The Liberal Democrat manifesto (page 22) includes the following in its list of things the party would like to do if it obtains power:

We will introduce a Banking Levy, so that banks pay for their tax-payer guarantee,...

• Get the banks lending responsibly again. The taxpayers’
representatives on the boards of the banks the public own or partown
should insist banks lend to viable businesses on fair terms again.

This is nonsense that verges on plain lying. It is, of course, not dissimilar to the line put out by the Government. The Tories, too, want to tax the banks. The centre of the widely repeated nonsense is this:

The politicians have said that the banks need to be on a sounder footing. That means that they must lend less in relation to their capital - their shareholders' funds. But at the same time, they loudly demand that the banks are not lending enough and must be made to lend more.

These two demands are mutually contradictory. If a bank is told it must lend out less money in proportion to its capital, it cannot, at the same time, lend out more. I am far from being the first to point this out. Tim Congdon, the economist, and doubtless many others have made the point. But the newspapers and, most importantly, the television interviewers, are not sufficiently financially literate to get the point.

Sometimes when you see and hear nonsense, you think, "maybe there is something I am missing. After all, most people seem to think it is not nonsense. The interviewers nod sagely and in apparent agreement." But I recently had a conversation with someone who is a fairly senior bank regulator. He said that, yes, the reaction to the banking crisis of both the government and the Financial Services Authority (FSA)was that banks must lend less in relation to their capital. He went on to say that when ministers then went on television to demand that banks should continue lending as before, senior staff at the FSA were astonished. They knew it made no sense. They knew it was political claptrap. But of course they cannot say anything in public.

And when people like Nick Clegg demand an extra tax or 'levy' on banks, what does he think that will do to their ability to lend? It will reduce the capital they otherwise would have had and thus reduce the amount on which lending can be based. In short, it will reduce lending and prolong the recession.

Of course the Basel Agreement is key in the international regulation of the banks. I have heard it suggested that a loosening in capital requirements more than a decade ago - apparently to try to match Japanese competition in banking - had a role in making the banks less safe and thus played a part in causing the recent financial crisis. The current intention, of course, is to tighten capital requirements up again. For some of the argument currently going on about this (barely reported at all in the British press) see this Bloomberg report today.

Posted by James Bartholomew • Indexed in Politics

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