Friday, 6 July 2012

“Can’t live with them, can’t live without them”

Image: © BBC
Jaffar Hussain, a former leading Malaysian banker, is once quoted as saying "Good bankers, like good tea, can only be appreciated when they are in hot water." These words must have been at the front of the minds of the UK Treasury Select Committee members this week during their preliminary investigations into the Barclays Libor Fixing scandal.  Make no mistake, this is not a problem restricted to one bank. There will certainly be others – and not just UK banks – who will put their hands up over this sorry saga over the months ahead. It is hard to imagine how the reputation of bankers could sink any lower and, I must say, a little depressing that, as an industry, they have continued to live down to people’s already low expectations.

However, we all need a healthy and functioning banking system. When healthy, Banks act as the arteries of the economy, helping money to circulate and financing growing companies. It is a recognition of this that was a major factor behind the European Central Banks €1tn three-year loan facility at the end of last year as an attempt to provide liquidity to the banking sector. The problems, unfortunately, are a little more complex.  As the ECB has found, the banks are wrestling with an increase in regulatory capital required for them to operate. This has led to a string of asset sales – Barclays disposal of its successful Fund Management business to Blackrock or Société Générale’s sale of its stake in Rockefeller Asset Management to RIT Capital are cases in point. Moreover, given potential write-offs on the horizon, there is little appetite for risk taking as banks are keen to preserve what capital they have.The other side of the equation is demand for credit, where businesses and households have reacted to the uncertain outlook by tempering their own enthusiasm for borrowing.

There is a fine balance that needs to be found.  On the one hand, regulators are keen to reduce banks’ balance sheets, which had grown unsustainably large during the Noughties. This, too, should ultimately reduce some of the stresses on sovereign solvency. On the other hand, politicians whose economies are faced with stringent austerity measures are very keen to see bank lending maintained or even increased. Central Banks, too, are conscious of the deflationary effects of this de-leveraging exercise and are responding via various schemes to boost liquidity. 

In the end, love banks or hate banks – and I don’t think they are feeling too much love this week – we can’t live without them. The question going forward will be what kind of banks we are prepared, or indeed can afford, to have.

Rob Burgeman
Divisional Director


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