THE TELEGRAPH: Make no mistake. Power has shifted. Britain’s free-wheeling banking model is finished. Profits will play second fiddle to social responsibility. Bonuses will no longer be in cash.
Corporate clients will be offered products that mitigate their risk, rather then promise undeliverable yields and returns. Growth will be slower.
Lenders will become households’ fourth utility, after gas water and electricity. Thatcher’s Big Bang revolution is over.
After the £28bn equity injection into Royal Bank of Scotland, HBOS and Lloyds TSB, the Government will have effective control of two of Britain’s biggest banks.
The Treasury will own roughly 60pc of RBS and 43.5pc of the merged HBOS and Lloyds. The Government is providing a further £9bn of preference shares to the three banks for good measure - to make sure Britain’s lenders are among the most financially robust in the world and ready to contend with even the worst global economic depression.
As an attempt to stabilise the system without completely forsaking the market model, this appears to be a magic bullet. Confidence in the banks’ finances, if not in their past actions, should recover and with it the money markets that are the lifeblood of UK lending. Some £550bn of customer loans have been made through the money markets in the UK. The Government knows they must come back to life, as the alternative is credit rationing.
The conditions attached to this once-in-a-lifetime bail-out are clear, though. Growth and profitability at the banks will no longer be made on the back of high debt levels.
Any homeowner knows that the bigger your mortgage is, the more profit you make in a rising market. At heart, the banks’ models were no more sophisticated. Like the myopic property speculator, they’ve been caught by the asset price crash.
The statement from RBS showed just how banks will have to operate in the future. “Future profitability and capital generation will be optimised by placing a greater emphasis on risk- adjusted returns.” In other words, back-to-basics banking where profits are made by charging appropriate levels of interest on carefully assessed risks. The days of leverage – or debt - are gone. British Banks’ Era of Excess Is Over. RIP. >>> By Philip Aldrick, Banking Editor | October 13, 2008
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