100% reserve banking
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Slightly worrying news about the Co-op bank:http://www.bbc.co.uk/news/business-22507937
Quote:Here is what stood out for me. At the end of 2011, the Co-op Bank had £1.45bn of corporate loans on its "watchlist". In other words, it thought that £1.45bn of lending to companies – much of it property lending – could go bad….The point is that in the subsequent year, many of the companies with loans on the Co-op's watchlist did in fact default. Corporate loans in default at the Co-op jumped from £922m to just under £2bn….And that rise in defaults was a big contributor to the colossal £674m loss that the Co-op incurred in 2012….At the end of 2012, the Co-op had £3.7bn of commercial loans, home loans and personal loans that it classified as impaired or bad. Against that, it was holding a provision for potential losses on these loans of £643m….In other words the Co-op believes it will ultimately lose just 17% of these bad loans….At the same time, the Co-op has loss-absorbing equity capital of £1.6bn…Or to put it another way, impaired loans minus provisions for losses as a percentage of loss-absorbing capital is 194%.So, things to absorb. The Co-op is a small relatively conservatively run bank, not a bunch of profiteering spivs, and a large tranche of it's loan book is going bad. So the problem isn't with the bank, it is just a symptom of flailing in the wider economy. Secondly, this just shows that co-operatives are not a genuine alternative to the capitalist system, and are certainly not immune from its economic woes. Thirdly, banks really, really, cannot just create credit a the stroke of a pen, otherwise it wouldn't be in this mess.
Oh dear. So much for "ethical banking". I wonder what all those Guardian-readers who "moved their money" (to the Co-op Bank) are thinking now. Another quack remedy hits the dust.
The significant thing is that the bad debts appear to be securitised on property, so even foreclosing on the building value won't cover the losses (which means the property market must still be floundering).
I read a good column on this in a financial magazine recently, and the take home lesson is indeed Bill's. Ironically, the Co-op might have been better off it had indulged in all the complex financial jiggery-pokery that is often blamed for the crisis. The big finance side of things has proved less risky, perhaps, certainly more profitable, than the straight high street banking that some have claimed we all need to get back to.Adam is wrong though. Guardian readers and others, including myself, who moved to the Co-op did so because it is indeed more ethical than the alternatives, has better customer service, works harder at community relations, pays its staff, doesn't have to pay huge bonuses to City spivs, etc, etc. People who moved their money to the Co-op weren't wrong to do so. It's people who can't see anything in the world except through their narrow sectarian goggles and think everyone but them is a deluded idiot who are really quackers.
Former Co-op Bank chief executive Neville Richardson’s left the bank in 2011 with a package worth £4.6 million, including a £1.4 million payment for ‘loss of office’, and the same amount as ‘compensation’ for leaving.The downgrade was mainly based on the deterioration in the performance of the loan portfolios the Co-op Bank acquired with its takeover of the Britannia Building Society in 2009 when Richardson was chief executive of the Britannia at the time of the deal. The Co-op Bank is among the lenders to have brought in so-called “malus” clauses for its staff to allow it to claw back pay from current and former staff if it is discovered that the lender’s performance at the time the pay was granted was based on taking positions that subsequently soured. We’ll see if they have much luck in reclaiming it. I’m sure lawyers will have a field-day. I’m very ethical – i always use the Co-op for cremating my family’s dead.
It's not the Co-op Bank or having an account there that's the quackery. I've got one there myself and am also a member of the Co-operative Movement (for the divi). It's the claim of groups like Move Your Money (slogan on their homepage: "Using consumer power to build a better banking system") that consumers can somehow influence what happens under capitalism by the exercise of so-called "consumer power". That's the "quack remedy" that's hit the dust.I don't know if you meant to explain the Co-op Bank's current difficulties as being the result of pursuing an "ethical" rather than an income-maximising investment policy, did you?
Alan: Yes indeed, but those are pretty modest payouts by City standards, if not by socialist ones.Adam: Yes, I suppose that was the implication of the argument I read. The argument seemed plausible to me, but I've not looked at the details.
https://theconversation.com/what-went-wrong-for-the-co-op-bank-14308This article seems to be pointing the blame at over-ambition and expansion:
Quote:But in recent years the bank became increasingly ambitious and expansionary.This was most vividly demonstrated when it took over the Britannia Building Society in 2009. At that time, Britannia was the second biggest building society in the UK. The business plan was to build a mutual bank that could start to take on the plc banks like HSBC and Barclays. This strategy found favour with many commentators and politicians who, in the wake of the 2007/08 financial crisis, were keen to have more competition in the financial services market and to see ethical banking succeed.Interestingly, Britannia was also a mutual organisation (so it slightly surprising that it's loan book was not transparent, unless they didn't know how based it was neither). Upton's conclusion is telling:
Quote:It tried to expand too quickly, and it took over an organisation without properly considering the value of the purchase. These are mistakes any business can make.The mistakes that can cause untold misery for thousands of people.
