1. One of the Big Myths put about by bankers and politicians is that 'banks are too big to fail', because if you add up all their balance sheet totals, you end up with a figure of £6,000 or £7,000 billion, which is four or five times the UK's GDP. This is because every bank owes all the other banks vast amounts of money, and because of accounting rules that force you to show closely related assets and liabilities (i.e. derivatives) gross, rather than netting them off to a small, manageable figure.
2. Another Big Myth is that if house prices fall, banks will somehow disappear in a puff of smoke and savers won't get their money back (let alone bondholders or shareholders), which I will deal with in Parts 2 and 3 of today's mini-series.
3. So I have printed off the balance sheets of the five largest UK banks (see footnotes) and done all the netting off for you, which gives a more realistic balance sheet total for the UK banking system of £3,602 billion (still more than twice GDP, but that figure can be whittled down further). Article continues below:
4. I trust it's obvious where all the QE money went - straight back back into the Bank of England!
5. This balance sheet total is still overstated, so I have proposed a couple of further contra entries:
a) The UK government has lent the banks a couple of hundred billion to bail them out, which is included in 'bonds' but it also holds a couple of hundred of billion of the banks' money at the Bank of England (so it has lent money and borrowed it back again). Then there's the deferred tax asset which I can't be bothered to explain. Let's net all these off to nothing.
b) According to their individual balance sheets, total UK bank borrowing from other banks is £359 billion and total UK bank lending to other banks is £238 billion, which I have already netted down to £121 billion. We can only assume that the net figure is borrowed from non-UK banks, so let's net that off with 'Securities for sale', which includes all the mortgage-backed bonds and rubbish from other banks, primarily from the USA, i.e. repay them with their own rubbish. Also known as 'doing an Iceland'.
I'll show the effect of these contras and also look at the impact of a house price crash in Part 2 later today,
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Footnotes:
A. Balance sheets downloaded from here:
Royal Bank of Scotland
Barclays, page 19, pdf
Lloyds Banking Group
HSBC, page 357, pdf
Nationwide, page 40, pdf
B. I didn't include Abbey, which is part of Santander, and of course Nationwide is a building society, not a bank. I only included the 53.7% of HSBC which relates to European operations but not smaller UK banks and building societies. By and large, the overs and unders will net off - Barclays has quite sizeable non-UK operations and what we get is a fair picture of the UK banking system as a whole.
C. There is of course no clear dividing line between 'customer deposits' and 'bonds', but a dividing line has to be drawn somewhere between true liabilities and ownership. For example, if you borrow £50,000 from your uncle to set up in business, and a year or two later you have also run up unpaid invoices of £50,000 it is up to the bankruptcy courts to decide that your uncle is part-owner of the business and that your suppliers are normal trade creditors.
D. I added up the market capitalisation of the four banks using Yahoo Finance's numbers to arrive at the market value of the shares. Nationwide doesn't have a market capitalisation, so I have assumed this to be £nil.
Once I dipt into the future
6 minutes ago
16 comments:
This is really good data thank you. Is there any way you could summarise it all in plain English for this simpleton. I trust that what you say in the numbers it true. Just tell me the upshot.
Also will you be looking at any of the off balance sheet stuff?
As usual you simply do not believe that QE is the Guv creating new money despite the B of E telling everybody this is so on its website.The Nationwide realises what is going on and hopes house prices will go up as a result.
RS, parts 2 and 3 to follow.
DBC, to summarise QE yet again, one part of Treasury (the Bank of England) is 'buying back' government bonds issued by another part of the Treasury (the debt management office). The money goes in a closed loop and ends up where it started.
To use a simple analogy - it's like the Royal Mint making 501 pence in coins and 'buying back' £5 notes held by the banks.
QE is a giant paper shuffling exercise, with a handsome margin for the banks (i.e. the 1p by which The Royal Mint overpays).
Yeah ,after this transaction the money supply has increased because you have the 501 pound coins that the Gov has newly minted in one place plus the 500 notes already in existence in another.To begin with you just had the original notes/bonds.
DBC, let's agree that coins and notes in circulation are 'real money', and that coins and notes held in the Bank of England or Royal Mint are not 'real money'. They are bits of paper or metal and are NOT legal tender*.
So the RM takes the £5 note OUT OF CIRCULATION and puts 501p in coins INTO circulation. The bank makes a nice profit of 1p and that is the end of that.
