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We'll pay for banks to be virtuous

Robert Peston | 10:09 UK time, Tuesday, 6 October 2009

I've talked before about the fallacy of composition arising from all banks discovering virtue and prudence at the same time.

If all banks increase their holdings of liquid assets, shrink their reliance on wholesale finance and lend less relative to their capital resources in one fell swoop, well there would be a collapse in lending to the real economy and we'd be in a fair old depression in no time at all - and the banks themselves would soon find themselves bust.

Even so it's to the benefit of the economy over the longer term and in the interest of the banks individually for the banks collectively to strengthen their finances in just that way (though we should be under no illusion that in the first phase of the credit crunch, in the year before the collapse of Lehman, the knee-jerk evasive action taken by banks to shrink their balance sheets relative to their capital and liquidity - which was encouraged by regulators - did tremendous damage to the economy, in curtailing the supply of credit).

But even if the banks are given long enough to reinvent themselves as more cautious, well capitalised, better balanced institutions, it would be very foolish to believe there won't be costs - and most of those costs will probably fall on us, their customers, rather than on the banks themselves and their shareholders.

Canary Wharf skyline

The point is that safe liquid assets, such as high quality government bonds, have a lower yield - they pay out less income - than other kinds of riskier loans. So when banks have to hold more cash and government bonds, their revenues fall.

Also, capital - which is vital for banks as insulation against potential losses - is expensive. Banks have to reward the providers of capital with fat dividends.

So safe, sturdy banks are intrinsically less profitable banks. And safe, sturdy banks have a huge incentive to endeavour to recoup their lost profit by pushing up what they charge households and businesses for loans and also by reducing what they pay for deposits (although that is harder, when deposits are in short supply).

How big a price will we have to pay for a fit banking system?

Well, in spelling out the new liquidity rules for banks yesterday, the City watchdog, the Financial Services Authority, gave some estimates of the profits that banks will forego.

It is impossible to be precise at this stage, because the FSA has yet to determine quite how much stress it wants banks to be able to withstand.

But on the basis that banks are also forced to reduce their dependence on unreliable short-term wholesale funding by up to 40%, well they would be forced to hold between £310bn and £450bn of additional top quality liquid assets.

And, according to the FSA, that would lead to a reduction in their profits of between £5.7bn and £7.8bn.

Which is not trivial. Especially since the FSA says that "we expect these costs to be absorbed by the wider economy [rather] than by the banks themselves."

In other words, merely making sure that banks have enough cash to meet demand from creditors in a panic would take up to £7.8bn every year from households and businesses in the form of higher interest charges or lower deposit rates.

If you translated that into an equivalent tax rise, there would be uproar.

But, funnily enough, there hasn't been any debate about how much we are prepared to pay to make our banks safe.

Some would say the FSA - and other regulators around the world - are imposing taxation without any kind of representation.

What's more, the cost to us of forcing the banks to hold more capital could be just as high, if not higher.

In the case of capital, banks were previously obliged to hold 2% of their assets in the form of what's called core tier one capital (or more-or-less pure equity, genuine risk capital). Right now - at the urging of regulators - that's risen to between 6.5% and 9%. And the FSA has signalled that it wants banks to hold even more, probably 10%.

So the amount of core tier one capital that'll be held by banks will have quintupled.

Which will increase the banks' costs of doing business very significantly.

So they'll levy another de facto tax on all of us running to many billions of pounds in the form of higher interest charges and lower deposit rates.

To be fair to the FSA, it seems to recognise that in imposing these costs on banks and us without actually asking us, there is something of a democratic deficit (to put it mildly).

It is therefore working on an assessment of the impact of the economy of these separate measures to strengthen banks.

Which - let's hope - should spark a debate.

Because it's all very well to say that we want a safe banking system, one that isn't vulnerable to the kind of meltdown we experienced last autumn.

But if we wanted to eliminate all risk from the banking system, that would be very expensive indeed: a zero-risk banking system would be one which supplied very little and very expensive credit; and it would probably be associated with a sclerotic, stagnating economy.

It's very much like safety on the railways.

We need to decide the maximum price we're prepared to pay to avoid crashes. And we should recognise that the cost of eliminating all risk of crashes is prohibitive.

PS. In a world where capital requirements have gone through the roof, shouldn't we all just club together to form mutuals - so that the price of servicing all that additional capital is distributed between lenders and borrowers, rather than transferred to outside shareholders? Just a thought.


  • Comment number 1.

    I would simply like to say that modern finance is too expensive. The system is wonderously inefficient and the profits it produces are of no use to our economy. The money taken for costs and profits is better left with customers, who can spend it or invest it as they choose rather than funding the financial lunacy that is currently rampant. Banking costs to much and should be cut down to size.

  • Comment number 2.

    As always happens when there is a crisis govt (and regulators) natural reaction is to overcook the solution. This pendulum effect is seen in many many areas of policy not just financial sector.

    Do banks need to improve liquidity and reduce dependence on the wholesale funding market - obviously yes, the issue is by how much and how quickly.

    Too much too quickly leads to a second, and bigger credit crunch. Best guess is that it will need to phased in over 10 years and actually amounts will on average be smaller than initial suggestions. However, for the very largest banks, those in the too big to fail catagory, this needs radical re-thinking. For those banks, severe pruning or severe capital and liquidity constraints look like they are needed.

  • Comment number 3.

    What price do we pay for a fit banking system Robert: a high one. More importantly, what price will we pay for an unfit one: an even higher one.

  • Comment number 4.

    There will be another financial crisis in the future unless a GLASS-STEAGALL equivalent law is made (in both the US and the UK)in order separate the casino investment banks from the 'real world' retail banks.

    Then, only the retail banks should be protected by the taxpayer. This would allow the normal plebs to safely bank with 'boring' retail banks. It worked before for crying out loud! The Tobin tax could then be applied to the casino investment banks as an insurance against a future market collapse.


    I wanted a boring bank to bank I switched to the Cooperative Bank. I urge all other readers to do the same.

  • Comment number 5.

    Your assumptions are based on an understandable bias that has crept in over the last 20 years; that banks alone are responsible for the creation of credit, the provision of liquidity and the management of financial risk.

    There are perfectly legitimate (by that I mean FSA-compliant) ways of increasing liquidity (let's move away from the vague term 'lending') whilst reducing bank funders regulatory capital charges and increasing their RAROC without the costs being passed onto consumers or corporates.

    We need to move away from the belief many clearly have that banks are everyones 'one-stop' shop for funding solutions. They are not. You only have to look at the role trade credit insurance has played over the last couple of years to see structural weaknesses in the way corporates transact their funding. There is a more productive role the regulated insurance market can play in substituting the Probability of Default of the non-financial corporate with a higher rating (and therefore lower PD) of a regulated insurer. All relating to Basel II and credit risk mitigation techniques.

