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London
Friday
18 December 2009
Editor Muhammad Haque
From the web site of the London GUARDIAN: 0440 GMT Friday 18 December 2009
Quote "
Series: Viewpoint columnPrevious
Index Bank of England reveals secret to easy money for banksThe banking crisis could have been a lot less painful if banks had taken a more sober line on "discretionary distributions"
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Nils Pratley guardian.co.uk, Friday 18 December 2009 00.05 GMT Article history
The report suggests banks cut their staff costs by a 10th and reduce their dividends to shareholders by a third. Photograph: Peter Macdiarmid/Getty Images
Good news: we are not doomed to die a slow economic death at the hands of a broken banking system. Today's financial stability report from the Bank of England doesn't put it quite that way, of course, but it does set out a way in which UK banks might add £70bn to their reserves over the next five years in a relatively easy manner.
All the banks might have to do, suggests the report, is cut their staff costs by a 10th and reduce their dividends to shareholders by a third when compared to levels that prevailed in 2001 to 2006.
Naturally, a few other assumptions go into that calculation, like a 10% return on equity. But it is easy to see how the banking crisis could have been significantly less painful if banks had taken a more sober line on what the Bank calls "discretionary distributions" – bonuses and dividends. If UK banks had knocked 20% off the discretionary stuff between 2000-2008 they would have had an extra £75bn in the vaults – or a little more than taxpayers have just provided in capital to the sector. The message to banks should be clear: just do it.
Shareholders should also draw a moral: start tackling the bonus culture if you don't want your dividends squeezed even further than they will be anyway. That's because you can be sure that bankers themselves don't see their bonuses as discretionary – they file them under "variable pay".
But let's not carried away by the Bank's encouraging description of how £70bn could be found. First, the stability report also highlights plenty of risks that remain in the system – like vulnerabilities in commercial property and household balance sheets plus banks' need to refinance £1tn of assets in the next five years.
Second, £70bn sounds like a huge sum but may not be enough to lift banks' ratios as high as regulators want them to go. When today's recommendations from the Basel Committee of Banking Supervision are digested, sights many have to be raised considerably higher – "pretty punitive on the sector", was Credit Suisse's instant analysis.
But punitive is the right stance. We need banks' coffers to be filled with hard assets, not funny-money paper like deferred tax assets. So be warned: another round of capital-raisings by banks may lie ahead. That part of the story still looks far from easy, notwithstanding recent successes like Lloyds's £13.5bn rights issue. The road to a dynamic, well-capitalised banking sector still looks long.
" Unquote
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London
Friday
18 December 2009
Editor Muhammad Haque
From the web site of the London GUARDIAN: 0440 GMT Friday 18 December 2009
Quote "
Series: Viewpoint columnPrevious
Index Bank of England reveals secret to easy money for banksThe banking crisis could have been a lot less painful if banks had taken a more sober line on "discretionary distributions"
Buzz up!
Digg it
Nils Pratley guardian.co.uk, Friday 18 December 2009 00.05 GMT Article history
The report suggests banks cut their staff costs by a 10th and reduce their dividends to shareholders by a third. Photograph: Peter Macdiarmid/Getty Images
Good news: we are not doomed to die a slow economic death at the hands of a broken banking system. Today's financial stability report from the Bank of England doesn't put it quite that way, of course, but it does set out a way in which UK banks might add £70bn to their reserves over the next five years in a relatively easy manner.
All the banks might have to do, suggests the report, is cut their staff costs by a 10th and reduce their dividends to shareholders by a third when compared to levels that prevailed in 2001 to 2006.
Naturally, a few other assumptions go into that calculation, like a 10% return on equity. But it is easy to see how the banking crisis could have been significantly less painful if banks had taken a more sober line on what the Bank calls "discretionary distributions" – bonuses and dividends. If UK banks had knocked 20% off the discretionary stuff between 2000-2008 they would have had an extra £75bn in the vaults – or a little more than taxpayers have just provided in capital to the sector. The message to banks should be clear: just do it.
Shareholders should also draw a moral: start tackling the bonus culture if you don't want your dividends squeezed even further than they will be anyway. That's because you can be sure that bankers themselves don't see their bonuses as discretionary – they file them under "variable pay".
But let's not carried away by the Bank's encouraging description of how £70bn could be found. First, the stability report also highlights plenty of risks that remain in the system – like vulnerabilities in commercial property and household balance sheets plus banks' need to refinance £1tn of assets in the next five years.
Second, £70bn sounds like a huge sum but may not be enough to lift banks' ratios as high as regulators want them to go. When today's recommendations from the Basel Committee of Banking Supervision are digested, sights many have to be raised considerably higher – "pretty punitive on the sector", was Credit Suisse's instant analysis.
But punitive is the right stance. We need banks' coffers to be filled with hard assets, not funny-money paper like deferred tax assets. So be warned: another round of capital-raisings by banks may lie ahead. That part of the story still looks far from easy, notwithstanding recent successes like Lloyds's £13.5bn rights issue. The road to a dynamic, well-capitalised banking sector still looks long.
" Unquote
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