George Osborne announced yesterday that the UK’s major banks and the government have come to an agreement over bonuses. Lloyds and RBS have gone as far as limiting cash payouts to £2,000. The deal has been agreed as part of Project Merlin – the government and the banks are attempting to come to some sort of settlement over how the banks should/will behave in the future.
As well as making the bankers’ bonuses disappear, Merlin has also led to the banks committing to lend £190bn to businesses in an effort to support the economy. It’s a noble objective but one which is going to cause the banks further pain. Lending to SME’s has never been a particularly attractive activity and it has become even less so since the beginning of the financial crisis. These charts, submitted to the Independent Banking Commission by Barclays and RBS which were kindly highlighted to us by Tamara Burnell (head of our financials credit analysis team) show the cost to banks of providing credit to companies. They are effectively saying that lending to small and medium sized firms has never been particularly profitable and is even less so now.
.JPG)
The first, from Barclays, shows that they barely made any money from providing commercial mortgages before the crisis and how unprofitable it has become for them.
.JPG)
The second one shows that the cost of funding for RBS is higher than the rate at which they lend to SME’s.
Forcing banks to lend on uneconomic terms at a time when they need to be increasing their capital levels feels a little counterintuitive to me. I understand the rationale of trying to buoy the economy, but putting banks under more stress when they are already weakened just doesn’t seem like the cleverest move to me. Will the bonus caps lead to a brain drain from British banks if the best and the brightest can earn more at their foreign competitors? It also doesn’t take a wizard to realise that is was too much lending that caused the financial crisis and resulting recession in the first place, will more really do the trick?
Read these stats http://stats.bis.gov.uk/ed/sme/Stats_Press_Release_2009.pdf. If the banks are unable to fund a major part of the economy, then what the f@$k are they there for? Surely, that line of reasoning will have the pollies queueing up to impose 100% taxes until all the bankers are either unemployed or have quit UK. Isn’t the reason for those low margins that the bankers are using the high street facade to finance the investment banking. Yet another argument then to split the sectors and let each stand alone on sound finances.
They didn’t really make any commitment though, did they?
They said they will make more money available and will try and encourage people to borrow.
Did you hear Lord Oakeshott and Angela Knight on R4 ths morning?
http://news.bbc.co.uk/today/hi/today/newsid_9393000/9393087.stm
nice post
The two graphs here are fascinating and should be much more widely publicised. They somewhat bely the common belief that banks are borrowing at 0.5% and lending at 7% and therefore are making huge profits already.
It would be interesting to put actual numbers on some of those figures though – perhaps to show if the bank lends at 7% to an average SME what is its profit or loss margin – I guess that the credit cost would probably be a little too variable to allow that to work.
The problem in Japan post their bust has not been that businesses couldn’t get loans but that they were all paying down debt and not wanting to borrow. I suspect,in time, we will find out that much the same thing has been happening here, so I agree Osborne’s policy on this is likely to prove misguided. As far as bank profitability on loans to SMEs is concerned , given what has gone before I think they have a social responsibility – they caused the car crash they should contribute to clearing up the mess – it’s the nature of banking that they don’t expect to make a profit in every area so higher than average margins elsewhere will carry this. Re your question of a potential bran drain from the banks – one of the causes of the crash was too much “sophistication” eg CEOs and compliance didn’t even understand what was going on in some areas so it’s my view that there is more than enough brain power within the banks at the next level down to run them successfully in the new lower risk environment they will be operating in for the foreseeable future.