Wednesday 25 March 2015

George Osborne talks sense: shock.

From City AM:

BRITAIN’S lenders face having to pay the bank levy forever, as the chancellor yesterday revealed that the crisis-era tax was here to stay...

“I think the bank levy is going to be here to stay. It is perfectly reasonable as a society to ask the banking sector to make a contribution,” the chancellor told MPs on the treasury select committee.


Hooray.

“I was very clear in 2010 when I replaced the bonus tax with the bank levy, that the bank levy was a more effective way of getting the banking sector to make contributions.”

It is and it does.

Osborne hiked the levy for the ninth time in his Budget last week, increasing it to 0.21 per cent of UK banks’ global balance sheets. The initial plan was to set it at just 0.05 per cent of the balance sheet.

Osborne had targeted revenues of £2.5bn from the tax, hiking the rate as banks shrank in order to maintain that level of revenue. But under the latest plan, it will increase to take £3.7bn per year.


That's part of the point; to get banks to "shrink their balance sheets"; in other words to stop making the very low margin but high risk loans to land price speculators. So to keep revenues constant, the headline rate has to increase.

It's still only a paltry 0.21% though, which barely nibbles into banks' overall lending margin of 2% (i.e. mortgage interest average 3%, deposit interest average 1%, or whatever).

Analysts fear that such a large loss from the banking system will have larger ramifications for the wider economy.

"Large loss"? Get a grip. Banks hand out £10 billion a year in bonuses; the financial sector boasts that it pays over £50 billion a year in tax (mainly PAYE plus corporation tax and other bits and pieces). UK gross bank balance sheets are in the many trillions; if you net off inter-bank lending and other pure accounting entries, they are about £1,800 billion. Check: £1,800 billion x 0.21% = £3.8 billion.

“If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy,” said analyst Joseph Dickerson from Jefferies. “I’m not sure it makes a lot of economic sense. It is like a sin tax, like on cigarettes, and governments usually like to have more taxes.”

Nope.

Loans create deposits (especially in a land price fuelled bubble system). The constraint is what people are willing to borrow; once they've 'borrowed' that freshly printed money, it goes straight back into the banking system as a deposit.

The mechanism by which the bank asset tax depresses lending volumes is because the very, very low margin loans are no longer profitable; hence and why the sensible medium term policy would be to hike the bank asset tax to 1% or even 2% of assets (there are plenty of other bad taxes we could get rid of, like Stamp Duty or the 45% income tax rate, just to make it fair all round and fiscally neutral).
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Dinero adds: "Bank capital is paid in capital. Its not derived from lending. See the document. Basel III capital"

1. Where did I say that "bank capital" was derived from lending? I didn't, that is an irrelevance and not central to this debate. I said that "loans create deposits". A well run bank doesn't actually need any share capital (Basel notwithstanding), and strictly speaking, building societies do not have any share capital at all.

2. If bank capital is issued in exchange for cash, then what does that cash represent? Ultimately it represents somebody else's debt. If different people have some spare cash, they can either give it to the bank as a deposit, or give it to the bank in exchange for new shares (or half-way house, give it to the bank for bonds). It's a legal distinction rather than an economic one.
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Dinero again: "and so the statement "If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy," is broadly correct."

No it's broadly complete and utter bollocks, this is special pleading put out by the banksters. The total amount they can lend is restricted only by the amount that people are prepared to borrow. Whatever they lend out comes straight back in again, as deposits, as bonds or as share capital. If they want people to put the money back in as share capital rather than deposits, they will just reduce interest on deposits and increase dividends on shares.

"Capital adequacy requirement is to be 10%
Mortgages have a risk weighting of 1/2
3.7 bn times 10 = 37
37 times 2 = £74 Bn
the £3.7 Billion goes from retained earnings, bank capital and so is no longer available for the capital adequacy criteria."


Read the post! That £3.7 bn is only a very modest increase in their current overall tax bills and only one-third of the bonuses they award themselves.

And finally... lending to land speculators (akak "mortgages") is not lending to "the economy", is it? It's just an increase in debts for some people and deposits for other people.
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Dinero: "" If they want people to put the money back in as share capital rather than deposits, they will just reduce interest on deposits and increase dividends on shares."