Stuart will be relieved that the Cooperative Bank's current difficulties are not the result of pursuing a "ethical banking" policy. On the contrary, they would seem to have resulted from them behaving like any other capitalist enterprise. But then to stay in business so as to be able to pursue an "ethical" policy, a business has to behave like any other business, has to beat the competition, make profits and accumulate capital (grow).. Either way, "ethical" capitalism is exposed as a sham. Though I'm not quite sure what to do with my accounts with the Cooperative Bank and the Britannia Building Society. Move My Money perhaps?
Another relevant news item:http://www.thetimes.co.uk/tto/business/industries/banking/article3781429.eceQuestion for those who think a bank can create money from thin air by a stroke of the pen: why did the Co-op Bank not do this instead of asking for a loan from the Bank of England? The answer that they would have regarded this as "unethical" won't be accepted.
Quote:Studying the figures provided by several large European and Asian banks, including British lenders such as Lloyds and HSBC, Barclays found that, on average, banks predicted a probability of default on their lending books that was 51pc higher than what they actually experienced.As comforting as this conservatism is, the worrying implication is that banks are rather poor assessors of their own risks.After all, the primary function of creditors is supposed to be risk management, this seems to be the capitalist economic calculation problem in evidence: they're just guessing. Which in the light of this point:
Quote:The ripple effects of Moody’s decision to downgrade Co-op Bank’s debt by six notches to “junk” status last month are still being felt, as some large depositors look to move their cash out of the bank. “You might not think much of the ratings, but institutions like local councils have a fiduciary responsibility to not leave taxpayers’ money in a bank where there are any questions about its solvency,” said one London-based banks analyst.means that substantial effects can occur because of flighty responses to bad news (and rationally so).Frankly, I think the Co-op is going to get out of this intact:http://www.bbc.co.uk/news/business-22754201Suggests that the stake of the Bank of England in it will mean it will have to resolve any problems deliccately, but also means that the gap is being plugged by state fund (a very mutual solution).
alanjjohnstone wrote:Former Co-op Bank chief executive Neville Richardson’s left the bank in 2011 with a package worth £4.6 million, including a £1.4 million payment for ‘loss of office’, and the same amount as ‘compensation’ for leaving.From yesterday's London Evening Standard:
Quote:The new chief executive of the Co-op Group, Euan Sutherland, today also saw off his deputy Martyn Wates who had been at the group 16 years. He was paid £970,000 last year including a £164,000 bonus and is likely to receive a year's pay off.Very ethical! What a bunch of hypocrites.
Because to create money, they have to have someone to lend to. Also by the act of lending, their account at the Bank of England would be reduced (assuming the borrower spent the money with someone at another bank), unless they can rely on getting back a corresponding increase in new deposits and / or loan repayments. It is similar to when Northern Rock went bust (why did they just not create the money themselves ?)
simondav wrote:Because to create money, they have to have someone to lend to.As an attempt to explain the Coop Banks's current difficulties, this is upside down and back-to-front. As if the function of banks was to "create money" rather than make loans. Also, of course, because you define bank loans as money all you saying here is that to make a loan banks have to have someone to lend to. Which is rather obvious.
simondav wrote:Also by the act of lending, their account at the Bank of England would be reduced (assuming the borrower spent the money with someone at another bank), unless they can rely on getting back a corresponding increase in new deposits and / or loan repayments.I don't know why you make this assumption, but for this explanation of the Coop Bank's difficulty to be true it would require the additional assumption that this wasn't balanced by loans made by other banks not ending up with the Coop. In any event you are conceding that a bank can only lend what it has got or at least can get very quickly (literally by the end of the day, when banks clear their debts to each other via the Bank of England and the money market).It looks as if the Coop Bank's difficulty has arisen from "loan repayments" being less than expected, i.e some of their loans not being repaid in full or on time. I would think that there are many businesses and people who would love to have a loan from the Coop Bank. The trouble seems to be that it is having to use the funds it has to increase its capital rather than to make loans.
simondav wrote:It is similar to when Northern Rock went bust (why did they just not create the money themselves ?)This whole issue has been dealt with extensively in past threads on this forum. For example:http://www.worldsocialism.org/spgb/forum/general-discussion/creating-money-out-nothing
Quote:Positive Money says that Northern Rock went bust because it expanded its loans faster than the other banks (so violating one of the assumptions of your ideal scenario). If you think that banks "create money" from thin air rather than from funds they already have this is the only logical explanation you can give. But since banks do make loans from funds they have it is perfectly possible for one bank to expand its loans faster than others, as long as it gets the extra funds. Northern Rock did so by borrowing heavily from the money market. It got into trouble when the interest rates at which it could borrow from here rose. What has been called "funding strains arising from reliance on short-term wholesale funds". Positive Money of course deny that this could happen or would be a problem because they don't accept that banks need funds to make loans.
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