大象传媒

Why our banks are vulnerable

• Robert Peston
• 30 Sep 08, 09:22 AM

The most important markets announcement this morning is that the Irish government has placed an on all deposits and some debt in six Irish banks, to "safeguard the Irish financial system".

The emergency measure follows an extraordinary 26% fall in Irish bank shares yesterday.

This has huge ramifications for us.

Potentially it puts British banks at a massive competitive disadvantage - especially since other European governments are also taking urgent steps to reassure their citizens that their bank deposits are safe.

There is a widespread perception that the 拢35,000 limit to deposit protection in the UK, and the proposed increase to 拢50,000, are inadequate - and that the absence of full protection makes our banks more at risk of a run on retail deposits.

That has two damaging effects.

It spooks giant global money managers and providers of wholesale funding - and if they were to accelerate their withdrawal of cash from UK banks, well we'd see a domino-effect of horrible banking failures.

Second, it undermines the confidence of investors in our banks shares - which is why their share prices have become so vulnerable to sharp falls.

So top of the list of what this government could do to limit the damage to us from Washington's bail-out bungle would be to announce with immediate effect that all deposits in UK banks are 100% guaranteed by the government.

The chancellor did this after the run on Northern Rock last September.

There's a powerful argument that he should do it again.

PS. There is also a perception that our banks remain at a disadvantage compared with those in the eurozone and the US in respect of the assets they can swap for central bank loans.

Although the Bank of England has, over recent months, widened the collateral it will take in exchange for loans, there is a perception (which is as important as the reality in a climate of hysteria) that it is less amenable in the way it provides financial support than either the European Central Bank or the Federal Reserve.

This is something that the Bank of England can and should probably address, fairly speedily, if it wants to shore up the confidence of money markets in the robustness of our banks.

• Permalink
• Comments (0)

Catastrophic system failure

• Robert Peston
• 30 Sep 08, 07:44 AM

"We've got to sit, wait and hope."

That sentiment was expressed to me in the past 12 hours by bankers, fund managers, regulators and politicians.

What it reflects is a sense of powerless to direct events in global markets, following the to extract poison from US banks.

There are two big fears driving markets: first that the risk of a serious recession in the US and in Europe has risen sharply; second, and more immediately, that the danger of a domino-effect collapse of a series of financial firms is also much more real than it was.

Both of these anxieties has prompted a massive reallocation of investors' cash, away from shares perceived as risky and commodities that are vulnerable to lower global demand as economies slow.

US government bonds, gold and investments perceived as - well - solid gold have soared.

These are the sort of conditions that can kill hedge funds for example, as the value of their investments suffer from violent swings and their backers ask for their money back.

You may not weep for them, but if they're forced to liquidate in a hurry - well that would force down prices of their investments in a way that would damage other financial firms.
In this climate of sheer anxiety, the normal levers pulled by central banks and governments aren't very effective.

Extraordinary quantities of loans have been provided by central banks to commercial banks - but it hasn't made the banks much more willing to lend to each other.

Central banks could cut interest rates - but these rate cuts may not actually be passed on to any great degree in the interest rates the banks charge each other or us.

What's needed is some sign that the White House and Congress do have the ability to mend ailing US banks.

At the moment, it's the breakdown in the US political system that's doing as much damage as the breakdown in its banking system.

• Permalink
• Comments (0)