Some interesting points raised by Andrew Haldane, the Bank of England’s financial stability executive director, in a speech given in Liverpool on Wednesday.
Namely:
Global banks’ net income in 2009 is expected to be around $60 billion, compared to a loss of roughly that amount in 2008. Income from market-making in various financial products has been especially lucrative, given higher bid-ask spreads and client activity (Chart 8).
This windfall gain has helped repair banks’ over-extended balance sheets. Global banks have boosted their Tier 1 capital ratios by almost 3 percentage points since the start of 2009. UK banks’ Tier 1 ratios have increased by around 3.4 percentage points. Liquidity ratios among global banks have also risen, with sterling liquid assets relative to total asset holdings more than trebling among UK banks.
And here’s the chart referred to:
Here, meanwhile, is a chart from the same report reflecting to what degree the 2009 equity rally can be seen as much a black-swan event as the 2008 crash itself:
So what should be done with all that lovely bank-revenue that’s been generated?
Obviously, says Haldane, use it to bolster the banks:
Global banks have recently received just such a profit windfall, as full-year results for the main banks are beginning to attest. There is a strong case for banks, in the UK and internationally, pocketing this windfall rather than distributing it to either staff or shareholders. This would allow banks’ balance sheets to be repaired while supporting lending to the real economy. It is prudential opportunism.
Meaning: stop paying the money out as bonuses or dividends — but don’t necessarily stop making it (as the Volcker rule proposes).
As Haldane advises on the matter of dividend payments:
This behaviour is unlikely to support banking stability. It risks profits being distributed as dividends when they are most needed to augment capital ratios and boost confidence. In 1996, the Chief Executive of a famous company observed: “We are an old-fashioned business, not a quoted plc, and we don’t pay dividends to shareholders”. The chief executive? Peter Robinson. The company? Liverpool FC. Perhaps banks should have heeded the message.
Related links:
The market-maker problem – FT Alphaville
Was 2009 the year of the market maker? - FT Alphaville