Saturday, 8 August 2009

Banks: Too big to Fail?

I've been watching the financial results of the various banks this week with an amount of curiosity and some horror. Here's an overview of the various bank results on the BBC website.

Especially the Northern Rock Results. How the fuck can a high street bank, whith (as far as I know) no global presence make nearly 1 billion quids worth of losses? How can they be doing that amount of business with (again, as far as I can tell) nowhere near that amount of assets to back up the business? Isn't that classic insolvency?

When NR went bust, we were told the problem was one of liquidity, not insolvency: that the bank was having a cashflow problem. More and more it seems that the bank was trading insolvently. Maybe not knowingly: it may have believed the value of the assets it had on its books. But as the financial adverts say to inform us the public: "The value may go up and down". It seems the valuations of NR's assets and the security of it's debtors may not have been what was believed before the crash and now even worse, what it was valued at after the crash.

The whole sorry sage of NR and the other banks, lends me to say that I think the banks are too big. When a smallish high street bank is doing billions of pounds worth of business, with spuriously valued assets to back that business up, I say that business model is deeply flawed. Also to be honest, I don't think banks should be doing that amount of business, because if it fails, it puts a deep dent in the rest of the financial system. In effect the bank is too big to fail.

The reason for all the blind panic and the hundreds of billions thrown at the banks in order to prop them up is the fact that the virtual business of financial transactions have replaced traditional real business in generating tax revenues. Thats what the government was preserving when it lashed out billions: it was desperately propping up the whole virtual house of cards that tax revenue in this country is based on.

Look deeper and you see that a large percentage of tax revenue in the UK is based on financial transactions which are themselves based and secured on spuriously valued virtual assets. To me that percentage is still far too overvalued, even after the crash.

If ever a reality check did hit the financial sector, we would, as I've predicted before, be catapulted into third world status. I don't know about you, but I'm more than concerned about this.

Its no way to run a business, a bank and especially no way to run a country.

The successive government's policies that have allowed tax revenue generation to shift from hard, real industry to virtual, financial business in the volumes that they have in recent history, need a radical rethink. The downside is, how to we get back into the global business of hard industry?

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