Saturday, November 29, 2008

Mandelson on the banks

Mandelson isn't pleased with UK banks. He thinks they are over-reacting to the credit crunch.

"The banks have experienced a sharp liquidity crisis. They have lent too much at too cheap a price for too long. But they are now overreacting to that, in my opinion, in too conservative and restrictive a way.

They are in danger of substituting one set of problems for another, and in the process doing themselves further damage by under lending and not strengthening their balance sheets and profits in the longer term. They are close to cutting off their noses to spite their faces."

I found this intervention from Mandelson deeply depressing. Nu-Labour have little understanding of banking. Yet Mandelson's comments seem to be paving the way towards direct state intervention in lending decisions. When the government takes control of lending, the UK banking disaster will be turned into a calamity.

See-saw banking

Banking isn't a see-saw, where there is too much lending one day, and not enough the next. It is a regulated activity. If the regulators slacken off, banks will take advantage, which is what they did for the last decade, expanding credit at double digit growth rates.

However, the days of slack supervision are supposedly over. The FSA is asking banks to increase their capital adequacy ratios. In the absence of a massive capital injection, banks have to restrict lending in order to meet FSA targets.

As such, it is hard to see how Mandelson's demands for more lending can be squared with the FSA's push for improved capital ratios.

Bank balance sheets - the smaller, the better

The recent conservatism of banks comes directly from the appalling state of their balance sheets. It is a recognition that banks became too big during the bubble and now need to shrink. It put it another way, banks have too many loans and not enough capital to absorb losses.

Mandelson doesn't seem to appreciate this problem, because if he did he wouldn't be pressurizing Banks to go out and lend. If banks again went on a borrowing binge, leverage ratios would go up, and banks would be even less able to absorb any future rise in default rates.

Big is not always profitable

A bank does not strengthen its balance sheet by increasing lending. Nor does profitability necessarily increase when lending goes up. Banks are profitable when they have strong lending books and low unit labour costs.

Mandelson doesn't seem to appreciate the hazards of an expanding lending book. With today's deteriorating economy, new loans could easily go bad. With increasing default rates, any bank following Mandelson's exhortations might easily find themselves on a fast track to bankruptcy.

State owned banks - the first step towards socialism

Mandelson's comments also scare me.

Now that the government has a major equity holding in the financial sector, it may only be a matter of time before Mandelson instructs state owned banks to begin lending. We could easily see the government introducing credit growth targets, which would be one more crafty step towards socialism.


  1. The thought of mandelson in charge of anything fills me with dread.

  2. Mr Mandelson has friends in high places who stand to gain handsomely from his 'folly'!

  3. Remember the man in Terry Gilliam's "Brazil" who succumbs to an apocalyptic wrappig of bureaucratic litter? Meet the modern British worker, struggling for hours every day with pointless paper work thrown at his by the apparatchik classes, public and private.

    There are whole classes of workers and "managers" who just create and monitor pointless paper. Can't face the rock-face any more? Become a "quality" bureaucrat...

    B. in C.

  4. Sorry - above comment belongs to previous post.

    It's not overreaction on the part of the banks. The banks are bust, and the economy is collapsing.

    B. in C.

  5. Mandelson knows nothing about banks - it was a Building Society that he lied to.

  6. We really are in terrible difficulties. The government's desire to get re-elected will lead to them imposing this nonsense and lead to the mother of all crashes. Looks like they'll be needing their tasers after all.....

  7. Of course banks are lending - that's what banks do. Anyone who tells you the opposite is either ignorant or a liar (Mandelson falls into the second category).

    The problem for the government is that the banks won't lend to unproductive industries any more, which is a shame for Mandelson's buddies (and consequently the rest of us) because the UK is one gigantic unproductive industry.

    Get out while you can. Run for the hills, etc, etc..