That would only work if people were happy to convert their no risk deposit at the bank to an at risk capital at the bank. That would satisfy capital adequacy, but its not very likely to happen."


Again, nope.

Apply common sense or read my earlier post "Economic Myths: Gearing reduces the cost of capital".

The total 'risk' of borrower defaults etc. faced by 'the bank' is the same however it is funded. And that 'risk' is ultimately borne by its funders (be they depositors, bondholders or shareholders).

From a depositor's point of view, the more share capital there is, the safer he is.

But the same applies to shareholders. The more share capital there is, the safer each individual one is.

Imagine a bank that was ONLY funded by share capital. The shares would be very, very safe indeed. Even Northern Rock only managed to lose about 5% of the money it had lent out on reckless mortgages.

Or imagine a bank that was ONLY funded by deposits, i.e. a building society in the good old days. Putting your money in a building society is technically slightly riskier than in a bank, but the difference is negligible and nobody ever gave it a second thought.

(The £85,000 deposit guarantee clouds this picture, but then the government always does.)
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Dinero: "People would not want to convert their deposits to share capital..."

Yes they would, I just explained that. If a mortgage bank were 100% funded by share capital, then its shares would trade at close to par and be easily buy-able and sellable; banks would redeem them when they had spare cash, pay very modest dividends that are only slightly more than normal deposit interest, and worst case in really bad years, you'd not get any dividends. They would be so close to being 'cash' as makes no difference.

"... and so that is not a route by which the retained earnings that are transferr5ed to the HM Treasury's custody by the levy could be replaced. So the amount of assets allowed to be held in line the capital adequacy regulation is reduced by the bank levy. "

A tax is a tax is a tax. Banks already claim that they pay £50 billion a year in tax, what's another £3.7bn?

That tax can be paid out of retained profits (i.e. share capital); or it can be paid by reducing deposit interest, or the banks could reduce bankers' bonuses by one-third. Or downsize their palatial head offices a bit etc etc etc.

The quoted bankster is talking shit, you can bend and twist it any way you like. If you follow that fucker's logic, banks should not pay any tax at all.

22 comments:

Lola said...

And, as 80% (I think) od bank lending is secured on land, it's really LVT by one remove. A 'mansion' tax.

ontheotherhand said...

Well, is it not just clawing back some of the subsidy given underwriting the riskiest 15% under his Help to Buy: Equity loan scheme? He pumps up the pyramid scheme a bit more with wheezes like that and turning new pensioners into BTL landlords, pulls in the Stamp Duty and this bank levy, and kicks the problems into the long grass.

Dinero said...

Lola > agreed, a bit like an LVT,a property tax.


Mark

Bank capital is paid in capital. Its not derived from lending. See the document. Basel III capital

http://www.bis.org/bcbs/basel3.htm


Definition of tier1 and tier2 capital.
You'll be suprised at what it is in that document. Give it a read. It doesn't say what you expect. The language is arcane. I wonder what you make of it. Give it a comment here if you have the time.

mombers said...

I think the only thing wrong with it that it should be on local banks local wholesale balance sheet. It might be all talk and no pork but maybe one of the big banks will domicile elsewhere. But then again, is that a bad thing?

DBC Reed said...

Nationalise the Banks .Why should they create money and not the State? Also "How can Banks lose money when they can create it?" =Takes a lot of training .

Dinero said...

> Mark




and so the statement

"
If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy,"

is broadly correct.


Capital adequacy requirement is to be 10%

Mortgages have a risk weighting of 1/2

3.7 bn times 10 = 37

37 times 2 = £74 Bn


the £3.7 Billion goes from retained earnings , bank capital and so is no longer available for the capital adequacy criteria.

Dinero said...

" If they want people to put the money back in as share capital rather than deposits, they will just reduce interest on deposits and increase dividends on shares."

That would only work if people were happy to convert their no risk deposit at the bank to an at risk capital at the bank.

That would satisfy capital adequacy , but its not very likely to happen.

Derek said...

Agreed. The bank levy is a good thing and it should be bigger so that more harmful taxes can be reduced or eliminated.

