UK banking reaches its nadir

Can the reputation of British Banking ever have been in a worse state, at home and abroad?

At home, state-owned RBS/NatWest proved unable even to function at the most basic level in providing simple retail services to consumers and businesses.

Across the banking piece, business customers found themselves involved in a real reverse bank heist with dodgy interest swap products missold (a story broken at the Birmingham Post days before all of the major news organisations).

Then, at home and abroad, Barclays gets viciously trashed, reputationally. Trust being the most fundamental asset in banking, Barclays may never recover from the Libor scandal. The amount of litigation knives being sharpened the world over, but especially in the US, LIEBOR could yet do for Barclays.

In US Senate hearings this week, it was clear that the international community sees the City of London as a trust black hole, with hearings looking first at the LIBOR scandal. Barclays and the Bank of England got a total mauling.

Minutes later the last British bank with any real reputation left, HSBC, had to appear in front of the Senate hearing and admit to, and apologise for, failing to prevent itself being effectively a money launderer. HSBC offshore funds (thousands of them in the Caymans) proved to be the worst vessels for this.

HSBC are likely to be fined at least $1billion, and that’s just by the US authorities.

And the $5.1billion loss to J.P. Morgan occurred through the actions of a trader in the city of London.

We are surely at the nadir when it comes to UK banks.

The always-oversold importance of the City of London to the UK’s economy and the UK’s standing is left in tatters. We have to be ready to diversify out of the high finance industry with even more urgency now. I suspect down the line that job losses in the finance sector, in London and in Birmingham, will start to accelerate. Degrees in banking and finance will start to become the real Mickey Mouse degrees.

But the UK banking industry still has some friends: most notably the UK government and taxpayer.

Flogging a dead horse comes to mind with the latest Funding For Lending (FFL) government scheme announced this week to try to jump-start the zombie banks into actually engaging with the real economy and real businesses. How many times have we been down this road?

In addition to the bailouts and guarantees to British banks of £1.2Trillion (£500billion of which is still in place) the ‘Extended Collateral Term Repo Facility’ (ECTRF) was swung last month in to action by the Bank of England. It is effectively an ongoing monthly bailout (every 3^rd Wednesday!) of all of the banks. The Bank of England gets banks’ dodgy loans, banks get pure cash.

We’ve had the carrot, so now we have the..er..carrot.

The FFL is presented as a way of rewarding good behaviour by the banks and getting them to lend to businesses and families.

In reality, without both of these interventions, all lending by banks into the economy would actually have dried up completely at meaningful rates this summer. These schemes are a back-stop provision to try to preserve the pretty paltry status quo before rates soared for the banks themselves and thereon to businesses and consumers.  They are, by definition, panic measures.

So what’s the game this time? Because it goes beyond the Bank of England’s remit to do what is proposed, the Treasury will oversee the Bank of England injecting even more liquidity into the distressed UK banking system (including Barclays and HSBC). That’s in addition to the Big (on-going) Bailout from last time and the new monthly ECTRF bailout.

This third leg under the FFL is a scheme to swap for Treasury bills existing, and then future, loans to UK resident households and non-financial businesses.

Until January 2014 the Bank of England will lend Treasury Bills to any of the UK Banks and building societies in return for the bank depositing  collateral in the form of loans to businesses and households, “and other assets” (whatever they are). The T-Bills will last for as much as 4 years, so those collateral assets could be held by the Bank of England for quite some time.

What makes this scheme different to the monthly 3d Wednesday ECTRF bailout is not that clear. I would guess that the expectation is that this collateral is not necessarily meant to be existing dodgy debt, but acceptable, ongoing prime debt: more steak than dodgy sausage meat.

The treasury suggests that 5% of the existing loans out there in banks could be swapped right now. That’s about £80billion.

New loans from this month on will mean much more than that £80 billion can be swapped on an ongoing basis. It would appear that every further pound lent out can be swapped for treasury bills, pound for pound. This is quite a commitment.

And the commitment is touchingly open-ended: “There is no upper limit on the size of either individual or aggregate bank borrowing under the Scheme.”

It had been suggested last month that £200billion was the limit; it would now appear that it is the sky.

It begs the question of why the scheme is needed at all if this collateral is actually good prime debt, other than that the international markets simply won’t recognise them as such and/or will only lend to the UK banks if the Bank of England is standing behind them.

So unless the government is there holding each bank’s hand with treasury bills, the money markets won’t lend to British banks at acceptable levels. This is a crisis.

If the Treasury and Bank of England are going to end up with masses of business, commercial property, mortgage and credit card debt, good and bad, you have to wonder why we actually need the middle men in this wheeze.

Why not just set up a National Investment Bank and invest direct? Surely the government itself could borrow at cheaper rates? And what’s the point of having such low rates for our sovereign debt if we don’t actually borrow to invest?

More importantly, real, non-financial businesses would get cheaper rates at which to borrow. Otherwise real businesses are effectively subsidising the banks’ survival with their own higher borrowing costs.

Setting up a State Business Investment bank would seem sensible, but if we did this we would be leaving the UK banks to the wolves, it would seem. So this scheme and the others are new bailouts by any other name.

And another bailout to an UK banking industry the rest of the world has just given up on.

Courtesy of The Birmingham Post