Misty times on Wall Street

Banks are returning to profit. The new chief executive of the taxpayer-owned Royal Bank of Scotland complains that

We sometimes feel as if commentators variously want us to go back to over-lending, to operate on a ‘not-for-profit’ basis, to never entertain a client and to offer employment conditions that deter the best and brightest.

All the evidence is that the government is listening to him, and that the banks will soon re-acquire their independent status and carry on pretty much as before. And yet the complaints of Stephen Hester are somewhat undermined by the balance sheet changes that by his own admission are necessary to restore the bank (from its own point of view) to health and safety over the next 3 years. This involves doubling its ratio of the safest-rated assets from 4% to at least 8%, increasing its liquidity reserves from £90bn to £150bn, and reducing its wholesale funding reliance from £343bn to £150bn with a consequent reduction of its loan/deposit ratio from 156% to 100%. According to Hester, ‘those with accountability for past mistakes have gone.’ So the previous appalling state of the balance sheet should be regarded as a natural disaster of which the ‘the new RBS’ need hold no memory. This is clearly nonsense. No other bankers, Hester among them, were queuing up to denounce the Royal Bank’s balance sheet position before the crunch came. Nor would we expect them to do so. The problem with the banks was and is little to do with the errors of individuals. It isn’t much to do with their talent and inspiration either. The problem lies with a complete failure on the part of bankers and the government to understand banking and its social function. Read the rest of this entry »