Banking

The National Audit Office’s report into the government's handling of the banking crisis and taxpayers’ continued exposure is a pandora’s box of financial horrors. The NAO estimate that taxpayers are underwriting liabilities exceeding £850bn and, buried in the document, is the revelation that the FSA and the Treasury gave RBS “a clean bill of health” in October 2008, days before the bank nearly collapsed. Details are scarce and I haven’t seen the relevant Treasury document to which the NAO refers; but this disclosure is astonishing, even by the standards of Fred the Shred, the FSA et al. This crisis was caused not by market failure but by systemic incompetence within the banking’s sectors most regulated arm – the commercial.

With the largest transfer of liabilities in British history – the insurance of the risk of loss on £240 billion of toxic RBS assets by taxpayers – proceeding, there is worryingly little information being given about either what these assets may be or what risks there are to the taxpayer. Rather than the parliamentary enquiry and detailed disclosure Swiss parliamentarians demanded when UBS needed similar assistance, a small press release noting such exotics as “structured credit assets “ has been issued. The spin continues to be that there is nothing to worry about and all this money will come back fine. Bank of England data shows that UK bank exposure to the US increased increased by over half a trillion dollars between 2004 and 2007 to 1.2 trillion.

An Abu Dhabian official has briefed Reuters that Abu Dhabi will rescue Dubai on a “case-by-case basis”. The official stated: “We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts. “Some of Dubai's entities are commercial, semi-government ones. Abu Dhabi will pick and choose when and where to assist." This is potentially bad news for the UK taxpayer, who faces the prospect of provided further cover for British banks, who invested $50bn in the region at the height of the boom. The reason we're in the firing line?

The FT’s Alphaville blog has published a table detailing foreign banks’ exposure in the UAE. Look away now because it’s horrific. Of course not all of this lending was to Dubai, but those sort of funds are unlikely to be required by Abu Dhabi, with its gigantic oil profits and £900bn wealth fund. If Abu Dhabi doesn’t bail out its ailing partner, you can bet your bottom dollar who will.

Today’s revised GDP data confirms that the UK remained alone of the world’s major economies in recession in the third quarter of this year*. The fact that the UK remains mired in recession long after most economies have recovered makes clear how uniquely badly positioned the UK economy was to handle a downturn.  While some investment banks continue to argue that this performance reflects the inability of the Office of National Statistics to calculate the data correctly, there is good reason to believe that this huge underperformance is grounded in reality. Economic history teaches that bank crises are amongst the worst things that can ever hit an economy. The collapse in credit availability and soaring bank margins have posed very substantial risks to economic growth.

Home of golf and full of five star hotels, St. Andrews is a lovely spot for a weekend shindig, so it’s no surprise that the G20 have convened there for their latest navel-gaze.   This meeting was supposed to be the preserve of finance ministers, but you can’t keep a statesman down. Gordon Brown delivered an impromptu lecture on 'the way ahead' to ministers who have, by some fluke obviously, stewarded a return to growth in their respective countries. Brown is adamant that curbing stimulus packages and inaugurating exit strategies be co-ordinated globally. He spoke of the need to protect taxpayers’ investments with what he called a ‘social contract’.

Readers of the Spectator will know George Trefgarne’s work, and today he delivered an important report on the dangers of Quantitative Easing. I urge Coffee Housers to read the speech. It provides an interesting and relevant insight into historical precedents for the policy and how to manage it, and gives a balanced analysis of the current policy’s pros and cons. Trefgarne concurs with Mark Bathgate’s critique. There is little evidence that QE has stimulated money supply, as banks are using the cash to re-balance their lop-sided books. QE is funding the government’s debt habit. The IMF estimates that QE has reduced the benchmark 10-year interest rate on government debt by up to 1%, currently standing at 3.5%.

With another £40bn disappearing down the black hole known as the British Banking sector, the financial cost of the economic and banking collapse is now only rivaled by the two World Wars in it’s cost to the UK taxpayer. Rather than going to support credit to business or households, the further £25bn of “newly printed money” announced today is likely to go to help prop up the Government debt mountain.   The above chart shows how the Bank of England has been using quantative easing since March. 98.8 per cent has been used to purchase Gilts. As fast as the Debt Management Office “sells” Gilts to the “market”, the Bank of England shows up and buys them.

As another £30 billion of taxpayers’ money is handed over to banks, the role of banking sector in the continuing UK recession cannot be understated. 1990s Japan taught the world that developed economies with zombie banking systems don’t grow.  Crippled by bad debts, lending margins on solvent borrowers increase, credit availability declines and ongoing bailouts are needed. This hampers growth in the rest of the economy. The more indebted the private sector, the greater the damage a bust banking system inflicts. The above chart shows how margins on UK mortgages – the gap between borrowing from the Bank of England and what is then leant to mortgage holders – have soared since September last year.

Two years after Northern Rock became the first bank failure of this crisis, another £30 billion of taxpayers’ money needs to be thrown at the banking system. Behind all the noise about improving competition and the European Commission lies one core fact: the UK banks have lost an astonishing sum of money. The above chart shows bank losses as a percentage share of GDP, and illustrates the scale of the crisis that has overwhelmed the banking system and the taxpayer. The IMF estimates that losses could be as high as 25% of UK GDP.   UK banks went on an orgy of lending around the world, becoming the biggest source of credit growth in many countries. RBS trebled its total lending in just three years, expanding its balance sheet to almost 1.5 times the size of the UK economy.