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Tighter banking rules will drain £1tn from financial system, study shows

Banks are drawing on research conducted by PricewaterhouseCoopers which shows two percentage points would be sliced off economic growth

George Osborne, the new chancellor, outside 11 Downing Street on 12 May 2010.
Britain's biggest banks will attempt to alert George Osborne to the impact of proposed regulations. Photograph: Geoff Caddick/AFP/Getty Images

Britain's biggest banks will warn the chancellor that up to £1tn is poised to be drained from the financial system, hampering economic recovery and depriving households and businesses of loans and other forms of credit.

The bank bosses wrote to George Osborne shortly after he took office are to meet him to express their concerns about the impact of regulatory changes which require banks to hold bigger capital cushions. These changes are coming at the same time that the Bank of England withdraws liquidity schemes designed to help banks during the financial crisis.

The banks, through the British Bankers' Association (BBA), intend to tell the chancellor that when the Bank of England pulls the plug on these liquidity programmes some £400bn will be withdrawn from the UK's banking system. The schemes were put in place to help get money flowing between banks after the credit crunch, but are due to end in 2012.

The banks have also calculated that demands by international banking regulators in Basle that they bolster their capital will require the UK's banking industry to hold an extra £600bn of capital that might otherwise have been deployed as loans to businesses or households.

The banks are drawing on research conducted by PricewaterhouseCoopers, some of which was used to appeal to G20 leaders ahead of last month's meeting to delay regulatory changes, in setting out their concerns to the chancellor. The research claims that two percentage points would be sliced off UK economic growth because of proposed regulations, driving the country into a double-dip recession.

At the June G20 meeting, the leaders appear to have heeded the lobbying efforts of banks by slowing down the implementation of the international rules and giving individual governments the responsibility of introducing the plans at their own speed.

While this delay has helped to alleviate some of the most pressing concerns, the industry is still determined to air its fears about the dramatic withdrawal of funds from the economy in the coming years.

It is also expressing its concerns to Vince Cable, the business secretary, who is in discussions with banks about ways to stimulate lending to businesses, particularly small and medium-sized enterprises, and generate growth for the economy.

The chancellor, while prepared to listen to the banking industry, is determined to push through regulatory changes, such as the new bank levy. Osborne is also convinced that the banks should work with the government to ensure that credit gets through to businesses and households even while regulatory changes are made.

The Bank of England, for instance, has calculated that banks could free up £10bn of capital to support £50bn of lending by restricting bonuses and cutting dividends to shareholders.

But Osborne is also thought to have argued during the recent G20 leaders meeting that some delay was needed to the regulatory changes and is also prepared to discuss with banks ways of staggering of any reforms.

The banks are meeting the chancellor as the government prepares a green paper to thrash out some of the issues involved in getting loans flowing to businesses. In a recent speech, City minister Mark Hoban said that the paper – being published at the end of this month – would consider the "broad range of finance options" to businesses, including equity which is used by only 1% to 2% of small firms.

The government sees such lack of equity investment in small businesses as "missed opportunity" that should be explored along more traditional bank loans and overdrafts.

Neither the Treasury nor the BBA would comment on any upcoming meeting or the topic for any discussions.


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  • physiocrat physiocrat

    11 Jul 2010, 12:08AM

    But how else are the Augean Stables that are the banking system to be cleaned? That is bound to disrupt the economic system for a while.

    The real worry is that nothing fundamental is being changed.

  • ArseneKnows ArseneKnows

    11 Jul 2010, 12:51AM

    The Bank of England, for instance, has calculated that banks could free up £10bn of capital to support £50bn of lending by restricting bonuses and cutting dividends to shareholders.

    Why on earth would they do this when they have almost every country in the world by the balls?

    Just how long can the banks and the financial institutions be allowed to get away with a never-ending supply of subsidies from countries who are cutting the pensions, jobs, benefits and public services of their people whilst the banks continue to pay out hundreds of billions in bonuses and 7-figure salaries.

