Why not start over?

RandomAccess

Apologies for what may be a noob-ish question,
But..
I was watching the BBC news just now and it was reported that soon the UK tax payer will have injected a Trillion Pounds into UK banks so as to encourage them to lend.

But how come they did not pick a bank which had very little exposure, or perhaps even create a new bank and give them all this capital instead...

The existing banks & the businesses which rely on them don't appear to be in a significantly better position after all this cash has been injected.
From what I gather the credit lines are drying up, its become impossible for many businesses to trade because they can't borrow reasonably small amounts for short term loans.

If this is a load of cobblers, then let me know,
Cheers

Hellm0

RandomAccess wrote: »

Apologies for what may be a noob-ish question,
But..
I was watching the BBC news just now and it was reported that soon the UK tax payer will have injected a Trillion Pounds into UK banks so as to encourage them to lend.

But how come they did not pick a bank which had very little exposure, or perhaps even create a new bank and give them all this capital instead...

The existing banks & the businesses which rely on them don't appear to be in a significantly better position after all this cash has been injected.
From what I gather the credit lines are drying up, its become impossible for many businesses to trade because they can't borrow reasonably small amounts for short term loans.

If this is a load of cobblers, then let me know,
Cheers

Because they do not have enough money to secure all the deposits people have made. If a new bank was formed and given all that money then people would logically flock to take their business to it, taking out their savings and such and in the process breaking these established banks.

Banks generally operate on leverage, they are able to lend out up to 10X the value of your deposits. That means(potentially) banks are in debt up to 10X more than they have on hand.

I for one am all for letting the banks fall, if they cannot compete then let them die. That is capitalism, bailing them out is corporo-socialism.

Économiste Monétaire

I don't know where the trillion pound figure is coming from. It may have been a confusion between the concepts of when the central bank (the Bank of England) provides liquidity to a bank, and when a government (the tax payer) injects capital into a bank. A trillion pounds would be over 1/3 of the UK GDP. When a central bank provides liquidity it comes back after a certain period of time, think of it as a short term loan--usually lasting a week--and that isn't tax payers money, really. Or, it could have been the combined liabilities of the banks the British government has taken over, or part-nationalised by purchasing large stakes in them.

The idea of letting large clearing banks fail is silly. Banks are part of the infrastructure of an economy, and if one large clearing bank were to fail the knock on effect would be dire for an economy. A large clearing bank failing and a regular corporation failing aren't on the same level of galactic fan-poop-hitting. Also, the maximum of 10x your deposits to loans isn't really true; it can be much higher (or lower) depending on institution type, and banking regulation area. The actual figure varies from bank to bank and where you are (minimum reserve requirements have a quasi-application in the U.S. for example, and the minimum reserve requirement in the Eurozone is 2%). Unless you're talking about capital requirements, which are different than reserve requirements for liabilities.

You could make a point of nationalising the existing banks and merging them into one or two entities, but setting up an entirely new bank just to watch the others fail is bemusing.

book smarts

In Tom Clancy's book Debt of Honor, Japs destroy the New York stock exchange overnight by hacking the computer system, as a prelude to invasion. As the world panic begins, the powers that be get together and agree to wipe the slate clean. Money only passes "from one perception to another" as Gordon Gecko says. Maybe the world will have to do something similar...?

thebman

Économiste Monétaire wrote: »

I don't know where the trillion pound figure is coming from. It may have been a confusion between the concepts of when the central bank (the Bank of England) provides liquidity to a bank, and when a government (the tax payer) injects capital into a bank. A trillion pounds would be over 1/3 of the UK GDP. When a central bank provides liquidity it comes back after a certain period of time, think of it as a short term loan--usually lasting a week--and that isn't tax payers money, really. Or, it could have been the combined liabilities of the banks the British government has taken over, or part-nationalised by purchasing large stakes in them.