    Strong overseas banks with UK branches looking to expand their market share are willing to offer liquidity to corporates particularly if the lending structure requires less reg capital, achieves a higher RAROC, improves their risk visibility and enhances their security interest under English Law.

    Peoples mindset need to move away from that of being the 'servants' of banks to one where banks are simply utilities we use. That means people 'shop around' for liquidity and do not accept corporate finance execs (seeking to increase funding margins and transaction fees) shrugging their shoulders and saying to their customers' well, this price rise; it's the recession wot done it'(subtext: it's you - not us- who'll pay the price)

    AS an underwriter in my former life, whenever there was a massive earthquake or hurricane, insurers and reinsurers would rub their hands with glee at the opportunity to increase premiums across the board -even if the hurricane was in Florida and the client was based in London. The brokers (client 'advocates' until Spitzer uncovered this fallacy) received higher commission-based remuneration.

    Banks want to scare people into thinking they will pass on costs to customers, and they will. to those who think their options are limited. But for others, there are funding alternatives.

    Keep up the good work and check out the 'representativeness heuristic'.

    PS. Very clever of the FSA to require £370Billion of gilts to be held by banks to improve access to liquidity in times of stress, particularly when the government has so much debt to issue over the coming years. A rather clever insurance policy the banks are being forced to buy- has anyone else noticed that?

  • Comment number 6.

    In this day and age current accounts are just the digital equivalent of notes and coins. They should be 100% safe, 100% secure, guaranteed by the Government and controlled by the Government. There is no economic need for money in current accounts to be available to the banks to speculate on risky investments.

    Force the banks to ring-fence current accounts and have them 100% backed by safe, liquid assets. Bank lending should be financed by savings accounts (preferably term deposits so the banks are borrowing long to lend long), which the Government should not guarantee.

    Of course we need to reduce our reliance on borrowing. Companies can go back to issuing shares to raise capital rather than borrowing from banks (ie unwind all the Private Equity nonsense of recent years). House prices can fall to affordable levels (which would be a *good* thing) so borrowing for mortgages would be much lower. We need to learn that borrowing to finance consumption is fundamentally unsustainable - instead we need to accept that there must be an active policy of redistributing wealth and income to reduce the gap between rich and poor. And overall the banks can shrink to perhaps 50% of their current size.

  • Comment number 7.

    It seems a futile exercise to even bother urging the banks to "increase their holdings of liquid assets" when the taxpayer has done it for them, in 3 ways. First, government bail-outs, which will happen again if ever required. Second, QE, the bulk of which has simply landed in banks' coffers and stayed there. And Third, the ongoing rip-off of high interest charges and arrangement fees which banks are currently extorting from businesses and individuals despite the record low base rate. Banks = con merchants. Caledonian Comment

  • Comment number 8.

    Hang on a sec Robert you are assuming we are all happy to swallow a pretty big premise here, namely that the banks get to maintain their sizable profits.

    I recognise that banks are commercial institutions with shareholders who need to be compensated for their risk but the banks have made stupid amounts of money earlier this decade and took many risks, although no one really realised just how risky they were. We know that now, we are making the banks less risky, rewards will fall accordingly. If the yield is unacceptable to shareholders they should switch to another type of investment. I'm not accepting the assumption that the customers should pay for this.

  • Comment number 9.

    "..and most of these costs will probably fall on us, their customers.."

    Well if that's the case they damned well should NOT! IT's about time Bank Shareholders became accountable for their own non-intervention in this crisis and start taking meaningful losses, not customers. Yes bank income is likely to drop in future, but WE (the customers) want to hear bank shareholders Squealing, not laughing all the way to the bank!

    If banks are in a genuine position to pass all costs and losses onto their customers, it PROVES there is NO (serious) COMPETITION IN BANKING!!! The Regulator SHOULD be doing something about THIS, not making life easy for bankers!

    The ordinary man needs to Get a Grip, not roll over and play doormat!

    "P.S in a world where capital requirements have gone through the roof, shouldn't we all club together to form mutuals"

    Yes! In a world where we are being dictated to more by shadowy bankers, (even than Brussels?) it is absolutely ESSENTIAL! Part of the problem with this is the flippin' Regulator who has to treat even the most tiddler of a deposit taking institution like it's a Big Bank, thus totally undermining competition - New entrants are effectively barred, unless you're big to start with.

    Banking is a Total Rip-Off for ordinary customers!

  • Comment number 10.

    The regulators should take a look at the way the Danish mortgage market is organised. I am no expert, but my understanding is that most mortgages are syndicated into bonds, with the key feature that mortgage holders can refinance their loans by purchasing these bonds directly in the market and use them to cancel out the mortgage. Hence, they does not suffer the liquidity problems that for example mortgage CDOs have. Better than forcing banks to buy dodgy government debt.

  • Comment number 11.

    "taxation without any kind of representation" - perish the thought.
    Your PS sums it all up for me, Robert. Take the Co-operative Bank, for example. Their policies are truly prudent (unlike those of a certain Chancellor I could name) and whilst they may not be the cheapest supplier of financial services at present, that could easily change when the measures to which you refer are enacted. The old fashioned "only lend to others from the pool of money that is loaned to you" approach may not be so profitable, but it sure is safer.
    As for "banks that are too big too fail", the solution is simple - force them to be smaller. The argument often used for consolidation is that overheads are reduced, but reduced for whose benefit when the tax payer has to stump up billions to support the life styles and pensions of a few? Banking MUST have social responsibility built in, not just drip fed to the customer on a whim. This is where mutuals show their true worth.

  • Comment number 12.

    "A zero-risk banking system would be one which supplied very little and very expensive credit; and it would probably be associated with a sclerotic, stagnating economy"

    Perhaps, but many years ago the banks did lend in a more conservative manner and the economy seemed to grow OK. Or am I missing something?

  • Comment number 13.

    The whole system is illogical. How can you spend money which does not exist/which you have'nt earned? Why do you need a phd in economics to figure that out? Mortgages, loans, credit cards should all be abolised. Banking should be a non-profit making organisation. You are right mutual is the nearest to a non-profit banking system. Banks should either be mutualised or nationalised. All bonuses should be cancelled. This should happen all over the world so that bankers have nowhere to go.
    Some might ask, oh how will I ever be able to buy a home without a mortgage. Answer is, if there were no mortgages available house prices will fall and people will be able to buy homes for cheap again.

    If we don't do this now, we will ultimately have to do it sometime when all these institutions fail, it might take 5,10,20 years. This system is not workable or logical.

  • Comment number 14.

    the public are paying just to keep the financial 'industry' afloat. which is why it would be right that they should be taxed 70% of all profits until all the debt that has had to be taken out to keep them afloat is paid back.

    the banks can no longer pretend to be commercial organisations. they take no risk because the public bails them out. if it was not for the public the shareholders would have lost everything so its only right that they row on the oars until all the debt which is forcing huge cuts upon the rest of us is paid off.

