In my next life, I’ll try to be become a bank.

This is staggering, especially since Libdems said they would try and focus on banking reform.

If you let the banks reduce the assets they have to hold – the whole system becomes unstable again. How exactly do they plan to make the financial system secure again?!

Andreas, why wait until the next life? Why not become a banker now:

http://www.appointmetotheboard.com/apply.htm

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Seriously, though, this is pretty bad news if this turns into reality. Already we know that Osborne’s bank levy is effectively revenue-neutral once cuts in corporation tax come in. And Bob Diamond admitted Barclays had hundreds of subsidiaries overseas. Even though liquidity requirements are higher in the UK than in Europe, we’re probably more vulnerable than anywhere else should there be a Credit Crunch II…

Osborne’s plan: Keep the assets, let them mature as you cut the state blaming Labour for the structural deficit (which could be greatly relieved by selling the banks.)

Now I wouldn’t disagree too much with this plan were it not for the fact that he is putting the economy in further danger by relaxing rules like here and in project Merlin, which could seriously hurt us (and further shows the “Labour created the banker’s crash/mess we’re in” line as being nothing but lies-the whole of parliament has been complicit for generations).

What galls me most though is what I’m certain will happen. Upon the sale of the banks (I predict in 3-4 years) we won’t see the state rebuilt from the ashes. Instead we’ll see tax reduction. I’d guess the 50% threshold and inheritance tax will be the two first to go.

If all that happens, I’ll be far from happy to be proven wrong.

Or proven right even.

This is the correct thing to do regardless of the motivations of the diminutive Mr Osborne. All the Basel proposals are in relation to capital and liquidity buffers being countercyclical. Forcing the banks to be ultra safe at the moment is procyclical and is the opposite of what we want. That was what the last government were doing and at the same time lambasting the banks for not lending more. Be safer by holding more capital and liquidity and lend more were contradictory. The whole point of countercyclical policy is the buffers should be reduced in bad times and increase in good times when the banks are taking on more risk. We need them to take on risk by lending more and then the capital requirements go up.

Richard @6,

I disagree.

Barclays alone has a £1.5 trillion balance sheet, the cash for lending to SMEs is there if they want to do it. They prefer to use it for other purposes (with a higher margin for them but less social value and with more risk).

This isn’t about supporting the recovery – it’s about (i) boosting banking profits and hence resale value (the bank that will benefit the most from this is Lloyds) (ii) hoping for a “nice” asset price (especially house price) boom to help Tory voters. Lawson style.

One banker involved in the talks (according to the FT) has already described the Merlin lending targets as ‘barking mad’. And they’re gross targets anyway which is pretty meaningless, as Cable used to acknowledge.

I think watering down liquidity rules, less than three years after the crisis, is crazy.

Well yes it will save them money in the short-term and Lloyds especially have a lot of refinancing to do over the next two years. However, in a countercyclical regime their profits will be reduced when they have to hold more capital. Maybe Mr Osborne wants the equity values up for a sale. However, they would need to rise a lot from here as he would need to offer that huge amount of shares at about a 20% discount to the market price. The market could or would not absorb that amount of bank shares all at once and it would be bad publicity to sell at a loss. Selling big tranches to sovereign wealth funds rather than public sale would be my guess. They could always buy back their own shares. I still think it is cray to be following procyclical policy as the banks are now too safe. Anyway, here is Felix Salmon last year pondering the concept of countercyclical policy.

http://blogs.reuters.com/felix-salmon/2010/07/16/basel-iii-the-incomplete-capital-buffer-proposal/

I wouldn’t trust George osborne with my child’s piggy bank, let alone the countrys finances. He hasn’t got a scoobies.

No surprise here. Our Pip squeak chancellor has always been a banker bottom sniffer.

There is not enough money in all of Christendom that he would not give away to his banker mates roulette tables.

Once again it does make Vince Cable look like the sell out that he has become. A mans integrity sold for a govt car. Vichy Vince we shall have to call him. At least the Lie Dems spokesman on banks in the Lords resigned last week.

No such principle from Vince and Clegg.

I’m a bit confused by all this (and I’m supposed to teach it).

it’s easy to muddle up capital requirements, which is to do with the ratio of shareholder equity to assets, with liquidity requirements, which is about the composition of assets. I’m not accusing Duncan or Richard W of this, btw.

Does it make sense to say “the banks have plenty of cash on their balance sheets to lend out if they wanted to, so cannot argue liquidity requirements are preventing them from making loans”?

If they are holding cash in excess of the liquidity requirements, then the constraint is non-binding and they won’t benefit from having it relaxed because they are already choosing cash levels higher than it. If that was the situation, how exactly would banks benefit from having requirements relaxed? Where would the “hand out” be that commentators are so appalled at?

If the liquidity requirements are binding, then as soon as they lend some cash out, that turns an asset from liquid to non-liquid and they have to find some more cash to replace what they loaned out …. don’t they? If not actually cash, they have to liquidate an asset of some sort to turn it into a gilt or cash.

In which case, relaxing the requirements will be a “hand out” of sorts, but it will also have an affect on lending, won’t it?

