I think some people expect banks to be social enterprises. They are businesses. Banks are hardly making any money at all at the moment. They're returning around 5-10% ROE (return on equity) and in some cases (RBS/Lloyds) negative returns for shareholders. Banks are businesses with shareholders at the end of the day and have to make money. If i have shares in a bank which return me 5% a year, I'll just move them to a company which makes me 10% a year...simplistic but they have to be viable attractive businesses.|
Against this, they're all tasked with shrinking due to Basle 3, almost every single bank has to REDUCE the amount of assets they hold by large amounts to meet 10% Tier1 capital in the coming years.
Clearly the fact banks were undercapitalised caused a large part of the problem in 2007-2009 so government regulation to increase capital is probably the right thing to do.
But banks can't reduce assets, reduce their riskiness, increase margins, increase lending and transform all at the same time.
The credit crisis was caused by the easy supply of credit. If the banks flood the market with credit we'll just get another bubble in 5-10 years. Anyway, what's the problem with charging 10% on a 5y loan? I can take money and put it in safe 5y assets at 6%. SME's are clearly all different but generally all would be classified as high yield due to their small business profile reliance on one industry. Therefore they should be borrowing at 15%. As an investor I would rather get 6% from a safe asset than 10% from a highly risky asset.
This is where a government 'bank' comes in. It works on two fronts, charity (non-profit) and access to government funding (2-3% cheaper than UK banks at the moment). The bank can even lose money because the government see's positives on lots of other fronts, increased employment so a reduction in benefits, increased taxes from income, less social problems due to unemployment etc etc
Edited by IJ at 16:05:53 24-09-2012