5 things the banks have to face up to

9th June 2010

With the exception of the last couple of years, banking has always been a very lucrative business.

Whether you think the Florentine Medicis invented, it or simply improved on it (bank comes from banca, the Italian for bench or counter) it has almost always looked much harder to lose money from banking than to make money. 

However, contrary to popular opinion, banks and particularly investment banks have always failed from time to time. Remember Barings and BCCI? But on the whole banking has worked pretty well until this crunch. 

The adage summing this up was the '3,6,3' rule i.e. "borrow at 3%, lend at 6%, be on the golf course by 3 pm". 

It's not a perfect summing up of what banks do these days, but some on Wall Street and in the City of London probably wish they had followed it at least in spirit in the late noughties.

Actually now I think of it, many of the Wall Street bosses still made sure they got to the golf course even as their banks were collapsing. Nice work etc. 

But was banking's fatal mistake the linking of huge high street lending operations to huge investment banks?

Certainly what they invested in was mispriced, misconstructed, and probably misbought and missold which is some trick to manage simultaneously. Banks ended up owning billions upon billions of toxic assets, and then got terrified to lend even to other banks, so it is surely no surprise the the whole system came juddering to a halt. 

A knock-on effect

Lehman Brothers showed us that an investment bank, when it failed, could hurt all the other banks on all the other streets, Wall Street, Main Street and Oxford Street.

AIG proved that insurers could behave in a very 'investment bank-like' way too, Northern Rock proved that the 125% mortgage was a loan too far, HBOS and RBS showed that even high street giants might fall. 

But in all this, it seems rather unfair that old fashioned lending to businesses has suffered so much too.

Surely the old rules that made banks quietly richer and richer all these years ( you might call it Captain Mainwaring banking) still apply?

The business secretary Vince Cable has certainly been making noises about getting banks to lend. He believes the state owned banks have not made good on agreements they signed when they got the Government cash. 

We shall see how easily done this is, as most banks are still determinedly repairing their own balance sheets. 

 

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