The Fat Cats Party is over.
Yesterday's set of Government measures to bolster the Fat Cats will change how the Bank system operates, hopefully closing the door on the era of greediness in the financial industry but it still protecting the Fat Cats.
After more than a year of telling the banks to put their own houses in order, the authorities were finally forced by tumbling share prices and seizure in the money markets to come to the Fat Cat's rescue by helping their industry.
There will be the widely expected industry-wide recapitalisation, using tax payer's money with the big seven banks plus Nationwide boosting their safety buffers by about £25bn this year.
But the most important elements were the doubling of the Bank of England's Special Liquidity Scheme to £200bn and the acceptance of a wider range of collateral and especially the Government's offer to guarantee up to £250bn of their debt (more tax Payers money). Lack of liquidity was the biggest concern for the banks and if increasing their capital ratios is the price they have to pay.
The initial £25bn capital boost would take the big eight's average tier one capital ratio from 9.1 to 10.3 per cent, Keefe Bruyette & Woods analysts calculate. All the big lenders have agreed to get their capital ratios up to the required level, but not necessarily by taking the Tax payer's money.
HSBC, Abbey Santander and Standard Chartered all said they were participating, but that they would either raise the money internally or in the market. Barclays is also understood to believe it can raise the money from existing investors by issuing preference shares on the same terms the Government would have demanded.
But whether or not they take the tax payer's money paying a reported coupon of 9-12 per cent the banks will have to hold more capital and will face greater scrutiny of their business risk by the Financial Services Authority, which is throwing its weight around after being caught napping during the boom years.
The Government has not set a common ratio, and instead the FSA will negotiate with or tell individual banks about what levels of capital they should hold. They will also have to pay more for the Government's guarantee of their debt if their business models are judged to be risky another incentive to toe the line.
Is this the socialisation of the banking system? Not really, it's just more supervison and help for the Fat Cats. But the measures will add to existing pressures that will constrain banks' businesses and reshape the sector.
Alex Potter, banking analyst at Collins Stewart, says the Government's drive to improve capital ratios is correct. That system gave way to a free-for-all in recent years where both the level and quality of bank's capital buffers was allowed to slip as lenders lent more and more against their reserves, moved assets off balance sheet and replaced top-notch shareholder equity with new debt instruments.
The Government is taking more interest in the banking system and is saying if you want access to these funds you will have to run less risky business models.
Banks used to act simply as middle men between depositors with excess funds and borrowers who wanted to buy houses or invest in their businesses. This "maturity transformation" plays a vital role in the economy by using short-term funding for longer term purposes.
Here is where the GREEDINESS started:
To boost profitability in what is naturally a mature, slow-growth banking market, Britain's lenders spent the last 10 years gearing up their balance sheets. This meant expanding lending massively and using the booming wholesale markets to offload assets and raise fresh funds. Northern Rock securitised mortgages and used short-term funding to the point where only A QUARTER!! of its loans were supported by REAL DEPOSITS. Banks with big corporate and markets arms, like Royal Bank of Scotland, expanded in leveraged lending and parcelling up mortgages into structured products that could be sold to investors, DEBT and FRAUD.
The Government wants to be seen to be bringing the banking industry into line after the years of lending amongst them. Shareholders and bosses will be protected and in a way rewarded because they are not losing their business while ordinary taxpayers will be penalised by getting shares they have been forced to buy when those shares should be expropiated. The Government said it "will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers".
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