  • lostindenmark lostindenmark

    11 Jul 2010, 12:52AM

    the reason the £1trillion will vanish is because it doesn't exist. the current regulations allow banks to hide debts with financial slight-of-hand and magic up money out of nothing.

    what the banks are saying is "£1trillion's worth of fraud, hidden debts and fake assets will be discovered"

    regulate and tax the greedy so-and-so's

  • MikeRichards MikeRichards

    11 Jul 2010, 12:53AM

    @ FrederickL
    How many trillions has their appalling conduct cost us already?

    I'm not sure here, but in the US one year ago, the head of the US bailout told the Senate that the total cost of the bailout of the American system might come to $24 TRILLION. So throw in another two or three trillion for the British banks. And then there are the trillions more in lost production, ruined businesses, repossessed homes...

    That's the problem with these subsidised industries - as soon as they're asked to stand on their own two feet they start saying they can't live without the subsidies. What about all the nearly free money they've been hoarding rather than extending loans to individuals and businesses? What about the billions they've poured into paying themselves obscene salaries and ludicrous bonuses in the last few months. From here it looks like the banks have got plenty of money slopping around without us keeping them going.

    On the day the BoE decided to keep rates at 0.5%, my bank told me that because I was such a good customer with an excellent financial record I could have a loan if I wanted for just - 8.75% - someone's making a lot of money somewhere.

  • bob15 bob15

    11 Jul 2010, 12:59AM

    The banks, through the British Bankers' Association (BBA), intend to tell the chancellor that when the Bank of England pulls the plug on these liquidity programmes some £400bn will be withdrawn from the UK's banking system. The schemes were put in place to help get money flowing between banks after the credit crunch, but are due to end in 2012.

    The chancellor doesn't have £400bn to lend, if it were lent in anyway the financial markets would treat the UK would fall apart like Greece.

  • FrederickL FrederickL

    11 Jul 2010, 1:03AM

    @ MikeRichards

    "I'm not sure here, but in the US one year ago, the head of the US bailout told the Senate that the total cost of the bailout of the American system might come to $24 TRILLION"

    Yes, it is pretty mind-bending is it not! Now the swines are claiming are saying that if it is not business as usual it will "damage the economy". What in heavens name do they think that they have "achieved" so far?

  • Rickcam Rickcam

    11 Jul 2010, 1:05AM

    Let's see if I can grasp this. Bankers showed poor judgement and lack of ethics and caused the biggest recession since the 1930s. They were then bailed out worldwide. They then took this money to pay themselves astronomical bonuses. The money they received came from governments - that is to say it came from ordinary taxpayers. I have a few rhetorical questions.

    1.) Why can't the bankers pay back what they 'stole'?
    2.) Why aren't they all in jail?

    Banking needs to be completely reformed. It surely needs an injection of honesty and accountability.

  • Rickcam Rickcam

    11 Jul 2010, 1:09AM

    A good start to banking reform would look like this.

    1. Confiscate the personal fortunes of all these bankers as you toss them in jail.
    2. Repossess their homes and all their possessions and toss their families in council housing.
    3. Put all this up at auction and keep careful account of what the proceed are.
    4. Use these revenues to help poor people and lower taxes.

  • KenBarlow KenBarlow

    11 Jul 2010, 1:12AM

    Capitalism is Dead, But We Still Dance With the Corpse
    http://www.counterpunch.org/bageant07092010.html

    "If there is no economy left, what the hell are we all participating in? A mirage? The zombie ball? The short answer is: Because the economy is a belief system, you are participating in whatever you believe you are. Personally, I believe we are participating in a modern extension of the feudal system, with bankers as the new feudal barons and credit demographics as their turf. "

  • ReluctantRioter ReluctantRioter

    11 Jul 2010, 1:15AM

    Can we really trust the veracity of the banks' protestations about regulation? No chance. And PWC is hardly an independent body, they were clearly instructed to deliver a dramatically high figure by the people who paid them for their services. Slicing two points off economic growth sounds like a grossly disproportionate result of this initiative.

    How are we supposed to trust a single thing those self-interested bankers tell us?

  • lostindenmark lostindenmark

    11 Jul 2010, 1:17AM

    1.) Why can't the bankers pay back what they 'stole'?
    2.) Why aren't they all in jail?

    it's simple: they're the real bosses. what they're saying to Osborne is "do as we say or we'll crash the economy"

  • M0ngrel M0ngrel

    11 Jul 2010, 1:21AM

    The research claims that two percentage points would be sliced off UK economic growth because of proposed regulations, driving the country into a double-dip recession.