  • Comment number 15.

    The problem is we are used to banks underpricing risk.

    The cheap finance of previous years was a mirage - the vast sums of money we have had to give to the banks recently makes up for the artificially low cost of credit we used to enjoy.

    Although painful for many, it is a good thing if loans cost more - there will be less chance of future asset bubbles and resulting crashes as a result.

  • Comment number 16.

    Is this not as much to do with creating a situation in which the FSA cannot get it wrong again? If it comes to pass that banks have to "reduce their dependence on unreliable short-term wholesale funding by up to 40%" and "the amount of core tier one capital that'll be held by banks will have quintupled" then it follows that the risk of a bank failing will be more or less zero. The need for the FSA's to use professional judgement in controlling individual banks will be eliminated and we will all be able to look forward to office space becoming vacant in Canary Wharf.

  • Comment number 17.

    A de facto tax on us all to maintain unearned income to shareholders at a high rate for nil risk and to pay for bonuses to the very special people who can manage to record a profit from our de facto tax? Not sold on this idea.

    How about a very real tax on bank profits and exorbitant bonuses until the cost to us all in bailing them out is repaid

    Or more simply as banks are proven not to be reliable in a free market, Nationalise

  • Comment number 18.

    Mutuals run for the benefit of its members? great idea, the problem is quite a few mutuals were converted into banks by the desire of the majority of its members to take a quick windfall. Maybe their is a grey area as to how far banks were "merely" satisfying consumer demands

  • Comment number 19.

    I think it is possible that many of the comments regarding banks miss the point.

    The banks own the world (literally through debt and mortgages).
    Government is subservient to the banks. It is no coincidence that ex polictians become bankers.

    The public are merely serfs whose efforts are pledged in the form of taxes to guarantee the debt.


  • Comment number 20.

    You are right the squeeze is on..

    The Halifax has just re issued its current account T&T's for December onwards

    1.The 1% interest when in credit has gone.
    2.Being 1p overdrawn will cost a £1 day
    3.If you go 1p above your overdraft limit it will be £5 a day.

    With the use of IT I find it hard to believe it costs more than a £5 a month to run a typical current account, so the profit margin above will be enormous.

    We need some guidance from the regulator on what is reasonable ,so we can vote with our feet if we feel getting ripped off.I am convinced the banks are acting like a cartel and not in open competition.Where is the FSA ??

  • Comment number 21.

    Taxation without representation? Don't make me laugh. My bank just tried to charge me £30 to transfer money from my savings account to an account held with another institution. I am sure that does not reflect the costs of providing the service. Banks don't seem to mind levying defacto taxes on its customers, can't see where they can morally object to the FSA doing the same.

    Here's a thought, perhaps bank shareholders should readjust their expectations in relation to returns for intermediation. Perhaps the return should be closer to growth in nominal GDP rather than the double digit growth seen in recent years that was generated by increasingly wafer thin equity cushions and piles of risk.

  • Comment number 22.


    A couple of observations:

    (1) you really shouldn't fall into the populist trap of using pejorative words like "fat" when referring to the dividends that bank shareholders (or any other shareholders, for that matter) require in return for their investments.

    As shareholders in all UK banks have found to their cost over the past 18 months, their investments can lose a very high percentage of their value.

    Indeed, in the case of Northern Rock and Bradford & Bingley, the shareholdings were lost completely.

    So, it is absolutely reasonable to seek some decent level of return on your investment, when you understand that most or all of the principal value can disappear in very short order.

    You don't usually sink to such tabloid journalism, and it doesn't impress the more serious of your readers.

    (2) On the import of the piece as a whole, I see that you have now changed your stance, as compared to when you were first suggesting that the inevitable consequence of tighter capital ratios and liquidity requirements on banks would be lower profitability of the said banks.

    In response to those earlier remarks, I noted on this blog before that it was not an inevitable consequence at all.

    Indeed, it was much more likely that bank customers will find that the cost of the bank services (credit and otherwise) will rise on a 'unit' basis, so as to restore the overall level of profitability.

    It seems that this light is now dawning on you and others, and it will no doubt produce some more vitriolic anti-bank commentaries.

    Although some of that vitriol is deserved, such commentators largely forget or ignore the fact that bank services have been under-priced in recent years - which bank customers happily - and voluntarily - enjoyed.

    Nobody forced the now over-stretched borrowers to take those under-priced loans or credit card facilities, and so the blame can't be laid 100% at the door of the banks, as many like to do.

  • Comment number 23.

    Agree with spareusthelies to a degree.
    However, there are alternatives to the belief in 'the one-stop shop approach'. The idea we are solely beholden to banks for all parts of the funding process and must pay for their risk management misjudgments is a 'bias' that regulators have allowed to inflate over the last 20 years. Commercial Banks are utilities whose role in the assessment of a companies creditworthiness has become far more critical than their ability to either effectively manage risk or provide sustainable liquidity. The separation of these discrete functions -at the point of purchase- is a necessary process all individuals and corporates must consider and regulators must encourage.

  • Comment number 24.

    In a world where capital requirements have gone through the roof, shouldn't we all just club together to form mutuals - so that the price of servicing all that additional capital is distributed between lenders and borrowers, rather than transferred to outside shareholders? Just a thought.

    Good idea.They could lend people money to by houses and we could call them building societies. ( However as soon as the time was right the members would get greedy and look to sell them off!)

  • Comment number 25.

    Will all this lead to a rebalancing of the economy where manufacturing, R&D and product development leads to higher exports and more UK products in our shops and showrooms?

    If not then it's no use and I'm not interested.

  • Comment number 26.

    Just to add an additional point , the "TRUE" building societies have had a very rough ride and have had to pay above and beyond their actual risks in the customer deposit scheme.The FSA should be encouraging this type of financial model not crucifying it.

    I agree with all above, who say big banks should be cut down to size, having banks that are to big to fall is simply stupid. The failed banks should of been liquidated and asset stripped by the UK government.That would of been a real lesson for investors, in ensuring managers did sustainable deals.

  • Comment number 27.

    I lauged this morning when I read the city news - the claim is that if banks had been allowed to fail then they would have 'self regulated' better and held bigger capital ratios.

    This is an example of the banal psyche of the city - they seem to be forgetting that banks were under the impression they could fail (or are the city suggesting they knew they would get bailed out??).

    Higher capital ratios merely means more expensive finance for consumers as the costs are passed down. The issue is with profits, and the advanced allocation of future profits to banks based on the possibility of future industrial output.

    That's why I want everyone to remember during the party conferences - exactly why there have to be cuts .

    It seems politicans have erased recent history and all agree that public services have to be cut in order to balance the books. They are whitewashing the fact that the reason there will be cuts is because banks have already extracted that future value from the Economy when you're wondering why your son has lost his teaching assistant, or why you have to wait an extra hour at A&E or why more troops are killed due to the lack of equipment in Afghanistan, or why there are less police on the streets - that it was all swapped for a golden toilet roll holder and a new paint job on a Ferrari.

