Banks in Profit
This week the Banks will be announcing their first half profits which are predicted to be much higher than more recent figures. HSBC, which did not directly involve itself in taxpayer loans, though benefited indirectly from the whole industry wide rescue package, is first up with a big jump. This has provoked the refrain from Osborne et al that banks must lend more to business.
In the round I agree, but I do not think it is as clear as that. The banks have to mend their ways from past follies and strengthen their own financial base. This means bigger reserves and wiser lending. Wiser lending is more cautious lending. That means not supporting daft or fanciful propositions. It also means a risk premium. If this recovery is going to gather momentum and remain sound, it will be built on sound business. A big start up bubble with lavish funding of businesses, without a model which will work, a product with a market, or management that knows it stuff will do no more than create another credit boom of the style to which we are addicted, followed by another spectacular bust.
So whilst supporting the call to boost business, I support caution in how it’s done. What is needed is the much talked about, but not yet happened, separation of proprietary trading by banks and the restoration of something akin to the old Merchant Bank. The bits are all there but they are mixed up in one pot. There is a Commission looking into this. The Coalition should have been more assertive and got on with it without another enquiry. It is a pity Vince was forced into an appeasement deal to calm certain vested interests in the City. There was no need. Now that the U.S has enacted its own legislation those people stand on low lying ground with an incoming tide. They know they will have to get into the boat sooner or later.
There is another point. Banks (real ones as opposed to building societies calling themselves banks) need to be less balanced in favour of property and more focused on business and industry. We keep getting to the point where a property boom is the spark igniting a slump. It happened to Heath and Barber, to Thatcher and Lawson then Major, and of course to Blair and Brown, or better said Brown Brown and Brown. We are slow to learn. We need to sharpen up.
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