* Another simple example - the Bank of England asks De la Rue to print trillions of £5 notes, which it delivers securely to the vaults of the BoE. The BoE keeps these in the vaults and never issues them to the general public or banks. Has that changed money supply (apart from De La Rue's normal invoice)?
No of course it hasn't. It's common sense.
Common sense?The bank prints up trillions of notes and virtually buries them?
Why should they do that?If your analogy between De la Rue and QE were to stand any chance,de la Rue
would have to receive the full face value of the notes plus a profit (snortle).
Banks are unloading their boring old gilts (which are bonds with a promise to pay so a form of money almost exactly the same as banknotes but with little velocity) and getting some new ready-money which they can loan out on houses while pretending to be shoring up industry.
I don't know why you choose to disagree with the BoE's admission of failure at having to resort to such ultra-unorthodoxy ,having screwed up a cosy cartel of private banks creating the national credit.
If you can find the right B of E website Bean of the Bank conducts a Q&A session,never a good idea , in which he answers why QE won't put up house prices.He replies that if so it'll put up other prices as well so will get a generalised clobbering
but the bank does n't discriminate between house and other prices.This is the real crux.
I'm suspicious of any argument in which the phrase "legal tender" is used, because it's almost always misused.
DBC: "Banks are unloading their boring old gilts (which are bonds with a promise to pay so a form of money almost exactly the same as banknotes but with little velocity)..."
Exactly!
They could, if they wished, sell the gilts in the market for cash (exchange one form of money for another). But they choose to sell them to the BoE and deposit the proceeds with the BoE (because BoE overpay ever so slightly).
So they haven't just swapped one form of money for another, what they have done is swap one form of government borrowing for another.
Does it not strike you that banks at the moment don't particularly want to lend to businesses or on mortgages? If they really wanted to do so, they could have sold those gilts in the market and lent out the cash proceeds.
D, bank notes that roll off the printing press are not legal tender. They have to be brought into circulation by the BoE first. De Le Rue can't just print notes on their own account and spend it.
Either way, QE is not the topic of this post. The topic is 'sorting out the banks'.
There is of course no clear dividing line between 'customer deposits' and 'bonds'
That is a huge part of the problem. I would prefer a clear distinction between "deposits" which would not be lent to anyone or used for any purpose by the bank and "bonds" which would finance lending by banks. The government would then guarantee the deposits but not the bonds.
Ed, do you mean the bank just stashes your coins and notes in a vault? If there were demand for this type of account, then surely the banks would offer it - but nobody wants such accounts because they would be expensive to hold (instead of paying a bit of interest and being broadly 'free').
Electronically (so you can still withdraw money at ATMs, pay by DD etc), yes. The bank would have to charge you to cover its costs. Nobody wants this because we have collectively fooled ourselves into thinking that the money in our current accounts is there just waiting to be used (when it has been lent out) and that it is perfectly safe (which it cannot be if it has been lent out). The result is that:
* the taxpayer has to guarantee things that can fail legally (e.g. Northern Rock), whereas I think the taxpayer should only guarantee against theft, fraud and maladministration (i.e. illegal activity).
* By not appreciating and not being directly exposed to the true risks involved, we underprice that risk and demand too little interest from banks, helping to fuel the easy credit bubble on the borrowing side.
Ed, of there is no demand for that sort of account, then banks won't offer it.
If you want that sort of account, then just keep the bare minimum you need to cover Direct Debits, ATM withdrawals etc in it, and stash the rest of your money in coins and notes in a safe place. The most you can lose is the few £100 that are in your 'account'.
Your problem them is that holding physical coins and notes is in fact an interest-free loan to the government.
There is no demand because deposit insurance exists to fool the public and banks like being able to put at risk as much money as possible while paying as little interest as possible. Deposit insurance introduces moral hazard, so I would eliminate it given the chance, and we'd see what demand arose then for proper deposit accounts.
Ed, that's already in the manifesto, give it a read!
I must have missed that post... Looks good. One addition I would consider is to force the mutual fund industry to separate out any initial and trail commissions they pay to intermediaries, so that cost is more explicit for the investor and so that direct investors do not get stuck paying extra to the fund managers.
Ed, that was Lola's fine work. He covered costs at point 10:
The single regulation that will remain is that of full disclosure of costs and charges, rates of interest – both APR and flat rates and any other factors that deduct money from client money or are taken.
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