The report talks about the "unresolved inconsistency between on the one hand, bankers' assurances that they are increasing the lending and on the other hand, widespread and clearly sincere complaints that credit is hard to obtain". There is no analysis of why that may be and thankfully Robert Peston recognises only too clearly what the issue is. Perhaps Robert should have written the report for the select committee and save us all the sight of the politicians' egos on heat while they made the bankers squirm.

Shutting the door after the horse has bolted

Robert's blog 'Making banks safe' points out the importance of a bank's capital ratio to its survival. Let me develop Robert's point a little further. Before the crisis the banks' minimum capital ratio required by the regulator was 8%. That means that for every £100 of exposure a bank must hold £8 in capital to meet the possibility that it might not get its money back. The impact of the crisis has proven that this is simply not enough to meet losses. In a clear case of shutting the door after the horse has bolted the FSA is already indicating very strongly to banks that it wants this capital to increase substantially.

How do they do this? The FSA says that banks should stress their exposures by introducing severe risk scenarios which might cause them to lose their shirt and then calculate the impact on their capital if such an event should occur. And what scenario should they use?

"The FSA says banks should stress their exposures by introducing severe risk scenarios"


Not surprisingly the bankers collapse of 2008! What that means is that banks have to hold more capital to cover the eventuality that the events of 2008 may occur again tomorrow.

So if the banks have to hold up to 30% more capital now then that is billions that they cannot lend to get the economy going again.

Mr McFall's report also says that "due diligence has been seemingly ignored" which is another way of saying that banks have been lending irresponsibly. What that means is that lending that was available before the crisis is no longer available because banks cannot be irresponsible and take undue risk.

Liquidity

There is also the problem of liquidity. Banks traditionally borrow short term and lend long term. Doing that caused the Northern Rock failure when all those short term depositors wanted their money back so now the FSA requires banks to keep a larger pot in easily saleable assets such as cash or government bonds to meet a liquidity shortage should one arise.

In summary, regulators are requiring banks to hold more capital, hold more cash and not lend irresponsibly. This is why "credit is hard to obtain". The banks have had to divert funds to meet those needs. The government, through the FSA, is telling the banks to stop lending for these three reasons while telling the public that those nasty bankers won't lend.

"If trust is to be regained something has to give"


But if trust is to be regained something has to give and the only way that can be done is with government support.

First, governments have to ensure that deposits are guaranteed up to £100,000. Second, banks have to be allowed by regulators to take more risks but not in the highly speculative private equity market or in derivative trading but in the areas where small business and first time buyers are helped most. If governments are to guarantee lending to first time buyers and small businesses that provide real jobs, while at the same time requiring banks to hold more capital for speculative market risk, trust will be rapidly regained.

To regain trust, the mission of banks has to change from maximising shareholder value to being socially aware organisations that have a fundamental responsibility to ensure the survival of the global economy.

All banks, big or small, are like giant boats with a massive propeller on one side (growth) and a little tiny dinghy sized one on the other (not growth). It is with this imbalance that we have been trying to turn ourselves back to a net neutral course in the (last metaphor I promise) stormy waters of the economy. There will be some for which this exercise has damaged their main propeller for a long time, potentially indefinitely. The spectre on the horizon is notable consolidation in the banking sector, with various 'non-core' chunks of business being snapped up by foreign owned banks.

"The ramifications for a whole generation of bankers doesn't bear thinking about"


Pity the poor souls at Lloyds HBOS who are going through a brutal restructure at the moment akin to a round peg being forcibly driven through a square hole. The process has not reached its crescendo yet as staff are still needed to sift through every client with a fine tooth comb to both identify losses and to manage away clients they don't want anymore. The ramifications for a whole generation of bankers, as is happening with lawyers, doesn't bear thinking about as so many of them will be out of work by this time next year. Our competitive skills base is being undermined as many of these people will never come back to the professions they previously excelled in, preferring to change career or change country.

I have been ruminating for a while on the transfer of ownership that has taken place not on a national level with the Chinese provision of Government borrowing, but on an industry level.

Foreign ownership of banking sector

"What exactly will the consequences be of most of our banking sector being foreign owned?"


It is often bemoaned that our energy security is weaker and bills higher than they should be as a result of nearly the entire UK energy sector being foreign owned. What exactly will the consequences be of most of our banking sector being foreign owned?

Santander now controls enough UK banks and building societies to fill a page, and Barclays has a giant chunk handed over to the Gulf. HSBC, although a 'British' bank makes most of its money abroad, with the still lending mid-size commercial banks also foreign owned. If the UK needs its financial sector in the future it may find that just as utilities are now run for the benefit of other countries and shareholders, the banks are too."

Read Laura's previous diary entries

MARK

Mark (not his real name) works for a stockbroker outside London.

Read Mark's previous diary entries