Confidence and banks
Bit of a shock from Credit Suisse this morning – not the stuff about how much it has lost on collateralised debt obligations as a result of alleged “intentional misconduct” by a few traders (which seems to be a bit less than it originally estimated), but its disclosure that it is likely to be in loss for the first quarter of this financial year.
It says that it was profitable until the end of February but that “in light of the difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter.”
That’ll put a dent in the hopes of those who felt that just maybe – after all the evasive action by the Federal Reserve of the past few days – we could perhaps have seen the worst of the bad news from banks and the financial sector.
Which brings me round to the importance of today’s meeting between the chief executives of the UK’s biggest banks and the Governor of the Bank of England, Mervyn King.
It was originally arranged last week, to discuss primarily what they thought of the government’s proposals to reform the regulation of banks and the protection of depositors.
But the agenda has been widened, to include a discussion of the banks’ concerns that the Bank of England is not providing enough loans to them, and loans of long enough duration, to make good the current deficiencies in money markets.
The big and simple point is that the solvency of all banks depends on the confidence of their creditors.
For the avoidance of doubt, that means the confidence of most of us, as depositors in banks.
So at a time of high anxiety in financial markets, all banks are - in a sense - on the brink of insolvency.
If creditors believe - rightly or wrongly - that a bank is in trouble, well then out come the deposits, and the fear becomes self-fulfilling.
Which is why the authorities were so alarmed yesterday at the scaremongering that led to a sharp fall in HBOS's share price.
And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed.
As one bank chief executive told me, the Bank of England could eliminate all anxiety about the health of British banks by announcing that it is prepared to provide whatever loans are required by our banks until the money markets are functioning in an orderly and calm way once again.
It would require quite a change of heart by the Governor to give such an assurance. He's been concerned that the Bank of England would in a sense be giving banks impunity to behave impulsively and imprudently.
But I would expect the Bank, as a constructive gesture, to announce later today that it's rolling over the additional £5bn of emergency loans which it provided earlier this week and initially had to be repaid within three days.