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Posts Tagged ‘banks’

Are there many more out there in the UK who are totally hacked off at this government’s treatment of savers during this financial crisis?

At a time when it’s clear to just about anyone with half a brain, that the present problems stem from excessive borrowing, this wonderful government of ours is doing all it can to promote yet more borrowing in a vain attempt to kick start the economy. In the process of course slashing interest rates which is having an exceedingly detrimental effect on those of us who rely on savings to at least keep pace with inflation.

So what’s to be done? I have this half formed plan.

The idea is that if a large enough group of us could act in concert with our savings, then we just might be able to make the government sit up and take notice. Particularly so since the UK banking industry is all but nationalised. Suppose a few thousand of us made it known to the government that unless it came up with some system for compensating savers with better interest rates, then we would take concerted action. Next month we’d all transfer our savings to Bank A, and then the month after move them all out to Bank B. Each month putting them somewhere different, going round in a complete circle if needs be. The idea being to create uncertainty about the level of deposits in any one institution at any one time. This would presumably hamper decision making and reduce the levels of lending the banks could commit to.

As I say it’s a germ of an idea I have, and I wonder if there are any readers out there who would wish to comment and suggest just how we might organise this.

Even if you just read this and don’t wish to comment, perhaps you would pass it on to other friends, colleagues and acquaintances. If I detect a sufficiently large ground swell of opinion, I’d be prepared to move it on to the next level and see where we get to.

Over to you…..

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Only in the technical financial press has any mention been made so far to the impact of the ludicrous “scientific precision” of Basel 2 EU directives. They have finally kicked their inventors in the teeth, as widely predicted by economists and others at the time.

Officially directives 2006/48 and 49, Basel 2 demands that banks and other financial institutions apply an EU-formulated “Risk Assessment Model” at the end of each and every day’s trading to show if it is solvent. If not, it must inform the authorities immediately and stop trading. That of course is no problem in a rising market as we have generally seen in recent years.

But it is a huge problem in a highly volatile or falling market, not least because the model fails to take any account of inevitable changes in market sentiment. Neither is the short-term impact of new information factored in, regardless of its accuracy or inaccuracy. The model also ignores the essential underlying worth of assets.

In the UK, both Northern Rock and Bradford and Bingley fell foul of Basel 2. It threatens the theoretical solvency of all major banks in the EU in a falling market, and accelerates the problem exponentially.

This banking crisis is is far worse than it should have been, not least because the ivory-tower bureaucrats in Brussels ignored sound advice based on market experience. We are all now reaping the whirlwind.

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Could Northern Rock go bust – to use the vernacular? (For non UK readers, Northern Rock is a UK bank which has today had to apply to the Bank of England for emergency financial support. The most visible effect so far of the impact of the US sub-prime lending debacle). Northern Rock is no different to any other commercial organisation, and if its liabilities are consistently larger than its assets for a significant period of time, the answer of course is yes. Would it be allowed to go under? The answer is probably no. Or certainly no on this occasion.

In a rare move the Bank of England has agreed to throw Northern Rock a lifeline and step in as the lender of last resort. Nevertheless this has been an unsettling morning for savers with NR. It appears that the intervention by the BoE has probably not stopped a run on the bank by its savers. One of the savers interviewed commented that withdrawing savings would undoubtedly add to the general air of panic, but as he succinctly put it, even if he stayed as a depositor he couldn’t trust others to do the same, and he was not prepared to take the risk. Although the media and banking authorities are pointing to this being a direct result of problems associated with the US sub-prime mortgage lending of recent years, there are more fundamental questions to answer. Why have Northern Rock got themselves into this position?

In recent years is seems to me that we’ve let the money men get away with murder. Whatever happened to prudence, a word the previous Chancellor of the Exchequer Gordon Brown, now Prime Minister, was keen to be associated with. In years gone by, mortgage lending was driven by how much a bank could attract from savers. Money in through one door (largely from savers), went out the other. Not these days. The Chancellor of the Exchequer, Alastair Darling, seemed quite blase about the way ever increasing loans between financial institutions have ratcheted up the levels of mortgages available. He seemed to regard this as a great virtue of the current system.Not in this region of planet reality it isn’t.When this easy access to funds by the lenders, is coupled with the ease with which, and the amount, borrowers are allowed to borrow, then it’s not rocket science to see that we’re on an escalator to the precipice. When I first borrowed for a mortgage, not only had you had to have been a saver with the Building Society for a period beforehand, thus demonstrating presumably a certain degree of financial understanding, but more importantly you could only borrow usually no more than two and three quarters your salary, plus perhaps if you were lucky half a partner’s salary.

It is just crazy to see mortgage borrowing multiples of several time earnings being the norm. Is it any wonder we have house price inflation and problems in the banking and funds market, when both money supply, and the ease of accessing it have few controls attached? But I come back to the question. Why were NR allowed to get to this stage? What has happened to the regulatory authorities that we hear so much about and why didn’t they step in sooner? Did no one see the significant increase in loans undertaken by NR in recent times and ask questions?

This would never have happened in Worthington-on-sea under Captain Mainwearing.

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