    Always with the threats. Wish they'd all just fuck off. Like they threatened to.

  • AlbionEikon AlbionEikon

    11 Jul 2010, 2:44AM

    Seems to me it's a "Pay now or pay later" scenario to me. I agree with the goal of requiring banks to back-up their activities with greater savings because the current system is far too erratic. As we have recently come to learn, economic health may be purely a cosmetic facade that obscures the underlying cancer. Perhaps a phased in approach would help ease the transition?

  • sandgrinder sandgrinder

    11 Jul 2010, 2:55AM

    james911 11 Jul 2010, 1:34AM
    Not many comments actually addressing the substance of the article. Not surprisingly -- just say the word "Banker" and watch the neurons light up.

    True-ish ... but the article puts our banker's concerns into an international context:

    At the June G20 meeting, the leaders appear to have heeded the lobbying efforts of banks by slowing down the implementation of the international rules and giving individual governments the responsibility of introducing the plans at their own speed.
    While this delay has helped to alleviate some of the most pressing concerns, the industry is still determined to air its fears about the dramatic withdrawal of funds from the economy in the coming years.

    ... and it read like toilet humour to me ... especially as I'd just been over here:

    Wall St. Hiring in Anticipation of an Economic Recovery. NYT. July 10, 2010.

    You are, of course, correct ... I see the word 'banker' and just can't help thinking 'banker'. I'm sure the 'new austerity' will knock such childishness out of me soon, though.

    Look ... a smiley ... :)

  • theoriginaljones theoriginaljones

    11 Jul 2010, 4:24AM

    Ahh, I see........'give us a trillion dollars or we'll go bust and it'll cost you'.....'thanks for that, now we'll continue our parasitical existence'............

    ' Hey, don't you dare now interfere with our parasitical prerogatives or it'll cost you'

    It may just be me but I get a sickly feeling that summat ain't right here. I have no expertise whatsoever in finance/economics and it's just intuition I'm working on.

    I am, as always, prepared to hear the arguments without prejudice but personally don't even know what question to frame to kick off with.

    Help, please.

  • theoriginaljones theoriginaljones

    11 Jul 2010, 4:35AM

    After some reflection I feel able to use the following form of words to describe the sensation I allude to above.

    Tis like being forcibly strapped down to a bed in a maximum security prison by a (hypothetical) room-mate by the name of 'Chervais' who is a self-confessed sado-dominatrix who proceeds to rip your skiddies off and then, before anything else happens, places his chin on your shoulder and whispers 'trust me'.

    That's how visceral my intuition is.

    Emotion will always defeat language of course.

    Debate will be welcomed.

  • GW74 GW74

    11 Jul 2010, 4:49AM

    This comment has been removed by a moderator. Replies may also be deleted.
  • Cameldancer Cameldancer

    11 Jul 2010, 4:53AM

    The banks, through the British Bankers' Association (BBA), intend to tell the chancellor that when the Bank of England pulls the plug on these liquidity programmes some £400bn will be withdrawn from the UK's banking system. The schemes were put in place to help get money flowing between banks after the credit crunch, but are due to end in 2012.

    What they are really saying is "Sorry, the emeregency loans you gave us to clear up the shitstorm we created with our rampant greed two years ago cannot now be withdrawn. Were you to do so, it would compromise our ability to pay bonuses to our amply remunerated staff and would mean we'd have to withdraw money from the economy to prevent that happening."

    The barefaced cheek of this cabal of fucking thiefs and fraudsters!

    It's time the government used those "preference shares" to exert some leverage... preferably on sensitive parts of certain directors' anatomy.

  • GW74 GW74

    11 Jul 2010, 4:58AM

    This comment has been removed by a moderator. Replies may also be deleted.
  • theoriginaljones theoriginaljones

    11 Jul 2010, 5:11AM

    GW74

    Thank you for that. I apologise for stepping on hidden sensitivities, that wasn't the intent and I do apologise.

    However, It could be said, in truth, that by definition most people have very little to no knowledge of most things. This would apply to you also of course.