I don’t see how you can simultaneously believe that this represents a hand out to banks and will have no bearing on their lending decisions.

I am prepared to be corrected!

I am familiar with arguments that capital requirements ought to be procyclical (by which I mean go up in good times) and I suppose if you are worried about the risk of bank runs rising during bubbles, then you want liquidity requirements to get tougher in good times too, implying they ought to be lower now.

Accusing the Tories of anything after new labour, bit rich me thinks.

OK it it fails thats the banking sector up the wall plus the Tories, but who think labour would have done anything different.

Not me

They do not hold a lot of cash as people understand cash. In the UK commercial banks they probably only hold around 1% of deposits as vault cash. With cash obviously being non-interest bearing it makes no money for the bank without a yield.

The liquidity that is referred to are funds that they transfer into short-dated government debt that does have a small yield. They are highly-liquid and easy to sell at short notice if required. The Basel liquidity rules are not applicable until 2015, the banks say that puts them at a disadvantage vis-a-vis others who are not applying the new rules yet. Having so much tied up in low-yielding assets costs them money when they could lend it at a higher yield. If we want the banks to lend more we need them to increase the leverage on their assets. That means reduce their exposure to low-yielding assets. It is a banks capital that determines its solvency not there short-term liquidity. If there was some sort of crisis causing a liquidity squeeze then that is what a central bank is there for and Mr King could maybe realise this time he is a central banker after all.

@ 12 Fred

“Accusing the Tories of anything after new labour, bit rich me thinks.”

Um, are you suggesting that the fact that the last administration was flawed means we’re not allowed to complain about the new one?

” I am familiar with arguments that capital requirements ought to be procyclical (by which I mean go up in good times ”

If they went up in the good times they would be countercyclical, Luis. The point is to get the banks holdings of safe assets moving in the opposite direction of the economic cycle.

Mr Brown ran a procyclical fiscal policy when he was chancellor and that is why we ended up with a big deficit when the cycle turned down. A true Keynesian would have run a countercyclical fiscal policy and accumulated surpluses in the good times. When the cycle turned he would then have expanded public spending as an offset to private sector retrenchment.

The Basel agreements aren’t worth the paper they’re written on; they’ve proved to be wrong every single time.

You would almost think the Tories are friends to the bankers and financiers wouldn’t you? Oh … they are? Golly!

@ 12 Fred

Why can’t people get over this idea that actually NONE of them would have been doing anything significantly different over the past few years?

It’s been like watching bald men fighting over a comb.

If anything, we’d be in a much worse position if the Tories had been in power, because their “light touch” regulation would have been even lighter. The basic probelm is that none of the big 3 parties in this country (OK, two and a half… or even two and a quarter the way the LD’s are going) differ in anything but degree on how fast and deep they would cut, or how far they would kow tow to the banks.

@15 come on Richard, I put in brackets how I was using the term. Counter-cyclical regulatory policy involves having capital and liquidity requirements that are pro-cyclical (rise with the cycle, as in pro-cyclical wages, productivity etc.)

Isn’t this a bit of a red herring? Isn’t the issue of more concern the one of banking reform? It’s the separation of the retail banks, from whom we want businesses to obtain loans and who we want to keep our money and mortgages safe, from the casino banks from which the crisis arose that we should be pushing for, surely?

@20 Cherub

In the UK it was the retail banks that failed, not the investment banking arms of the retail banks. Northern Rock giving out 125% mortgages with inadequate credit checks and relying on intra bank funding is a great example. nothing to do with ‘casino’ banks.

If you are going to go down the line that banks are too big to fail, this looks pretty logical – there is unlikely to be pressure on banks liquidity because a run on them now looks pretty unlikely as the government steps in if necessary (I could be totally wrong on the mechanics here, but not sure how).

Of course, if you want to break artificial monopolies (or technically oligopolies) and introduce a proper market, then much higher liquidity requirements and a clear statement that government will only protect certain assets is needed, but to be fair this may not be the time to unleash that sort of reform.

22 Watchman admits his beloved free market is a sham and does not want it introduced.

As usual from the right wing it is socialism for the rich, and capitalism for the poor.

What of course all these tory creeps forget is that Osborne said before the election that he would be tough on the banks. Just like their claim not to raise VAT tories are by nature compulsive liars.

sally,

As a rule, I prefer both rich and poor to have jobs (cue comments about high unemployment now etc, which since I am not a Conservative would be rather wasted). So a radical reform of the banks should not be made until we are out of a recession so that the resultant drop in available funds (uncertainty dries up funds – the problem of late) is not so destructive. Is that sort of consideration actually considered a bad thing now? Are you really going to sit there criticising a free marketeer for suggesting the best time to introduce the free market (which he is convinced will benefit everyone remember) is when it will do the least short-term damage? Perhaps you really think that free-marketeers are out to grind people’s faces in the dirt by every means possible, but even then, how would a free market be served by a potential total collapse in bank lending and a dependence on government funds?

Incidentally, how is giving money to the banks (not that that is what is happening in actual terms…) ‘socialism for the rich’. My understanding of socialism is that it does not involve giving one section of society money at the expense of others, but I bow to your superior knowledge if you insist…