually come unstuck.
        Incidentally, there seems to be 20-30 year gap between an ideology being implemented to the realisation it doesn’t work. Socialism 45-75, unfettered banksterism 86-16…. I wonder why..

    • As things stand, the investment banking industry has excessive political influence. Many immoral & probably illegal practices are tolerated, either by regulatory inaction or incompetence.’

      Too true Expat.Too true

  6. UK (and others) debt levels are dangerously high. Ideally we’d want to unwind them gently, but this implies that the big swinging dicks feel the effects of economic slowdown. Pay freezes, trivial bonuses, being happy to still have a job.

    Not everything was good in the Icelandic solution – and I have previously said that default and devaluation is very painful in the short term. It is probably needed in Greece.

    The question for the UK, in the words of Fish (Marillion) is “Where do we go from here ?”

  7. Pingback: não deve nossos bancos de estar ajudando a recuperação da economia e não impedi-la? «InvestmentWatch | HISTÓRIA da POLÍTICA

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