The banks are booming. Lloyds Bank has reported better than expected profits this morning. It's not the only bank to do so of late.
The reason is simple. As The Guardian notes:
Profits were boosted by the release of £459m of provisions it had set aside for expected loan defaults during the pandemic.
That requires just a bit of explanation, because as many will know there is serious expectation that many of the loans offered by the government to business through the UK banking system in the last year are expected to fail. In other words, they will not be repaid.
But, and this is the massive but. whilst the banks might pick up some admin hassle cost whilst trying to recover those loans the real cost - which is the unpaid return of the sum advanced - will be picked up by the government. They shoulder the real risk.
The banks, of course, knew this. So what they did was to persuade their customers to not only take out new government backed loans during the last year, but they also encouraged them to switch their old loans, where the banks took the risk of loss, to the government backed scheme so that the government then picked up the tab instead.
The result has been a bonanza for banks as they boom at public expense, yet again.
The idea that we might need a new tax on banks -as was appropriate after 2009 - seems to be made by this simple fact that banks are capturing public money for private gain, yet again.
A booming bank tax, anyone?
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Yes, the bumper profits are a result of “losses that never happened”. This is entirely due to furlough and other government support – we should remember that.
The banks have been able to shovel some risk on the the government and that has helped but is not a massive driver of the profit rebound. Looking further ahead, zero rates for the forseeable future (meaning that running free current accounts is very costly) and a weak economy (with businesses that can reduce debt doing so) is not a great prospect outlook for bank shareholders. Share prices are off the floor but still only trade at about half of book value – ie. The market does not believe things are anywhere as good as the accounts might suggest.
“A booming bank tax, anyone?”
Well looking at Lloyd’s the experience for shareholders has been painful. Since 2010 the share price had halved and for long periods no dividends have been paid. It hardly suggests special treatment now? I am not defending Lloyd’s in any way just pointing out what’s happened. Of course we could nationalise the banks, maybe that is what you want and it might be a course to follow as they are quasi government entities in many ways already. This would however open up many potential problems though the discussion would be interesting.
It’s a possibility
Their capital is already so heavily state underwritten the pretence that they are really free market agencies is pretty hollow anyway
Since the major banks have such a facility in a crisis (unlike real capital-risk businesses, with the emphasis on ‘real’); and the major banks are also ‘too big too fail’ and will be bailed out by Government in-extremis: in what sense are they risk-capital businesses at all? Should they not be completed re-constructed as a special form of financial enterprise that no longer operates on a bonus-dividend yield-ROI or standard captialist criteria? The time to devise an alternative is surely overdue, or it has to be acknowledged that the concept of ‘private’ banks is altogether redundant.
In any case, is major High Street banking not really a sub-set of a wider pool of financial resources that includes both pensions and insurance (I am reminded how difficult it is to define ‘banking’ or distinguish it from insurance in a world of modern financial instruments; and here I am reflecting on the way ‘insurance’ was drawn into the financial crisis of 2007-8).
The banks may be booming, but they are deserting the smaller market towns. Here in Buckingham, population 15,000, HSBC, then TSB, then Santander, then NatWest all closed their branches. Barclays is still here and LLoyds, but it is only a matter of time. Presumably, they can save money and increase profits by shutting down the local branches. Meanwhile, old people, street traders, charities, many others find themselves – ourselves – with nowhere to pay bills and change currency and get coins and notes essential for small transactions and parking meters and donations to the homeless and Big Issue sellers and bus rides and a hundred and one other instances when it is impossible to use a credit card or telephone banking.
In addition the major banks have the added advantage that if a member of the public elects to save with them, the first £85,000 is guaranteed by the Government. This is wise, because after the Financial Crash why would anyone take such a risk? The invisible cloak of the guaranteed protection of the currency issuer is extended to the banks. The banks are awarded with a special ‘safe asset’ diploma of merit. It is absolutely essential to ensure public trust in banks, but what on earth has any of this to do with capitalism? Little – or nothing at all. Capitalist High-Street banking is a fiction.
Agreed
I think it may tell one a lot about banks that they describe some of their favourite customers as “High net worth individuals” when in reality those customers are merely high net wealth individuals. One can’t be sure that bankers don’t know the difference between wealth and worth; although certainly wealth seems to be what they are really interested in. Equally one can’t be sure that they wish to imply that their wealthy customers are ipso facto meritorious – the line between implication and facilitation of inference is rather a shady one.
Just amazing. Corporations, – and banks in particular, – never fail to disappoint.
This on top of the for-profit resale of government bonds by banks to the Bank of England as a song and dance in order to pretend that we aren’t monetarily financing the deficit…
Strange how now say transferred existing loans to the state backed. When working with clients told that could only transfer bounce back loans. But anecdotally a number were called direct and offered transfer. Think that the Govt may look at this but then I am an optimist not a realist. The Lloyd’s indicative statement opens up the avenue!
Lloyds shareholders paid an absolutely huge tax some years ago when they were sold an obvious pup by Alistair Darling, something which absolutely ruined the company. It was such a blindingly awful purchase that their whole board of directors should have seen for exactly what it was, but their desire to make the bank bigger completely clouded any rational thinking!
When a government comes to you and offers to overturn competition law if you will just buy another bank you should run screaming in the other direction. To this day I am astonished that the directors went for it and the value in that particular bank. Things have never recovered and obviously competition law was brought back into play after the directors’ decision had frittered away the capital of what was LloydsTSB.
So blame the board…..
Where do chancellors go when they retire from politics? Banks. There, that solves that one.