    Anyone who agrees that cuts are neccessary are complicit in this conspiracy. If the money needs to be repaid then simply ask the bankers for it back

    This crisis is really showing where the Government's loyalties lie - and it's clearly not with the majority of people. The alternative parties are no better - the whole thing is a schmuck fest.

  • Comment number 28.

    End the fractional reserve lending fraud.

    Gold is money - paper is lies.

  • Comment number 29.

    I sometimes wonder if bloggers ever read their comnments.

    I pointed out some time ago here and on Flanders' blog that customers are being fleeced to support banks' recovery by the differential they are able to apply between lending and saving rates.

    However, Robert's response seems simply to accept this. I proposed that among the new policy toys available to regulators should be the ability to set the differntial between these rates. This would mean that the recovery for a bank in trouble would be slow and would be based on good practise - the upshot is that the shareholders will suffer rather tahn the customers, which is exactly how it should be since it is they who took the risk.

    This is happening all too often in modern times. Remenmber the great mobile phone licence sell-off? It was supposed to be a hit on the phone companies, but what actually happened? The price of a monthly contract went from £10/month to £35/month overnight - once again the hit is passed on to the customer, effectively a mobile phone tax was introduced by good old Greedy Gordy.

    Until we see the introduction of measures to curb the ability of essential services to pass on their problems to their customers instead of their shareholders we will live in a society that is headed for corporate slavery.

    We don't care about banks' profits as non-shareholders, they are not entitled to any given level of profit, in fact their profits of the past are obscene, so to suggest that they will do whatever it takes to return to that level of profitability is a cause for concern, not a fait accompli.

    We, the citizens, just want sensible institutions that can do simple things well and inexpensively. Divorcing the investment arm from the high street banking arm makes perfect sense if you want to achieve that. They can take risks with their own money (and that of their shareholders) and be sensible with ours.

    What we need is better regulation to ensure, among other things, that they don't use "our" money in the wrong way.

  • Comment number 30.

    Hughesz: "I am convinced the banks are acting like a cartel and not in open competition.Where is the FSA ??"

    I agree. The same was true of mobile phone cos after the great licence sell-off and now it cannot be coincidence that all banks are doing the same things, including those who didn't really have a problem in the first place (who therefore do not need to set their margins so high).

  • Comment number 31.

    I think that you missed the point again Robert, even though you covered it:

    The point is that safe liquid assets, such as high quality government bonds, have a lower yield - they pay out less income - than other kinds of riskier loans. So when banks have to hold more cash and government bonds, their revenues fall

    If this was any other company business plan then some remedial action would be required, and the structures would be cut to follow the cash to ensure that the business did not over extend itself

    This would feed itself through to shareholders and their expectations would be set out accordingly. Share prices and dividends would fall in line with this "brave new world" of responsible banking

    To try to squeeze money from its customers to make up for this shortfall to live as they once did, can have the absolute opposite effect

    Unfortunately, in the UK our zombie banks are being protected by the government and no new banks have been set up...and therefore they have no competition

    Why is our government allowing this non-competition?

    To protect the tax payers investment? Or do they thing that no-one else would buy our zombie banks bonds and shares?

  • Comment number 32.

    Always liked you Robert, as a writer, clear, concise and frank.

    May I ask why you continue to waste your time in a dead-end field like economics?

    Unless I am very much mistaken, economics in the modern world has two fundamental rules:

    1) Permanent growth is possible
    2) People will act rationally where money is concerned.

    Number 1 is so logically trash that I can't even be bothered to outline the case, and number 2 has been demonstrated to be flat out wrong in the last 2 years.

    So when the core aspects of modern economics are clearly and undeniably hogwash, what is the point of being an economist...may as well be Mystic Meg, right?

  • Comment number 33.

    There is only one way to prevent the 'to large to fail' problem, a government sponsored, owned and run National High Street Bank. One in which everyone is customer and shareholder. Interestingly, whichever your political persuasion, it is correct. One solution fits all camps. The economic 'recovery' underway, is not a recovery. No one, anywhere, yet knows or understands how matters will pan out. Optimism and confidence are prerequisite to those with hands on running this disaster. The solution mooted above is also a common sense must have requirement to enable the simple day to day financial fabric of our lives to continue should our financial geniuses actually turn out to have destroyed the system. Financial people are too clever to have any common sense - it must be rammed down their throats at least.

  • Comment number 34.

    29. At 12:50pm on 06 Oct 2009, chris911t wrote:

    "I pointed out some time ago here and on Flanders' blog that customers are being fleeced to support banks' recovery by the differential they are able to apply between lending and saving rates.

    However, Robert's response seems simply to accept this."

    Of course he does - the whole of society does! Until society starts questioning the source and reason behind banks profits then there is no moving forward.

    Banks profits are effectively a 'money tax' - every time you borrow they tax you and every time you lend (save) they offer a small rebate on that earlier tax.
    The efficiencies that big banks supposedly bring are used to justify their position, however the cost is that they can effectively charge whatever they like for the lending and borrowing of capital.

    Because there is an idea floating around that banks profits are somehow 'earned' (why do you think they call equity dividends 'earnings') - whereas the fact is this is no more earned than any Government tax. The profit banks make are simply taken - not earnt, which is why there is such excess in the city (ever heard the phrase about money earned being worth more than money won?)

    Far be it from me to tell the public what to do - but I find it strange that they scream blue murder at the thought of Government taxes and yet are happy to get fleeced by the banking system on a regular basis.

    Robert has elluded as to how this is done - slight increments on savings and loans rates, to little for any individual to notice but the cumulative gain is massive.

    At the end of this crisis we will be enduring:

    Higher taxation - to pay for the money extracted by banks and speculators

    Public sector cuts - So we're paying more and getting less!!

    Reduced output - Higher unemployment, longer and harder to pay back the public deficit.

    Increased cost of lending - To repair the cash levels of banks so that they don't take us down this road again.

    It seems the concept of 'you are responsible for your own actions' has been lost in the UK these days.

  • Comment number 35.

    9. At 11:26am on 06 Oct 2009, spareusthelies wrote:
    "..and most of these costs will probably fall on us, their customers.."

