The Bankwatch

Tracking the consumer evolution of financial services

David Camerons pending argument to leave banks unregulated is wrong and reeks of lobbying

There is the usual talk that increased bank capital requirements will curtail bank lending.  I have been a fan of David Cameron, but he is wrong here.  His inexperience is showing through.   This from E&Y (pdf) who are as guilty.

The combination of regulatory change, lower leverage and an uncertain economic outlook means that banks  may struggle to lift return-on-equity toward their 12-15% targets. We forecast total assets of the UK banking sector to expand at a significantly reduced rate of just 3%pa during 2011-15. Given these considerable headwinds, there remains a risk that credit shortages could restrict the pace of economic recovery over the forecast horizon.

This analysis is one sided.  It fails to consider what would occur if the capital requirements are maintained at todays lower levels.  Would we not get what we already have? Current levels of banks lending which are considered low, and continuing trillions of corporate cash sitting on the sidelines due to lack of confidence and clear signs of consumers returning to purchase. 

It seems to me this is exactly the time to force the banks back into shape while banks remain relatively servile and before they hit the inevitable balance sheet pressures from sovereign default and other pressures sooner or later.  There is no easy and soft landing from The Great Unwinding.

When we dig into the E&Y report, this comment is important. (emphasis mine)

This estimate may also be overstating the effect as large businesses have access to alternative sources of funds from debt and equity issuance in the capital markets, as well as being able to borrow from foreign banks. We can therefore conclude from this analysis that the impact of ringfencing on the wider UK economy isn’t likely to be vast.

So the result of ringfencing, the separation and independent capitalisation of retail banking from investment banking is basically almost zero to retail banking.  The impact is on investment banking, and that is why banks are so up in arms.  They are losing the cheapest cost of funds available. 

Time for the Camerons and other politicians to see clearly here.  I know banks … I do not know investment banking so much, but I know enough to know this is true.  Back to basics banking.

Written by Colin Henderson

September 7, 2011 at 21:03

Posted in Uncategorized

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