    A possible logical extension to your argument could be that we should abolish democracy as it is given that most don't really know the workings of statecraft then why should they have a say in it (as in a vote).

    I have a feeling that your response has a deeper genesis however but that is your business of course.

    But thank you, your contribution was stimulating.

  • RichardBurns RichardBurns

    11 Jul 2010, 5:23AM

    If they want capital to lend they can put their own homes, assets and pensions up as collateral, I am sure they will easily raise £400 billion,
    God knows they have paid themselves enough in pay and bonuses over the years!!
    If they need more they can raise it on the capital markets.

    They are just greedy idle reckless overpaid scum in my opinion.

  • busythinking busythinking

    11 Jul 2010, 5:50AM

    @GW74

    Given understandable and justified conditions of mistrust for the banking industry at present, don't you think it might seem just a little much for you to ridicule people as "beyond help", or as "reactionary and ignorant", for suggesting that the use of these findings from PWC seems to be something of a self-serving move on the part of the banking industry? Even if their responses might be described as "intuitive".

    Not everyone might grasp all the details - and in no way do I intend to say people shouldn't be educating themselves - but they I think understand well enough that these are the people whose greed and recklessness contributed very significantly to the current economic mess, and that this group has a strong tendency to act in an irresponsible and self-interested way.

    So while theoriginaljones's comment might not have enlarged our understanding, it does represent a fair and natural response in my view, as opposed to something bigoted or wildly prejudiced as you have made out.

  • GW74 GW74

    11 Jul 2010, 5:55AM

    @theoriginaljones ignorance is no defence, when voting or commenting. That is not a logical extension to my argument, that is an association fallacy.

  • fortyniner fortyniner

    11 Jul 2010, 5:56AM

    There's more than an element of self-interest in this claim by the banks and the public will naturally be sceptical some of the claims made.

    It is up to the government to examine the claims thoroughly and decide how much is true and how much is about the banks resisting necessary change. At the end of the day, we need a system that is far more robust than the one that almost collapsed in 2007-08 so better regulation is both right and inevitable.

    One important reform might be to try to break up the bigger banks into retail and investment arms so as to spread the risk, and try to ensure no bank is too big to fail. And of course part of the idea of a bank levy is to have an insurance policy in case of further trouble in the future.

    We need a healthy banking system to stimulate and support investment and there's always going to be an element of risk involved in lending. Making sure banks don't get greedy and stupid like they did in the recent past is the challenge both the government and the industry must face.

    Let's hope they get it right this time.

  • pinheadangel pinheadangel

    11 Jul 2010, 5:57AM

    GW74
    11 Jul 2010, 4:58AM

    Reading Guardian readers' rants against bankers is nothing short of hilarious. And they call Daily Mail readers reactionary and ignorant!

    You'll be telling me I believe in a moneytree next.

    Of course, there is a money tree. It's called banking.

  • MikeW47 MikeW47

    11 Jul 2010, 5:58AM

    Global financial reforms are long overdue. And the mega-banks had to be stabilized, they are too interconnected in the financial system we are all dependent on. Now they should be broken up into smaller pieces so this cannot happen again -- saw a cool site; Balkingpoints ; incredible satellite view of earth

  • pinheadangel pinheadangel

    11 Jul 2010, 6:13AM

    .

    GW74
    11 Jul 2010, 5:55AM

    @theoriginaljones ignorance is no defence, when voting or commenting. That is not a logical extension to my argument, that is an association fallacy

    If I've been hit by a car, I don't need to understand the working of the internal combustion engine to know that something's wrong and that I need help.

  • GW74 GW74

    11 Jul 2010, 6:29AM

    @busythinking

    (1) PWC is not in the banking industry, it is a firm of accountants, therefore your claims to self-interest are entirely false.

    (2) you focus on the UK banking industry's blame for this crisis. There is a long list of causes of this crisis. In descending order of blame and impact, they are:
    (i) US consumers getting mortgages they couldn't afford
    (ii) US banks packaging up those mortgages into toxic CDOs
    (iii) credit ratings agencies inaccurately rating these CDOs as AAA when they were C-
    (iv) US sub-prime lenders giving out these sub-prime mortgages like confetti
    (v) Lehman Brothers risky real estate speculation
    (vi) US investors buying those CDOs

    Not one single action by a British bank contributed to the causes of this crisis. Certainly, some UK banks were over-ambitious in their dependence on credit markets in funding their growth, and were caught out when those markets seized up - Northern Rock [funded the mortgage book], RBS [via ABN AMRO acquisition], HBOS [property speculation/risky loans].

