Monday, 16 July 2012

UK Bank pre-tax profits higher now than before the crisis

Who is paying for the crisis? It is not the banks, that is for sure. The Bank of England may have cut their interest rates to zero, but that hasn't stopped the banks from increasing their net interest rate earnings; the difference between what they receive on their loans and what they spend on interest payments on deposits and other financing operations. Since the crisis began,their interest earnings have increased by about £15 billion per half year.

Now, the banks are carrying a large stock of bad loans. That is reflected in their higher impairment charts, which have increased quite a bit (see chart below).

But what about the bottom line? Have banks seen a huge fall in pre-tax and provisioning profits? Of course not; profits are higher now than before the crisis.

The financial crisis has been a sequence of scams perpetrated by bankers. In the 10 years after 1997, UK banks fired up an almighty housing bubble. By 2007, the banks were full of bad loans and dodgy investments. But that didn't affect the income streams of banks. Instead of sucking up the losses, banks went crying to the Government and the Bank of England. The Government handed over uncountable billions of pounds of tax payers money. The Bank cut interest rates to zero, screwing every depositor and saver in the country, and ensuring that banks became even more profitable after the crisis than before.

Despite all the bad investment decisions, price fixing, miss-selling, money laundering and insider trading, the banks are doing better than ever. There are no consequences and no accountability. The bonuses continue to be paid, profits are up and no one except those chumps Bob Diamond and Fred the Shred lost their jobs.

It is time to stop blaming the banks. It is our fault. We let them get away with it. We allowed them to walk all over us, to pick our purses and then walk away. We didn't stop them when they powered up the bubble. We allowed the banks run the economy into the ground. We didn't stop them when ransacked the treasury so that they could continue to pay huge bonuses as the economy contracted.

We deserve to be rolled over and screwed because we never had the collective will to put a stop to it. We didn't take responsibility for our own country and cry out "enough". We just let it happen to us. Now we are paying for our spinelessness.

(In case, anyone is wondering where this data comes from, well, it is from the Bank of England's very own Financial Stability Report.)


Anonymous said...

What I suspected all along....

Sackerson said...

Would some of the increase in profits be attributable to the banks' being given ultra-cheap money and investing it in ultra-safe government bonds, thus getting a steady flow of risk-free income?

Jim said...

I'm afraid that you are looking at this with hindsight. If anyone had tried to slow the party down in the mid 2000s, to stop the massive rise in house prices, to increase interest rates to slow the economy down and get it on a more even keel, they would have been absolutely murdered by the electorate at the polls. With hindsight we can see that is what should have been done, but anyone suggesting it at the time would have been howled down.

We have no one to blame but ourselves, collectively. We would not have accepted a small amount of pain then, because we could not see the large amount of pain in the future. Such is human nature.

Jayarava said...


A number of economists did predict the crisis well ahead of time including Steve Keen, Ann Pettifor, Joseph Stiglitz, & Nouriel Roubini.

They all agreed and argued cogently about what the problem was i.e. banks creating too much debt in order to make excessive profits with no regard to consequences.

This is not hard to understand. I think we can blame bankers for breaking the law, and for lending unwisely--they are the experts and must carry the burden of decision making. We can also blame one-eyed politicians who made bad policy and who ignored opposing opinions when they did come across them.

And note that the same people who predicted the 2007 crisis are predicting another one quite soon. Perhaps 2012 or 2013. And still no one is listening. The voices are much louder this time.

The problem now is the same as it was in 1929, and 2007. The argument about hindsight doesn't really apply.

Ralph Musgrave said...

Another way in which it’s our fault is thus.

Everyone wants the money they deposit in a bank to be used for COMMERCIAL purposes (loans to businesses, mortgages, etc): that way the bank makes the money work, which earns interest for depositors.

At the same time, depositors refuse to accept the risk normally associated with COMMERCIAL activity: the possibility of losing some or all one’s money. Depositors want TAXPAYERS to foot the bill when a bank goes bust. Then they throw up their hands in faux surprise when told about the size of the bill footed by taxpayers.

People who want their bank to invest or lend their money on should carry the relevant risks, as advocated by Lawrence Kotlikoff, Prof R.A.Werner and others.

Jim said...

I don't often agree with Ralph Musgrave, but I do on that point. The biggest cause of reckless bank behaviour is the State guarantee of deposits. You can put your money in the most dodgy sounding bank imaginable, but as long as they are covered by the FSA in the UK, then you get your money back if they go t*ts up. Why should a bank act prudently, make sensible loans, not get involved in casino style investment banking, if their returns will be lower, and the interest they can offer to depositors is equally low? They can't compete with the dodgy banks offering higher rates.

If depositors stood to lose all their money if the bank went bust then they would be very careful where it was put. And that would be a powerful brake on risky bank behaviour. Any bank that took aggressive risks would risk depositors taking fright and leaving, causing a bank run.

As it is the taxpayer takes the risk for depositors instead. If a bank goes bust, the taxpayer has to stump up, like in the case of Northern Rock, or the Icelandic banks. No-one would have put a penny in an Icelandic bank without a State guarantee.

Anonymous said...

Alice this country is screwed. The rot goes deep. Perhaps there is nothing that can save us.

droog said...

I disagree with Ralph! (what else is new?)

It is shareholders, not depositors, who truly benefit from and clamour for their banks getting bailed. Shareholders stand to lose everything. Depositors have FSCS and while many depositors may not even be aware of it their savings are protected by the FSA insurance.

A bank where depositors share the risk would be:

a) certainly a bank with no FSCS insurance and therefore more vulnerable to a run by depositors.

b) most likely a bank where depositors are shareholder, ie, a cooperative bank or something similar. Which is a fine thing but hardly a new idea that could enter the banking industry today and heal it. It's already there, and look at how bad things are.

In the end I think Ralph's suggestion needs not be heeded. We just need to let banks fail. Depositors will continue to be safeguarded by FSA insurance. Let the angry shareholders take the executive managers to court for fraud. That is how the system is supposed to work, and these bailouts are preventing the system to purge itself of the rot.

ernie said...

The main reason the general public didn't object to what was ahppening (apart from that they probably didn't understand it anyway) was property. All those nice TV progs about making lots of money for doing very little by buying property - and all the homeowners( I am one btw) who just liked the idea that they were increasing their worth without doing anything at all. Situation now is the same in that no-one is prepared to accept cuts in living standards. We will end up having the situation forced on us, which of course is no good to anybody but there it is

Anonymous said...

Only to be expected. This is Britain.