Banks Can't Lend Won't Lend

Banks are at the heart of the financial crisis. For two decades they demanded and got deregulation and “light touch” supervision. This allowed them to minimise their capital reserves and invent risky new financial products in the search for greater profits. But their actions destabilised the whole financial system and plunged the major economies into recession.

Those deemed “too big to fail” have received billions in capital injections to prop them up and to encourage them to lend to each other and non-financial institutions. Some have been partly or wholly nationalised.

Central banks have slashed interest rates but little of the reduction has been passed onto consumers. Instead banks have hoarded these extra profits to double their tier one capital over the last year, with the proportion of profits saved relative to those used in dividends and lending standing at around three to one.
In the UK Chancellor Alistair Darling has banged the table and issued dire threats to the banks if they continue to refuse to lend more to small businesses and consumers and on cheaper terms. But to little effect, as the surviving banks need to repair themselves in a commercial, profit-making environment and want to avoid the excesses of the sub-prime lending which caused them so much trouble in the first place.

And in the UK at least the banks have been told by the government they have to repay the public money provided them in the short term (i.e. up to five years). This means they need to amass capital and profits now, which means little lending and at higher rates.

Secondly, regulators such as the FSA now insist the banks must hold much more capital and cash in their balance sheets relative to the value of their loans. As asset prices like property, shares and securities continue to fall, the banks have to both write down their assets, save to offset those write downs and raise more capital against increasing recession driven losses. Thirdly, British banks depend a lot on overseas sources of funding, sources that are calling in their loans rather than making new ones.

So consumer credit has become much more expensive and difficult to obtain. In September, US companies were only able to raise $10bn in short term investment-grade debt compared to $41bn a year ago. The IMF estimates that the banks’ bad housing related debts alone will amount to $1.6tn, of which around $1tn has been accounted for so far.
In this context the private interest of the banks and finance houses conflicts with the public interest of maintaining the free flow of credit. And indeed this is one conflict capitalism cannot overcome, namely, the anarchic, blind actions of the financial institutions all acting individually to preserve their capital at the expense of a functioning real economy.

The scale of the crisis demands an immediate end to this competitive, anarchic chaos and the centralisation of financial assets so that an emergency plan can keep people in work and workers spending their wages.

The UK measures have been dubbed part-nationalisation by some analysts because the government is issuing guarantees and taking out preference shares in those banks that take its help.
Brown has not sought to take over the running of the banks in question, nor even take seats on the banks’ governing boards. He has set up a Financial Investment Corporation as an “arms length” entity to oversee the government’s assets in these banks on a commercial basis. The furthest treasury influence has got is to invite them in for breakfast to try and strong-arm them into passing on interest rate cuts.

It is noteworthy that after the Bank of England slashed its rates, every one of the semi-nationalised banks passed on the cut in full to mortgage purchasers but none of the fully private banks did so.
So the banks remain in the hands of the private sector chiefs who brought this debacle about. Full and complete expropriation of the banks – at the cost of the existing shareholders – under the control of trade unions, mortgage holders and depositors – is the only way to ensure jobs, offices and factories public need, are not sacrificed for private greed.

Sat 28, February 2009 @ 12:19