Duncan’s Economic Blog


Posted in Uncategorized by duncanseconomicblog on August 11, 2009

I’m still here, although I’ve been rather busy with actual work for the past few days. So please accept my apologies for the lack of posting. I’m working on three long-ish posts but realistically they wouldn’t be finished before my upcoming two week holiday (during which posting will be light).

Today though, I want to talk about Lloyds. They’ve annoyed me. To be honest they’ve been annoying me since they billed me a fortune in overdraft charges when I was a student. I don’t like being ripped off. Now they’re trying to do it again. This time ripping me off as a taxpayer.

Lloyds Banking Group’s tentative plans to raise an estimated £15bn-£20bn ($25bn-$33bn) in a rights issue to reduce its reliance on the government face a wall of scepticism in Whitehall and among investors.

Lloyds last week floated the idea that the terms of its participation in the government’s asset protection scheme (APS) might be open to renegotiation after second-quarter results that were more upbeat than expected.

This all sounds a little technical, so let me explain. The APS was the scheme launched earlier this year whereby the government essentially guaranteed a load of useless assets on Lloyds (and other banks) balance sheets in return for a fee.

It was only because of the APS that Lloyds passed the FSA stress tests. The whole point of the APS was to prevent another round of capital raising by the banks.

Now, with the green shoots making the world look a little rosier, Lloyds have decided they don’t want to take part anymore.

Basically have free-rided on Treasury help in the dark days of the first quarter of this year, they now want to back out. This is unacceptable.

If they did proceed with a £15bn rights issue to raise capital, UKFI (the Treasury’s holding company) would face the choice of either seeing it’s 43% stake diluted down or putting in another £9bn to maintain the stake.

Officially, the bank declined to elaborate on a weekend statement that it was working with the Treasury on the fine print of the scheme and expected to conclude a deal that was “in the best interests of our shareholders”.

‘The best interests of shareholders’ indeed. Not necessarily their biggest shareholder.

We should be clear about this – RBS and Lloyds are only solvent because of taxpayer help. HSBC and Barclays (despite not having needed capital injections) have benifited massively from liquidity support schemes. These banks owe us.

And yet we are letting them ride roughshod over us on the issues of lending to small business, excessive charges, bonus and now they are trying to short change us. UKFI needs a new CEO urgently and they need someone to fight our case.

As John Ross commented on Reuters yesterday:

The UK government is rightly desperately attempting to increase bank lending in order to counter the economic downturn. As is also well known it is having little success in these efforts despite hundreds of billions of taxpayers money put into the UK banking system.

In China this problem does not exist. The state owned banks can be, and are, instructed to increase lending. The second part of China’s stimulus package, after the investment programmes, is therefore a rapid increase in bank lending — new loans in the first half of 2009 were $1.1 trillion and M2 to June rose by 28.5 percent providing an extremely strong counter-recessionary impulse.

Vince Cable, the Liberal Democrat’s Treasury spokesman, has rightly repeatedly pointed out the absurdity of the current situation with UK banking. All UK banks today exist only due to taxpayer subsidy — although Barclays and HSBC did not receive taxpayers equity, they would not be profitable operating without the taxpayer funded guarantee and economic stimulus schemes.

Yet despite UK banks existing only due to the taxpayer, Chancellor Alistair Darling is reduced to ineffectually pleading with them to increase lending. No such problem exists in China. A side effect is that China now has the most valuable banks in the world by market capitalisation –- but banks simultaneously doing the key job of expanding lending. In China, private and public interest are properly aligned within the banking system.


2 Responses

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  1. Tim Worstall said, on August 11, 2009 at 9:10 am

    Run this by me again? Someone trying to be taken seriously is equating banks in a market growing at 8% a year expanding their lending with banks in a market shrinking at 3% a year not expanding their lending?


    • John said, on August 11, 2009 at 9:53 am

      It’s not about equating the situations, Tim. It’s about them being the same organisations.

      The Government took a gamble and backed the banks – now that it appears to be a gamble that might pay off, the ‘bookies’ are trying to welch on the bet. “Oh!” they cry, “We thought that horse was knackered, we agreed much bigger odds than we should have, in retrospect. I’m sure we can come to some sort of arrangement?”

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