    But your "Intuitive" scatter-gun attack on "the bankers" is pure ignorance and wholly counterproductive, and unhelpful to the tens of thousands of branch workers whose bonuses (in reality just top-ups to their meagre salaries) you seem so ready to cry foul on.

    Such an ignorant witchhunt will not help stop another crisis from happening. Only a forensic understanding of what happened, precisely whose fault it was, and how they were able to do it, will do that. Which is why all this emotional opining helps no one.

  • potatopower potatopower

    11 Jul 2010, 6:30AM

    GW74
    Are you okay? Can we help you? Is something bothering you, please feel free to express yourself in this safe space, we're all here for you.

    You seem disproportionally upset by first a comment asking for information, and second one describing a gut feeling that many already experienced when we heard it was bonuses as usual.

    Actually I too would be very interested to hear some defense of the banks here - but then perhaps there isn't any and so spluttering and bombast are the best defense?

  • mahavati mahavati

    11 Jul 2010, 6:31AM

    The bank bosses wrote to George Osborne shortly after he took office are to meet him to express their concerns about the impact of regulatory changes which require banks to hold bigger capital cushions.

    They haven't got a clue, or a leg to stand on. These reforms are entirely rooted in the need to curb their excesses, the sort of excesses which caused the system to crash. They are a disgusting set of self-serving parasites on society.

  • GW74 GW74

    11 Jul 2010, 6:32AM

    @pinheadangel. Another association fallacy. What were the circumstances of the accident? What has the engine got to do with it? Surely either you or the driver made a mistake. That is nothing to do with the engine. What is this drivel you speak?

  • ture ture

    11 Jul 2010, 6:35AM

    ".....bolster their capital will require the UK's banking industry to hold an extra £600bn of capital that might otherwise have been deployed as loans to businesses or households".

    More likely it will be used to inflate the next speculative bubble.

    If one wants to avoid another financial crisis in the future there is nothing as important as increasing the banks capital requirements. The fact that major financial institutions were running with a leverage of 30 and sometimes like UBS up to 60 was the reason why without a taxpayer bailout most of them would have gone bankrupt.

    Not everybody understand the importance of leverage in the fractional reserve banking system. Most people think that money is created by the central banks. But most money in the world is created by commercial banks as loans. Yes, most money is created by banksters sitting at a computer, creating money out of thin air. How much money they can create is only limited by the capital requirements (which is very low) and their own stupidity (which is very high).

    Take the Greek crisis as an example. The Greek government has been consistently overspending for years and financed that to a large extent by loans from German and French banks. German banks have been allowed to create as much money out of thin air as they want since there is zero capital requirements for these loan in Germany, and then give it to the Greek government. The Greek government then have to pay a large interest rate in exchange for the massive work involved by the banksters when they sit at a computer and create the money.

    This would be a fantastic scheme of ripping off the Greek taxpayers (who have to pay the interest rate) if it was not for the fact that the banks went to far and let the irresponsible Greeks borrow too much. Now they have borrowed so much that they cannot afford to pay the interest rate, let alone pay back the loan.

    This is in principle the same situation that many home "owners" in the US and UK are in. Banks created money out of thin air and gave it to individual to buy houses at inflated prices. As the individuals are not able to pay back the interest the US and UK banks are in trouble in the same way as German banks are in trouble.

    So what do you do when companies, individuals and governments have overspent and cannot pay back their loan ? Well, they have to go bankrupt. The problem is that then the banks lose money. And they do not want that do they ?

    So another option is that the banks that created all the insane loans are bailed out by the tax payer i.e. the taxpayer takes over all the bad loans. The motivation for this is that "they are too big too fail". Now the taxpayer have to face higher taxes, lower pensions, unemployment, stagnant wages and a gutted public sector to pay for the insane loans that the banksters did. And the banksters can continue to pay themselves the multi-billion bonuses.

