Banks on methadone

[grumpy]

An unhealthy addiction to cheap government money

Jul 22nd 2010

BRITAIN’S biggest banks may pass the common “stress test” for resilience that was applied recently to banks in the European Union (results were expected on July 23rd when The Economist went to press). But that glosses over a long-term structural problem which makes them more of a burden than a benefit to the national economy. As banks struggle to deal with it, they may be smothering the chances of new entrants offering customers and small businesses a competitive alternative.

The problem is their addiction to government-supported funding: £165 billion of it through a Special Liquidity Scheme, which lets them refinance mortgage securities and other assets at a discount to market rates; and £120 billion more raised through bond issues bearing a government guarantee. These two schemes are due to come to an end in 2012, presenting the country’s big banks with a refinancing mountain. And other wholesale debt is also falling due—perhaps as much as £480 billion over the next three years. At the moment the banks are raising funds of around £12 billion a month, only half the rate they will need when the other bills are presented. Whether the Treasury will relent when the deadline arrives and keep some of its support in place is an open question.

The uncertainty means that big banks are hellbent on shoring up their balance-sheets by charging interest rates on loans that are much higher than the rates they themselves pay to borrow. This is not an outcome that pleases Vince Cable, the business secretary, who has been critical of bank behaviour since the onset of the credit crisis. But Mr Cable is not likely to see banks lend more—or more affordably—to small firms, as some state-assisted ones have promised under supposedly binding agreements, until their balance-sheet restructuring is under control.

economist.com/node/16645083? … d=16645083