business as usual

Posted on June 13, 2010
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From The Guardian

The poverty of action is inexcusable. The value of outstanding lending by British banks in all currencies is five times our national output – proportionally greater than any comparable country – and is underpinned by a puny amount of pure equity capital; £1 for every £50 lent. As an internal Bank of England working paper hypothesises, this collective balance sheet structure is so precarious that without substantial and far-reaching reform a second crisis is almost inevitable within 10-25 years. And next time we would be overwhelmed as a country.

Most industries that had undergone such a near-death experience – along with such a high probability of a recurrence – would be taking precautions. Not banking. Instead of building up its reserves aggressively, it is carrying on paying salaries at pre-crash levels. City head-hunter Chris Roebuck, pay consultant Shaun Springer and pay expert Jonathan Chapman confirm that any changes to remuneration are cosmetic; if bonuses have been lowered base pay has gone up. As it is, £6bn of bonuses were paid out last year. As Springer says, the status quo won. The regulators certainly want more prudence over pay, but the banks play cat and mouse with them, as they always have.

As worrying is the lack of reform to the business model of banking built up over the last 10 or 15 years. Barclays, RBS and HSBC each boasts more than 1,000 subsidiaries – most of which are secret vehicles created to warehouse lending or direct financial flows in artificial ways, whose purpose, as one official told me off the record, is essentially deception – to avoid tax or regulation or whose complexity is designed so that in an emergency all a government can do is write a blank bail-out cheque.

The opacity is dramatised by the ongoing multitrillion dollar trading in derivatives – essentially bets on the future prices of financial assets. The justification is that derivatives help buyers and sellers – companies or banks – better to manage risk. Some do. But derivatives are an invitation to speculate. A recent IMF working paper expresses concern that the 10 banks have not backed with the necessary capital or collateral as much as $1.6 trillion of derivatives (£1.1 trillion) they have created – essentially assuming liabilities without the money. Although highly profitable, this is behaviour that fatally weakens the system. The IMF don’t say it, but it would just take a market rumour and there would be panic. British banks have £1 trillion wrapped up in derivatives – a business that Nouriel Roubini, the economist who predicted the crash, thinks should be as closely regulated as guns because they are no less dangerous.

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