Duncan’s Economic Blog

Osborne gives the banks another hand out

Posted in Uncategorized by duncanseconomicblog on February 17, 2011

According to a front page FT story this morning George Osborne is looking to relax the rules on UK banks’ liquidity, in effect allowing them to hold less gilts and cash.

Barclays apparently claim that the UK’s tough liquidity rules, designed to prevent a repeat of the post-Lehman crisis, cost it around £900mn last year.

The FT reports that Nick Clegg and Vince Cable agree with Osborne.

The effects of this story are already being felt in the stock market where UK banking stocks are having a good day. FT Alphaville quotes one broker as saying: 

• Chancellor Osborne investigating ways to ease liquidity rules for UK banks according to FT overnight.

• Assuming a 50% reduction in cost of liquidity buffers boosts Lloyds PBT by >5%.

• The Liquidity Coverage Ratio(LCR) and Net Stable Funding Ratio(NSFR/LCR ratios) are not widely disclosed except for Barclays (End 2010: LCR 80%; NSFR 94%) which guides a liquidity buffer cost of £0.9bn per annum equivalent to c9.5% of 2012E Group PBT.

• Given Lloyds generally weaker liquidity position the benefit of easier liquidity is likely to be greater. Tougher liquidity rules have been a key concern re: LLOY’s NIM going forward; Other UK banks also clearly benefit but to lesser extent.

• Hint of easier liquidity rules being investigated by Osborne is consistent with Mervyn King’s (regulatory hawk) influence on FSA being reduced. The BoE governor will only become head of FSA after King retires in 2013 – which some believe has been deliberately timed- which could be a positive for the banks in the short term.

This is big news, George Osborne is relaxing rules on the UK banking sector, rules designed to prevent a future crisis by forcing the banks to hold more liquid assets – assets that can be easily sold in a crisis to raise cash.

This is the same pattern we saw with Project Merlin, Osborne will do nothing to damage the resale value of the banks. Given a choice between a better functioning, safer system and a larger pre-election war-chest from the sales of RBS and Lloyds, he is taking the second option each and every time.

I’m rapidly losing faith that the UK will see any major banking reform after the Vickers Commission reports in September.

EDIT – Wrong word in last sentence, now changed! (hat tip Tim)

7 Responses

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  1. That’s good then said, on February 17, 2011 at 10:49 am

    […] 17th, 2011 · No Comments I’m rapidly losing faith that the UK will see any ignorant banking reform after the Vickers Commission reports […]

  2. Will M said, on February 17, 2011 at 10:59 am

    Is there a flip-side though that with the banks being able to own more illiquid capital, it will be easier for SMEs businesses to sell them illiquid assets to raise fresh cash to invest, hire people, etc?

    • duncanseconomicblog said, on February 17, 2011 at 11:05 am

      That’ll be their argument yes. It’s rubbish.

      Barclays (for example) has a £1.5 trillion balance sheet, the cash for lending to SMEs is there if they want to do it.

  3. Dave Holden said, on February 17, 2011 at 11:32 am

    “If we have to hold large portfolios of gilts, we can’t deploy the assets in other ways,”

    like speculating…

  4. Luis Enrique said, on February 18, 2011 at 12:33 pm

    duncan – I commented in the wrong place – on LC – but I don’t think you can argue this is a hand out at the same time as arguing it won’t affect lending, I don’t think that’s compatible. It’s only a “hand out” if liquidity requirements are currently causing them to hold more assets in liquid form that they would otherwise choose, and if you want them to increase proportion of assets that are non-liquid (i.e. loans to businesses) then this matters, don’t it?

    – although I admit that’s partial analysis, cannot quite think through general equilib if all banks loan more, deposits go up somewhere, they can be held in either liquid or no liquid, um not sure where that leads.

    • duncanseconomicblog said, on February 18, 2011 at 12:51 pm

      Was just checking the comments over at LC…

      “It’s only a “hand out” if liquidity requirements are currently causing them to hold more assets in liquid form that they would otherwise choose, and if you want them to increase proportion of assets that are non-liquid (i.e. loans to businesses) then this matters, don’t it?”

      I’m reasonably comfortable in arguing that the assets they would increase would not be loans to business.

      I’ll do a tedious post for next week on the big banks’ balance sheets, to try and support this argument!

      I thought Guardian was quite good on this:

      http://www.guardian.co.uk/business/2011/feb/17/bank-liquidity-being-diluted

      Equally, I wonder what the DMO thinks would happen if UK banks were allowed to reduce gilt holdings…

  5. […] like the Vickers report will actually deal with some of the big issues around the banking sector. However last month I expressed some worries about how the government would react: This is the same pattern we saw with Project Merlin, Osborne will do nothing to damage the resale […]


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