The idea of letting large clearing banks fail is silly. Banks are part of the infrastructure of an economy, and if one large clearing bank were to fail the knock on effect would be dire for an economy. A large clearing bank failing and a regular corporation failing aren't on the same level of galactic fan-poop-hitting. Also, the maximum of 10x your deposits to loans isn't really true; it can be much higher (or lower) depending on institution type, and banking regulation area. The actual figure varies from bank to bank and where you are (minimum reserve requirements have a quasi-application in the U.S. for example, and the minimum reserve requirement in the Eurozone is 2%). Unless you're talking about capital requirements, which are different than reserve requirements for liabilities.

You could make a point of nationalising the existing banks and merging them into one or two entities, but setting up an entirely new bank just to watch the others fail is bemusing.

If the bank lends 10X your deposits (or more or less, doesn't really matter), where does that money come from?

Looks like it doesn't exist and if it doesn't how can it ever be repaid? Makes it look like 9/10 of that banks loans would essentially be bad debt in the long run.

Do they just assume it exists in the system already and is in circulation? Seems like that practice is an unstable system to begin with.

Just wondering TBH.

silverharp

brim4brim wrote: »

If the bank lends 10X your deposits (or more or less, doesn't really matter), where does that money come from?

Looks like it doesn't exist and if it doesn't how can it ever be repaid? Makes it look like 9/10 of that banks loans would essentially be bad debt in the long run.

Do they just assume it exists in the system already and is in circulation? Seems like that practice is an unstable system to begin with.

Just wondering TBH.

It is unstable to the extent that although the initial credit is created out of thin air the interest is not, the assumption is that the debt will be put to good use and the economy will grow and the old debt plus interest will be repaid. However the amount of non liquidating debt has hit that tipping point where there isnt enough income to service the debt. Bankers have to ask themselves where are the profitable opportunities to lend? there are very few.

Mikel

brim4brim wrote: »

If the bank lends 10X your deposits (or more or less, doesn't really matter), where does that money come from?

Looks like it doesn't exist and if it doesn't how can it ever be repaid? Makes it look like 9/10 of that banks loans would essentially be bad debt in the long run.

Do they just assume it exists in the system already and is in circulation? Seems like that practice is an unstable system to begin with.

Just wondering TBH.

You're confused about how a bank works.
The money they lend out is borrowed, in theory you could borrow as much as you possibly could on one side and lend it out on the other side at 1% more and make an enormous profit.
In practice this would be risky so there are rules that say the banks must maintain say 10% of the loans as a buffer.

In effect, if you walk into a bank and deposit 1m, they don't lend that 1m ten times over, what they do is say that 1m allows them to borrow 10m and lend 10m.
Does that make sense?

thebman

Mikel wrote: »

You're confused about how a bank works.
The money they lend out is borrowed, in theory you could borrow as much as you possibly could on one side and lend it out on the other side at 1% more and make an enormous profit.
In practice this would be risky so there are rules that say the banks must maintain say 10% of the loans as a buffer.

But where do they borrow it from and where does that body get it?

In effect, if you walk into a bank and deposit 1m, they don't lend that 1m ten times over, what they do is say that 1m allows them to borrow 10m and lend 10m.
Does that make sense?

That makes sense but I'm confused about the source of the 10m they borrow. Is this money already in the system somewhere else?

Also what happens if the deposit is withdrawn and another deposit is made of the same amount? Even though they still have the same amount, does the new deposit allow them to lend again 10 times over or does it just balance out the original deposit?

Doesn't it increase the risk substantially if they lend out again?

Mikel

They borrow it in the 'Capital Markets' ie other banks or bond investors.
The other banks borrow from other other banks or bond investors
etc etc etc
Hence why when banks got nervous they wouldn't lend to other banks and the system froze up and Govs pumped money into the system and provided lending facilities.
That's very simplistic but broadly true.
So there's two end sources in truth, investors and Governments.

Also what happens if the deposit is withdrawn and another deposit is made of the same amount? Even though they still have the same amount, does the new deposit allow them to lend again 10 times over or does it just balance out the original deposit?

What I said was extremely simplistic but to follow it through the new deposit cancels out the old deposit, they have to maintain the buffer against the original loan. If the buffer shrinks they have to reduce their lending.

This is why you will read a lot about capitalisation and capital ratios etc.
The buffers are not sufficient at the moment.