    Well if that's the case they damned well should NOT! IT's about time Bank Shareholders became accountable for their own non-intervention in this crisis and start taking meaningful losses, not customers. Yes bank income is likely to drop in future, but WE (the customers) want to hear bank shareholders Squealing, not laughing all the way to the bank!
    I am not laughing all the way to the bank, I took my medicine when HBOS went bust, I bitterly resent Brown and Blank saving HBOS by sacrificing LLoyds, as now I've lost the majority of my money in Lloyds too, with no chance of making it back as I have to cash in all my savings/shares as I'm now unemployed and need the money (NOTE NEVER save for a rainy day by using shares, as rainy days cause shares to crash, a useful, but painful lesson I have now learnt & a mistake I will not repeat). See later re Pension funds for how , you too, are probably a shareholder and losing out. If the stock market is to be fair, small shareholders need to have some control, maybe there are 2 classes of share, Fund Shares and Small Shares, and both groups have to vote 'yes' for a takeover etc. I voted no to the HBOS merger as both HBOS and LLoyds shareholder, as HBOS was patently doomed, having assured us all that the 4 Billion rights issue only weeks earlier was nothing to be concerned about (How have HBOS Directors NOT been sued? - I'd chip in to support any action against them) but no, Blank and Daniells , mates, so I believe of Gordon, stiched me up there too, and I'm amazed they haven't been sued. What a Banana Republic we are. Gordon rules on a whim and decides my future over Cocktails, and neither his Party, nor the Country, nor the law apparently, can do anything to stop him. How ironic, we fought a war centuries ago to remove the Divine Right of Kings, now we have a Divine Right of a Prime Minister, no parliamentary approval as far as I am aware, rode roughshod over competition law - "I can sort that later" I can imagine him saying to Blank between sips of Cocktail

    But back to personal money. It strikes me that the Elephant in the room is the Pension Funds & Pension rules, we, if we are lucky, hand over our money which ceases to be ours thanks to Government Legislation, and that money is given to men who, it appears to me anyway, become Masters of Their Universe, they support Hedge Funds by lending shares, control Companies and exert or not, as they see fit, massive influence over Company Chairman and Directors and their pay and conditions. Thus we, the source of the money that is their power, have no say, and get stuffed every which way, as when it all falls down, our pensions decrease in value and our everyday finances take a hammering as said Institutions etc try and regain their profitability at our expense. Is it not time to look at Pensions and Savings and arrange for those that want to, to have complete control over their money? I certainly would have mine out of my pension fund in a flash, and it wouldn't go near an Insurance Company for love nor any money they'd claim to offer me. Another problem is that 'Mutuals' as mentioned in the PS, included the likes of Northern Rock, Halifax/HBOS and a host of others all gone to the wall, even more sadly, thanks to the greed of members who voted to take the money and run (as ever I voted against for 2 of them, as my Children had money in them and their 'Pounds' were not deemed as important as my 'Pounds' because they were minors, talk about taking candy from Babies! That is when I stopped believeing in 'Mutuals' - Halifax in particlar, Take a Bow!), and, the so called Champion of Mutuals, Nationwide, may still be mutual, but look at some of their practices. Maybe we need the term Caveat Emptor writing large over the door of any Financial institution, Mutual or otherwise, together with, 'Unfit for Purpose' over the FSA, Bank of England and Parliament. Those of us who would prefer to handle our own money should be given the freedom to do so. I suspect that is too revolutionary for the Treasury, and, rather like a Flat Tax, would transfer power from them to us.
    Thus, it won't change, as Gordon would have no pension funds to dip into when he was stuck for cash. I thought Labour would learn lessons from Robert Maxwell seeing how close he was to Labour, little did I realise it would be how to rob pension funds.

  • Comment number 36.

    31. At 1:00pm on 06 Oct 2009, StrongholdBarricades wrote:
    "I think that you missed the point again Robert, even though you covered it:

    The point is that safe liquid assets, such as high quality government bonds, have a lower yield - they pay out less income - than other kinds of riskier loans. So when banks have to hold more cash and government bonds, their revenues fall"

    ...I would add that part of the problem faced by banks liquidity was that they assumed that their reserves were liquid. When it came to the crunch (no pun intended) they suddenly found their 'cash like' assets were not liquid - partly because the rest of the world was unloading simultaneously.

    Take Robert's example above - Banks are holding a nice comfortable set of AAA US and UK Bonds and cash which satisfy liquidity rules.

    ....then in the same week the UK is downgraded to AA and the greenback is dropped as the world reserve currency (see news today) - and all of a sudden......

    ....bonds get dumped, liquidity rules broken, penalties ensue, banks collapse.

    It doesn't take long for a shock to create an earthquake and there is one due soon. The FSA are merely setting up the next set of pins to get knocked over. I'm not saying the liquidity rules aren't valid but the problem is they won't stop the next tremor that hits - and in fact will probably make things worse.

  • Comment number 37.

    I agree with your comments, Robert. There isnt enough public scrutiny of these regulator-inspired initiatives. Against some objection, the FSA have given seven reasons as to why government bonds should make up the liquidity buffer : firms bear the costs ; price transparency and wrong-way risk; private repo markets / shock ; bonds are good collateral ; bond holding incentivises banks to manage risk and pass costs to those customers whose activities lead to stressed outflow requirements ; unavailability of access to central bank facilities to all firms ; governments must not be compelled to intervene next time.

    Is it just me or wouldnt it occur that other reasons could include that a regulator enforced gilt market making excercise such as this would have implications ( positive/negative) for Debt Management Office operations and the unwinding of QE ( Stephanie touched on this). Doesnt this also bind the banks to the credibility and size of government borrowing for the future? Would it create a shortage of gilts for other investors?

  • Comment number 38.

    More comments complaining about increased charges for us, the majority, while the banks have 'got away with it'.

    The reason banks will want to maintain their profits is because they have shareholders. Shareholders who have lost a great deal of money over the past couple of years as bank shares collapsed. And if you had shares in Northern Rock...well, enough said?

    During the good times, many people benefitted from the banks' excess, a fact which hasnt been appreciated in the press. Woolworths, and other businesses, ran up credit bills they didnt have a hope of repaying, because credit was cheap. Consumers got bigger and bigger mortgages, because they were cheap, and house prices rose accordingly. If you own a house, you received a huge dividend over the past 10 years through no effort, no thought, just thanks to the banks and their lovely lending rules (or lack of). Its only fair that these other parties also get hit, now that the banks' profitability has been shown to be an illusion based on future earnings which never materialised and probably never will.

    We should spare a thought for first time buyers locked out of the market, particularly young people who contributed nothing to the crisis but will be paying for it, in massive youth unemployment, high property prices combined with stringent lending terms, and higher taxes/lower spending for years to come. But apart from this group, many are virtually equally guilty.

    P.S. Does anyone remember the Conservatives muttering grave warnings about the £1 trillion debt mountain, and being laughed down?? I'm not tory supporter, but it does show that it wasnt just the banks who deluded themselves.

  • Comment number 39.