    The combination of close to zero capital requirements and a "too big to fail" policy is a recipe for future disasters. Either we increase the capital requirements much more than what has been proposed or we continue having financial crisis that will destroy the standard of living for everybody except the banksters.

  • pinheadangel pinheadangel

    11 Jul 2010, 6:49AM

    GW74
    11 Jul 2010, 6:32AM

    @pinheadangel. Another association fallacy. What were the circumstances of the accident? What has the engine got to do with it? Surely either you or the driver made a mistake. That is nothing to do with the engine. What is this drivel you speak?

    It's called a metaphor - and it obviously gets you very excited.

    What is an 'association fallacy'? That sounds quite hot, too!

  • busythinking busythinking

    11 Jul 2010, 6:55AM

    @GW74

    "(1) PWC is not in the banking industry, it is a firm of accountants, therefore your claims to self-interest are entirely false."

    I said that the bankers use of this information was self-serving, not that the PWC was part of the banking industry. Be careful.

    "(2) you focus on the UK banking industry's blame for this crisis. There is a long list of causes of this crisis. In descending order of blame and impact, they are:
    (i) US consumers getting mortgages they couldn't afford"

    So ordinary people acting in predictable ways are to blame? Well that's convenient: it's human nature's fault. Economic liberalism is dedicating to the notion of self-seeking individuals. Shouldn't the onus fall on those who were providing them mortgages?

    "But your "Intuitive" scatter-gun attack on "the bankers" is pure ignorance and wholly counterproductive"

    My point was that the tone of your tirade against comments was misplaced, since they were venting an understandable frustration. Your frustration, on the other hand, is veering a little further from the understandable, considering the context...

  • pinheadangel pinheadangel

    11 Jul 2010, 7:03AM

    @GW74

    Seriously tho - and you step over this very lightly in your 6.29am post - what did the bailout of HBOS, RBS and Northern rock add to our national debt and what impact did it have on the budget deficit (and yes, I'm very clear about the difference between debt and deficit) which needs to be cut by staggering amounts starting now, apparently, to to keep the bond people happy over the next few years?

    Do you know?

  • theoriginaljones theoriginaljones

    11 Jul 2010, 7:16AM

    GW74

    We, all of us, having a bit of a ding-dong in this forum, are not really out to change each others views as they are clearly fairly entrenched. The debate is essentially to edify those observing which is really the function of 'debate' in the first place.

    I have apologised for unsettling you and that was sincere (even if the offence was unavoidable in this case).I'm perfectly happy to hear the argument on your part but ad-hominem attacks are not the way to go. I would ask you to demonstrate similar consideration.

    Try to visualise how the difference in tone appears to others.

    In any event the discussion is about largesse in the financial system and how this impacts on others and an unavoidable feeling is afoot that the system is rotton on many fronts. Many lucid points have been put across and deserve consideration. Yes, I was being facetious in my take on the current set-up but that also has function in discourse.

    However, please put your points in defence of that financial system and see how it travels.

  • Timvincible Timvincible

    11 Jul 2010, 7:26AM

    lol

    If we've learned anything over the last couple of years it's that banks lie and cheat, are incapable of determining for themselves what constitutes best practice and care more about themselves than society as a whole. Why should we believe anything they say when it comes to policy decisions that will affect their profits?

  • Smogbound Smogbound

    11 Jul 2010, 7:42AM

    Two percentage points would be a bargain price if the regulations prevented future banking collapses similar to that we just went through. But I'm not sure that the bankers wouldn't just find new scams to create bogus profits so they could still pocket money that wasn't theirs.

    However, if we just put in prison - for life - the leading bankers behind the collapse that just happened, would that educate bankers sufficiently to do the trick?

  • theoriginaljones theoriginaljones

    11 Jul 2010, 7:44AM

    Or

    http://www.google.com.au/url?sa=t&source=web&cd=1&ved=0CBcQFjAA&url=http%3A%2F%2Fwww.guardian.co.uk%2Fworld%2F2010%2Fmar%2F18%2Fnorth-korean-executed-currency-reform&ei=NWg5TKXZEIzQce-Q1fwO&usg=AFQjCNHwhHk2GUfWo6fhU9C0WUNzG5MEoA

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