For the benefit of the majority of people who talk a lot about banks, but have never bothered looking at a bank balance sheet, here's the RBS balance sheet as at 30 September 2009 (full results here, pdf):
1. The only bits that the real world cares about are:
A. Loans and advances to customers of £631 billion. This is real money that real people (mortgage borrowers, credit card holders, businesses) are contractually bound to repay to the bank. Buried away in 'Other assets' of £102 billion are a few quid for proper fixed assets, buildings, safes, IT systems and so on.
B: Customer deposits, which are on the liabilities side of course, of £483 billion. This is real money deposited by real people, and the banks are contractually obliged to repay them when they ask for it.
All the rest of it is jiggery pokery, and even if I could explain what it all is and people understood it, that's of no real interest to real people in the real world.
2. We also know that the UK government has historically given implicit or explicit guarantees to depositors (which is fair enough, apart from the fact that the banks didn't pay for the insurance). So, next time RBS is in a bit of a mess, there's no reason why the government or the bankruptcy courts or whoever shouldn't do something similar to what they did with Bradford & Bingley or Northern Rock, which is to write down A to its market value (knock off twenty percent = £505 billion) and then transfer A and B into New RBS, the balance of £22 billion is non-repayable share capital in New RBS, which gets given back to Old RBS (so there's no net transfer of value away from actual Old RBS).
3. The non-repayable shares in New RBS and all the other rubbish gets left behind in Old RBS for the shareholders and long-term bondholders* and so on to squabble over. Whether they get back more or less than they expect to get back is a different topic - the total market value of all RBS shares is currently under £20 billion, so shareholders (mainly the government, having invested taxpayers' money) have already pencilled in losses of £37 billion. We could do the same exercise with bonds and we'd find out that they have also pencilled in losses of £50 billion or something, so splitting the bank is not depriving anybody of any money that they haven't lost already.
What's not to like?
* There are grey areas where it's not clear whether something is a deposit or a bond, but hey, lines have to be drawn somewhere. I suppose the acid test is "Would this bond have been included in the government's deposit guarantee scheme?"
Saturday, 20 February 2010
Nope, sorry, still not big enough to be "too big to fail"
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10 comments:
The whole "bank" bailout was in reality designed to bailout the bondholders.
He just would n't let it lie! You were telling us in the last set-to that great piles of bank notes were liabilities .
AC1, probably true.
DCB, I never said that, it is patently not true, and I have absolutely no reason to lie about anything anyway.
I said that customer deposits were liabilities, which they are. Look at the balance sheet!! I'm not saying that each individual item is correctly valued, but they are certainly all in the right place.
The coins and notes which depositors have handed over and which are still in a safe are included under 'Other assets'.
It's called 'double entry bookkeeping' which is one thing that banks have to be very, very good at.
DCB, as a separate issue, from the point of view of the issuer (i.e. the Bank of England), banknotes in circulation are of course liabilities.
For every financial asset there is a financial liability.
If you have a tenner in your pocket, that is an asset to you.
The flipside is that the BoE has a corresponding liability.
Why's that then?What liability has the Bank incurred by creating the great big piles of banknotes referred to above?
BTW I was referring to the old Vic Reeves catch-phrase about not letting things lie (doggo or undisturbed or whatever) not imputing personal mendacity.
DCB: "Why's that then?What liability has the Bank incurred by creating the great big piles of banknotes referred to above?"
Because it just has! That is the whole definition of 'bank notes', you may as well ask 'why is water wet?'
For example:
The Bank of England is part of the government, as is HM Revenue & Customs and excise.
You have a £50 note - that is your financial asset and the government's financial liability.
They issue you a £50 tax bill - that is your financial liability and the government's financial asset.
On the due day for payment, you present your bank note to the government in payment of your tax bill. All the assets and liablities net off to nothing.
"The Bank of England is part of the government"
But wasn't it privately owned until WWII? How did things work then?
B, it was sort of privately owned until then, but had special state granted powers and duties, in any event that's all ancient history and it is now very much part of HM Treasury.
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