It seems to me that several of the foundation problems have not been mentioned anywhere.
The customer with a credit balance.
What does the banmk do with that money? In theory it lends it to a thoroughly deserving (ie safe) borrower taking an interest margin to cpover the overheads, profit and risk. If he can't the banker might invest it - I'll come back to that in a minute. Unfortunately there are very few AAA borrowers so the bank goes downwards to AA and even A borrowers. So far the banker has on-lent a very miserable proportion of the depositor's money - AND it has been deposited in the borrowers' accounts and becomes available for lending again. Under the old old liquidity rules a £1 deposit could be responsible for £13 of loans plus cash security plus government bonds. OK, so we still have a mountain of greasy one pound coins so we start lending to the BBB companies then the BB companies and horror of horrors, even the B companies; anything below that is called "junk" because the risk risews even higher. The problem is that the bank still has a lot of cash to dispose of.
There are 2 more markets ' other banks which have no or too small a branch network borrow via the interbank market; this was Nortern Rock and HBOS who suddenly could not repay their borrowings in the market meaning that the banks who had lent to them couldn't repay their depositors.
Lending is based on trust; as an analyst you look art the potential borrower, its market, its finances, its management and a host of other factors. If the company is making widgets for a market which doesn't want them you don't lend; that "not wanting" can be a change in public demand due to less disposable income and is exactly why the big banks don't want to lend to Woolworths, to Corus to ...... Any politician continuing to tell banks to lend dangerously (which is what they are doing) is looking for trouble.
Investments are another problem area. They can be government bonds or other loan instruments with all the risks of simply lending money; shares are a small and very specialist part of minor importance. Deutsche Bank was the only AAA bank in the world - absolutely undoubted for its obligations. By law it had to invest a substantial proportion of its deposits in bonds issued by the Deutsches Bundesrepublik (itself considered undoubted). Come recession (early 1980's) and the stock market crashed. Deutsche Bank is required by international accounting regulations to value its government bonds at market value which was a fraction of what the Bundesrepublik would pay and what Deutsche had bought them for. Result - a loss of (from memory DEM400 million.) That started a major panic because the bank had never before in living memory made a loss, it was very well run and most people had money in Deutsche Bank.
Whay happened in the UK?: the stock market crashed from 6600 to 3800 or so so banks were forced to indicate losses on UK government bonds
It was all accounting tricks.
In conclusion, the changes in regulations have made it far more difficult for a bank to operate and these came in when the market collapsed. It is possible that, but for the change,, HBOS would have been OK. My brother by semi-adoption, retired chairman of a large UK bank, daily thanks God that he is is out of the business - so do I!
Julian does not mention dealers. These are clever individuals who often make more in profits than the bank declares as total profits. It is a high stress industry and I know many who's health is destroyed by the age of 35 and they become unemployable. They are paid big bonuses in lieu of the salaries they would have got had they been capable of working after reaching 35 or 40 instead of being laid off. Even the tax man allows them to retire at somewhere like 40 years of age..INHO rthey deserve every penny they get and if they get paid by rewsults (as they do) fine.
Julian wrote: There used to be, and probably still is, a practice where you got the business, made the money and got out before the business turned sour. All very short term and very difficult to control as the people at the top make big bonuses dependant on their staff doing the business, so it is not in their interest to rock the boat.
IMHO banking has to get back to basics and less of this fancy financial engineering that few understand
I agree; I saw too much of it and hated it. Fortunately I was in a position where I could claw a few of such people back and keep them at the bottom of the pile until they had got the money back.
My own bank had a strict policy of accountability. Every loan had to be approved by a credit committee with bigger / longer loans being passed up to higher and higher credit committees. If it went wrong and investigation showed that available information was not used or a recommendation was made contrary to the available info then each person whose signature appeared was fined a month's salary for each signature. One of my ex-bosses was on 6 levels of credit committee - the particular loan I am remembering was not from the area I covered but he found it very expensive!
Did my depatrtment have bad loans? - yes but ............... One customer, a journalist upset da biggie bossman who had a load of journalists locked in a plane. It flew over the capital and our customer was "invited to take a walk" - without a parachute! No further disaputre with the General. (fun conversation with the Inland Revenue who couldn;t understand that our customer was nothing but red ketchup on sone city street!) No, I didn't get fined! (quite)