    I've always felt that there should be level playing field in business.
    If my liabilities exceed my assets I'm in regarded as being in trouble.
    The same for banks seems to be some kind of benefit.
    We are always told that shares can go down as well as up. The down part seems to take the city completely by surprise.
    I'm sure I could make so much more money if I was allowed to overextend myself the way the banks do.
    We have already paid for the banks overextending themselves with a big crash. We will continue to pay for a long time.
    Your PS suggesting Mutuals sounds good - oh hang on we were forced to demutualise all the old ones. Now if we could have proper mutuals that were impervious to demutualisation... we'd be left with the government holding all the debt the banks...
    They wernt too big to fail - they were too big to continue!

  • Comment number 40.

    The most common and effective motivation is self-interest.

    Everyone who works in an industry and sector which are too "important" to fail, should have their personal interests and risks chained and proportional to the national interests of UK - including debt, law and order, unemployment, health. This should include MPs and senior public servants. The rewards and risks should not be able to be reduced or avoided by leavng the UK or protected by Money.

    Every other measures and regulations are just words, easily bypassed by those with sufficient money.

  • Comment number 41.

    I only come back here to read the comment posters.
    Much of what the blog says is not worth the read anymore.

    It amazes me that comment posters have a greater sense of what is right for this country than any reporters, banks or politicians.

    We need a written constitution in this country. It's not just the Labour party that is broken it's the whole structure of government.

  • Comment number 42.

    I happen to spend quite a bit of time in Italy whose banks have been much less hit by the credit crunch due to their conservative non-anglo-saxon type behaviour. The reasons for this are historical and probably have something to do with a history of corruption in the south of the country. Typically there one pays a small monthly fee to have a bank account or a credit card. I think this is quite a cheap and reasonable price to have to pay for banks which don't require rescuing to the tune of several tens of thousands of pounds per person.

  • Comment number 43.

    Will we go back to credit unions and the like? Will loan sharks reappear? At least you knew where you were with this type of finance. With the banks now to get credit (!) then the rules change in the course of the loan.
    Sorry my trust in the high street banks has failed, and on another note.... Where did the Spanish get all there cash to buy up our banks? I missed that one.

  • Comment number 44.

    Robert writes:
    “So safe, sturdy banks are intrinsically less profitable banks..........".

    We should not deny Banks sufficient profit for their “traditional” banking services. The sensible safe solution is to pay the right price for these services and separate this banking from “investment” banking.
    The greatest change that traditional banking has undergone is the total introduction of “electronic banking”; we should not ignore the productivity changes that have occurred. I believe these cost reductions have been ignored, who knows the real costs of our normal transactions? We should not assume that low cost banking is only possible if subsidised by risky investment income.
    With separated banking activities, management would focus on their specific business and drive improvement just as any other industry. Customers could decide the price they are prepared to pay for banking services and choose between competing providers. If they had excess cash they could choose the interest and the risk they wanted from the competing investment banks.
    The liquidity ratios required for these different risks could then be defined according to the risk but also the guarantees, if you give your money to a bookie you don’t assume you get it back or guaranteed by the tax payer if it goes wrong.

  • Comment number 45.

    'wrtingsonthewall' makes some valid points but with respect offers little that moves us forward constructively. To outline a scenario along the lines of 'a fissure erupts along the san andreas fault, takes out San Francisco and Los Angeles, and then travels down the western seaboard destroying all coastal cities in South America' is a little far-fetched.

    The liquidity requirements going forward are a very astute construct that:-
    1) allows the government to find a (domestic) home for much of the debt it will have to issue over the next few years.
    2) Offers the BoE solid collateral to offer liquidity against (with a painful haircut) at crystallization. This will be highly expensive insurance to call on for the banks.

    At a micro-level,those who continue to rely on revolving credit to support liquidity within a highly leveraged capital structure will struggle. Others will understand the Schumpeterian view that what is going on right now is 'creative destruction'. Financial services providers - like trade credit insurers and commercial banks - continue - like US auto manufacturers and their distributors - to 'manufacture' goods and services that no longer fit the needs of their customers.
    Basel II -only just rolled out when the crisis broke- offers many opportunities to create better risk-adjusted funding structures that give customers financial products that offer them better value at a cheaper all in cost of funds.

    It's up to individuals and corporates to do their homework -not for the nanny state to over-regulate (labour's lynch the bankers approach) or maintain the status quo (conservative - front bench of bankers).

  • Comment number 46.

    You haven't mentioned the cost to the Public in terms of the loss of their Pension Funds (invested in Bank Shares) which have lost enormous chunks of their value.

    Perhaps Pension Fund investment and management should be tighter regulated, including limiting the fees that can be charged by the Management firms.

  • Comment number 47.


    The Spanish banks are another house of cards...........

  • Comment number 48.

    Mind you one Spanish bank, that was handed poor old Bradford and Bingley on a plate, has a Scottish Investment Trust as a Shareholder !

    Could it be a Scots - Spanish conspiracy to own Britain ?

  • Comment number 49.

    I haven't read ALL that EVERYONE has said, but, with regard to the PS, I think the Cooperative Bank is exactly the mutual model of banking which can offer security and partnership, and ownership. So we already HAVE something which works well, and can be a template for other banking initiatives fit for the 21st century.

  • Comment number 50.

    On the one hand the banks may need to charge more, one way or the other. On the other hand there are endless offers of 0% deals on credit cards.

    'Our best ever 0% balance transfer offer
    Pay 0% interest on your balance transfers for 15 months (2.9% fee - min £5) and 0% on purchases for 3 months.'

    This is taken direct from the website of a bank owned by RBS

    It took me 30 seconds to find this

    Here's one from part of Lloyds TSB

    'If you want a card that gives you a great introductory offer on both balance transfers and purchases then look no further. The All in One Credit Card offers a fantastic 0% for 9 months on purchases and on balances transferred within the first 90 days (3% balance transfer fee applies).

    0% for 9 months on balance transfers made in the first 90 days
    0% for 9 months on new purchases'

    I could quickly find many other examples

    Exactly what is subsidising this business

    How many people are paying no interest on their credit

    What is the total value?

    How does this fit?

    Its contradictary nonsense

  • Comment number 51.

    Can we remember, just this once, that we're Europeans not Americans, and read the writing on the wall -- ie, that some problems simply do NOT have a simple solution, and a few more even can't be solved (at least not in a short time).
    The cost of safer banks to the public is huge. But insurance (if it's for real) doesn't come cheap. Democratic deficit? Possibly. But the electorate can only vote for mining mooncheese, they can't actually get it. Pity the poor Western politician who'll have to lie to their electorate even more than usual or promise falling incomes, a longer workweek for fewer employed and more-expensive holidays abroad.

  • Comment number 52.

    This was a brave topic, it sailed beneath many lofty brows. The virtues of Banking. :)

  • Comment number 53.

    Amongst comment floating about the web, Michael Geoghegan expects the requirement for core tier one capital ratios to be around the 10pc mark.

    I ask how this will work and how Banks 'will' leverage this asset?

  • Comment number 54.


    The shareholders can demand all the profit they want. That doesn't mean that the profits are there, and it certainly doesn't mean they should get what they want.

