Anyone who questions the way the banks were saved is asked by the incredulous interviewer whether it was better to let the banking system fail. Well, the only response to this question is clearly no. This does not mean that there wasn’t a better way.
Did you know that on 15% of RBS’s balance sheet relates to UK commercial and consumer lending?
I recently pointed this out to the opposition Treasury spokesmen and have sent a note to the Economist. My email asked the simple question, if we want to ensure that UK commercial and consumer banking is saved then why not focus on the 15% that this represents not bail out the 85% that it doesn’t?
Corporate law and Government powers would have enabled the Government to let all banks that couldn’t survive go into administration. Of course this wouldn’t have been done without giving depositors 100% loss protection. Once in administration the Government would have nationalised the UK commercial and consumer banking operations and let the administrator and subsequently the liquidator sort out the rest.
This would have cost a fraction of the supposed £200bn that the IMF suggests that the bail-out will cost the Government. Why has this not been discussed? I can make a few guesses.
Sorry to say but this one won’t work either. If the Government is a net purchaser of Government bonds (what they sell less what they buy is negative) then they are indeed increasing the cash available for purchasing other assets. Let us assume that the £75bn of Government purchases over the next few months does indeed result in a net inflow, what will happen to this cash? Will it indeed result in greater lending to consumers and corporates?
The problem is that there are too many ways that this cash can be employed without lending to consumers and corporates increasing. Government bonds are liquid – selling them is quick and easy. If the problem facing banks was that they needed to realise cash from liquid investments and couldn’t then this form of quantitative easing would solve the issue. Unfortunately the issue for banks is the extent of their non-liquid investments, so called level 2 and level 3 assets. Level 1 assets can always be sold and turned into cash.
For those who don’t agree or haven’t grasped my arguments for letting the banks go I want to have another try!
Let’s take RBS as an example. The bank has a £2.2 trillion balance sheet. A very small fraction of that relates to UK retail and corporate lending – circa £350bn.
My question is simple, in order to protect the core banking activity – i.e. managing deposits, allowing payment and withdrawal of cash and lending to consumers and corporates, why shore-up £2.2 trillion when this activity only relates to 15% of this amount? Read on……… Continue reading “Should the Government put the banks into liquidation?”
Nice Website. I went straight to the information for their creditors – given the “Credit Crunch” as the media are calling it this seemed the first place that I should focus. Easy, shareholders equity is $45.2bn. OK so now let’s look at the other side of their balance sheet. Oh, first problem, the creditor information seems to provide only information required by regulations – not exactly creditor friendly. Let’s explore the rest of the website and see if we can find out what the structure of their balance sheet is like. Continue reading “A look at Goldman Sachs’ balance sheet”