    The shareholders need to stop being so greedy. The demand for every increasing growth in profits is not sustainable.

    Secondly, we need to understand that our need for banking is much less then we are told it is. We do not need to borrow money for a car. You can arrange your life to avoid borrowing to buy a car, or anything else. Buy now, pay later is just as bad as grandad told you.

    Shop around for banking facilities. To me a bank is where you keep your cash. They've got it and making a profit as you dip in over the month. Dont pay charges. Go elsewhere. If everyone votes with their feet and moves next door to a better deal, the banks will learn.

    Why so many companies need debt is beyond me. That, in most cases, strikes me as bad housekeeping skills. Companies, just like all of us should have savings accounts, not debt.

    Get smart people.
    We have allowed the financial giants to become our rulers. That sadly, is the mess we are in. We need to take our democracy back, and the way to do it is play them at their own game. Play so hard and put the banks back in the place as service providers, not the rulers deciding our fate.

    Co-ops, mutuals, local credit unions. There is choice out there and all of us need to use them and our brains regardless of your income level.

    One last thing. If the politicians don't make the banks virtuous, then it is the politicians who will pay with their jobs. I am still not impressed with how the city-slickers have been let off the hook.

    Imagine, the headmaster taking all the naughty boys into his office and asking if they will AGREE to write out lines of 'I will be better behaved' 20 times! Absolute, utter nonsense.

    You will do what your told, no perks, no pocket money for the rest of your time on this earth (they can work for a giro like so many others filling their days in the voluntary sector). If you don't like it, there is an alternative - basket case Zimbabwe is always looking for more people....

  • Comment number 55.

    Sorry RP,your worst article by a long way.

    Your implied metaphor,of the juggler with long sticks and spinning plates on top,doesn't necessary led to all broken plates.

    Two words,Islamic banking.
    Here's four,cash assumes greater value.

    Now that the bottom of the crisis is over,the same ridiculous comments from invested business interests return.For example,

    ''...if you don't do this and that,the recovery will stall...blah,blah,blah,''
    They just haven't a clue.They didn't see the multi-trillion pound recession coming, and now still don't get it.

    2:Visiting a small Scottish hotel,a friend of mine enquired about it's (weak signal)WiFi to test out a new laptop I was fortunate to receive.She lives in the town.
    ''Oh yes we have WiFi''
    Can I have the passphrase please?
    ''Sorry, only for Hotel residents.''...
    I mean why bother ??
    The Station Hotel,Ellon,Aberdeenshire welcomes you to...everybody, except residents of the self-same town...and they wonder why business is quiet!!

  • Comment number 56.

    from Bloomberg
    do a search on "Bloomberg, bank runs, collapse" and follow the trail

    '...British banks have only recognized 40 percent of a likely $604 billion in (property) writedowns from 2007 to 2010...'

    In other words, the banks have not yet come clean on the true state of their books, and don't count on their auditors twisting their arms.

    Be aware, be very aware, the stock market upwards meander is not even built on sand, but custard skin.


  • Comment number 57.

    Economics is a modern conundrum of Maths (an art form), finance and politics - the never never. Gather up all your cash. Gather up your faith and trust. Open your own Bank. Invest all your cash in your banks savings accounts, (we promise to pay the bearer' etc.. Now lend those savings to one and all for interest. Instantly, your invetments are doubled and earning a return in interest. At least that is what your accounts will tell you. You can go live on credit because you are twice as wealthy but your capital is actually vapourware, never to be seen again. It has become zero's - the stuff of modern economics. This is good. It makes us all richer, by degrees :) and fuels business and growth. Clever bloke, that lad who started the Bank of England.
    Confidence in Banks and Finance failed, people wanted their capital back but of course in reality it was just zero's on computer screens and printout. Finance costs too much, it is to expensive. Cheap Credit works as we have seen during the past 30 years BUT sublime greed (read stupidity) took hold and high interest rates (the never, never) grew a gravy train as ridiculous as a whale with wings. Capital was never repaid and that was the risk that came home to roost. Low interest rates to the consumer mean they will clear capital debt rather than extortionate gravy (whoops) interest and the fun and games can resume. Profiteering by financial buccaneers is the problem and it is not alright. Front end interest rates are too high and generate the problems everyone is unwinding now.
    Will economies recover, of course they will, should finance be allowed to continue taking more than its share from the pot, what ever the reasons in favour, the answer is no. Capital must be repaid not extortionate interests.
    The problem was and remains Capital repayment of loans. Cheap interest DOES WORK if you get rid of the cuckoo's in the middle, or at least cut them down to size and maintain low interest rates which repay capital rather than INFLATING its value.

  • Comment number 58.

    Re: #56. At 3:03pm on 07 Oct 2009, allmyfault wrote: " '...British banks have only recognized 40 percent of a likely $604 billion in (property) writedowns from 2007 to 2010...' "
    This issue is not unique to UK and is now misnomer.
    Recent BBC headline - 2 October 2009 11:38 UKE- House prices 'back to 2008 level'.
    This was courtesy of Nationwide, nee Goldhawk Building Society who rule their world from here So i imagine accountants are very busy across the entire economic frontier, writing back up what they wrote down.
    Funny old world.

  • Comment number 59.

    Here is my final post on the comedy of 21st Century Trading Globalisation.
    FASB-157 was perhaps the regulatory blunder of all time. A battery of howitzers to crack a peanut. Arrogance sublime. Here's why - No one would address the real problem. CRIMINAL ACTIVITY at the top echelons of business management. No one who should have, would send in enforcement or blow whistles. The problem was handed to................ an accountant. He did a very brave job. Credit to him but it was never going to work. The wrong answer to the wrong problem brought about disaster - to the tune of -30% valuation adjustments which had pee running down peoples legs.

    The procedure changes introduced during 2006/2007, to correct accounting anomolies which 'could' be 'used' to inflate value were a noble attempt to address criminal business behaviour. The problems addressed were not identified correctly and impact of the rules in practical and financial senses, was not appreciated, understood or mitigated.

    Suddenly, very, very, suddenly, a system which reflected future values, ie endevour, opportunity and reward was changed to here & now, a 'backstreet market' system of accounting. The basic tenets of the changes are unarguably correct, their implications though are impractical in modern business. FASB-157 and its associated conundrum of accounting straight jackets was as dumb as it can get in terms of human nature. Criminals are simply that, criminal, unfortunately many of the few criminals responsible for the scandals which brought about the accounting changes had friends and puppets with influence and pull. These criminals also had open access through lobbying to people at all levels of society able to influence decision making.

    Everyone, the entire planet of people, are paying a terrible price for the failure of NOT enforcing perfectly good accounting practice and allowing a few rogue Bulls to spoil the party. Financial greed built inflation into Financial accounting. The bubble which burst was a banking finance bubble of a scale that is unimaginable. It was madness by insane criminals. The easy fix, let an accountant sort it out. Insanity.

    There is nothing to do but laugh, then smile, then call in the Marshalls and stop jerking around with a bunch of hard ball playing criminals who call themselves Bosses. A criminal is exactly that, what ever way their cloth is cut. Send in the Marshalls, clean up and clean out the robber barons who use business and finance to steal, robbing the world blind. Lets hear it for honest profit and the good guys who build stuff and create jobs and hope and prosperity and are not unduly greedy or playing games with other peoples money and taking an arm and a leg in interest rates and personal remuneration. Greed can be spotted from orbit, let alone the office next door.

  • Comment number 60. Leverage will 25 to 1. The question is who is the chicken laying the egg in UK. '£450bn of additional top quality liquid assets' is a lot of bananas when multiplied by 25. In fact it is 11,250bn. So why not make Tier 1, an upfront requirement, if this is the way to go.

    UK housing prices are a problem.

  • Comment number 61.

    It isn't often in life that one can make everybody smile.
    Here goes...... Lloyds Banking need a vast dollop of capital, desiring withdrawl from GAPS asset protection. Why should taxpayers underwrite £200bn of toxic assets when there is a private sector alternative? The government, with 43.5% in Lloyds, may subscribe to a rights issue, injecting up to £6.5bn, leaving investors to buy £8.5bn. Why government would do such is not clear but UK investors don’t seem to have a problem backing cash calls from even the most troubled of companies. Those who backed the last fund raising at Lloyds have not done too badly. They proudly thought of England. :)

    £15bn handed to the treasury (8.5bn net) x 25 leverage (Basel Commitee-Tier 1) is about as risk free as investment can be. Unless you are a goldfish.
    Keep it simple and put a smile on investors faces by wiping it off their faces.

  • Comment number 62.

    News: Excercise 002:
    Saw ''The Mothman Prophecies'' for the first time last night. This has been addressed by IDNKYN on The Fall Online.
    [On Random Thread,Post no.391 should read something like

    ...''I ll donate all my money to charity,'']

    If the message adds up,it hints at an American provider of security mucking about.

    [unrelated/related message returned:avoid yellow,till get all clear.]

    $600 trillion dollar world gdp($540 trillion dollar credit)
    $60 trillion dollar cash world gdp

    Move from credit to cash by worldwide next day delivery of 90% asset AND debt deflation.

    i.e. a $250,000 house, becomes $25,000='cash equivalent price' yesterday.
    i.e. a $1 trillion debt becomes $1 billion debt='cash equivalent price' yesterday.

    Everything remains relatively the same.(Of course the 'wealth' of individuals,sub-groups are affected differently)

    How do you do it ??
    Countries around the world agree through international law.

  • Comment number 63.

    I read a very interesting article recently that equates the whole bail out to a indirect taxation on businesses.

    Very interesting read:

  • Comment number 64.

    Royal Mail Strike: Who will win?

    There is currently a battle of words in the media between Royal and the Communication Workers Union.

    Firstly, the union claims that a majority of it's members support the strike. This may or may not be true. What is required by the 1992 Act is that a "majority voting in the ballot" vote yes for the strike. The union correctly claims that a clear majority, about two thirds, of those who voted supported the strike call. But what about those who did not vote? One can only speculate about their support. If the non-voters are a small minority then it remains true that a majority supports the strike. But the truth of the union's claim depends on the size of the minority: the larger the minority of non-voters the less likely is the claim to be true. The Act does not require non-members of the union to declare support, but their allegiance to the strike is very dubious, as they are not even members.

    Secondly, Royal Mail has problems with this strike. This is the first strike in a long time that is not apparently about money for workers. It is about modernisation. But what does modernisation mean? To management it is about more sophisticated machinery for sorting mail and packages. To workers it is about working faster, and walking faster on the daily delivery. More fundamentally workers fear that faster sorting will result in redundancies. So this strike is about job security in hard times. But money does rear it's head at this point. Redundancies, voluntary and involuntary, cost management money. New machinery cost money. Royal Mail does not have enough money to pay pensions.

    What to do? Should Royal Mail offer to pay decent compensation for voluntary redundancies. Raise charges for all commercial letters and packages, and use the extra to subsidise post for pensioners, and the outer islands of Britain? Ask the Chancellor for more money to pay for pensions? Pay for 30,000 extra wokers for the duration of the strike, and beyond? These are all hard choices, and produce a determined management. The prospect of job loss also produces determined workers. Who will win?

    Lastly, Royal Mail has a problem in that modernisation is clearly an issue to be sorted by management. Or is it a problem to be sorted by both parties? In this case unions start to look good to the general public.

  • Comment number 65.

    By putting large American losses through British banks Merrill Lynch can set these losses against their profits. The losses are so huge that no Corporation Tax may be liable for about 60 years in the UK.

    I am no lawyer, so I assume that the UK ruling allows losses to be set against profits is, or was, in some part benign. That is it allows struggling firms to reduce their tax bill, and so remain in business. This can be benign in a number of ways.

    Firstly, it keeps employees in a job. Secondly, it assumes that the product/service is, or is believed to be, of some real benefit to consumers. If the product/service remains in existence this may be a benign outcome. Thirdly, some firms kept alive in this way will pay some Corporation Tax. Further, if they recover, they will pay full Corporation Tax. And there may be other benign outcomes.

    How far does this scenario fit the current banking crisis?

    Firstly, keeping workers in a job may, or may not, be benign. It depends on a large number of things including: does the employer pay the minimum wage, is health and safety respected at work, are there similar jobs available in the local area. This list could be extended.

    Secondly, how products/services benefit consumers is very unclear. A simple belief in the positive benefits of a product/service is no guarantee that such benefit exists. Also, what does benefit one may well be a cost to another. For example, low flying aircraft over houses near airports is a cost to families in houses, but a benefit to business travellers and holiday makers. Lastly, are we the best judge of what is to our benefit; or are we too easily persuaded by advertising, product placement, or just a felt need for the latest version of something that we already possess.

    Thirdly, firms kept alive by putting losses against profits may not pay much, or any, Corporation Tax. This is especially true of banks, and other financial institutions currently. Indeed there is now some speculation that large banks, like Merrill Lynch, are recovering but paying little tax. This is because their losses are so large.

    The government's loss of income from Corporation Taxes raises a number of problems. Will the government have enough income to maintain a decent welfare state? How will a reduction in welfare state spending affect those on low incomes, and their voting habits?

  • Comment number 66.

    Just had an e-mail telling me that the FSA has appointed Nomura chairman, Colin Marshall, as a senior adviser on corporate governance just days after it fined Nomura £1.75m for systems and controls failings!

    What does Robert think of that, I wonder? As an IFA I can tell you that my thoughts are unprintable!

  • Comment number 67.

    This comment was removed because the moderators found it broke the house rules. Explain.


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