Dinero said...

> Mark

People would not want to convert their deposits to share capital and so that is not a route by which the retained earnings that are transfered to the HM treasury's custody by the levy could be replaced.

So the amount of assets allowed to be held in line the capital adequacy regulation is reduced by the bank levy.

Dinero said...

the risk to shareholders is higher than that of depositors because shareholer capital is used to replace lost assets and protects the ability for the bank to honour depositors.

Dinero said...

Yes

I do agree with you the analysts quote is nonsense.

He has no evidence that the tax would be from money that was destined to be regulatory capital and if it was then if a bank is profitable then the bank can sell more shares.

Bayard said...

"banks should not pay any tax at all"

Ah, now you're talking a language that the banksters can understand.

Osborne should make the bastards pay VAT.

Random said...

B, nobody should pay VAT
Dinero, not if they have not changed their tune lately:
http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
Though I admit money creation is confusing to me. Is the textbook version bullshit or not, Mark?

Mark Wadsworth said...

Din, I refer you to the actual post:

"It's still only a paltry 0.21% though, which barely nibbles into banks' overall lending margin of 2% (i.e. mortgage interest average 3%, deposit interest average 1%, or whatever)."

So actually, this is much the same as increasing corporation tax for banks from 20% to 30%, which is a lot lower than it is in many countries and no higher than it was in the UK until a few years ago.

Apart from that, you appear to be falling into the Bankster-Home-Owner-Ist trap of referring to things which aren't capital as capital; misdescribing taxes on monopoly rights or monopoly income as "taxes on capital" and then making the leap that somehow taxes on income are fair game but not taxes on faux capital.

B, no, he should keep nudging up the bank asset tax, it's like LVT for bank privileges.

Mark Wadsworth said...

L, OTOH, M, agreed.

DBC, bank asset tax is nationalisation but without assuming liabilities - win, win.

D, thanks.

R, depends which textbook you read. The proper text books make it clear that by and large, loans create deposits.

Money is not a thing in itself, it is a unit of measurement, and what it measures is indebtedness. So one man cannot have money unless somebody else has debts. Add all the monetary assets and liabilities in the world together and the sum total is precisely f- all.

John M said...

ALl very clever, but of course what happens after a few years is that the Banks just start pricing it in as a cost, and who gets to pay for that?

Then it stops being a tax on b&stard bankers and just becomes another direct tax on people and businesses...

Dinero said...

> Mark

I'm not falling into any trap , I agree with you the guys assertion that the levy reduces Lending provision is incorrect.


>Random

I read that bullitin last easter, very informative.
The text book money multiplier is wrong.


However bank regulatory capital is not the same as company book value capital.

That is assets minus liabilaties , balance sheet capital.

But regualtory capital is not calculated that way, from Basel 3.

http://www.bis.org/publ/bcbs189.htm

The terminolgy and approach used in that Basel document is quite perculiar and takes some getting your head around.

Dinero said...

> John M

Well that would be the same as an increase in mortgage interst rates, and the BoE infulences them anyway.

Mark Wadsworth said...

JM: "after a few years is that the Banks just start pricing it in as a cost, and who gets to pay for that?"

Nobody!

Because the effect will be primarily to choke off high risk, low margin lending to land speculators (which is a negative sum game). The real economy will do better for it.

That's like asking "Who pays the fines for breaking the speed limit?"

Answer: the people who break the speed limit. If you don't want to pay it, don't break the speed limit. If everybody stuck to the speed limit, then nobody pays it.

Random said...

http://www.bbc.co.uk/news/uk-politics-32047995
Yeah right.
Why don't they cut them back to the levels in 2009?

Mark Wadsworth said...

R, exactly.

It's not true until they deny it, therefore both major parties have the clear intention to hike either or both of the worst taxes. Bugger.

To paraphrase, if the "Labour Party" want to tax labour, wouldn't the "Land Party" want to tax land?

Bayard said...

Random, Mark,
Yes, I agree, no-one should have to pay VAT, but if the banksters had to pay it, perhaps there would be a bit more support for its abolition.

John M. Very few businesses in the UK work on cost plus and I'd be very surprised if the banks were one of them. Therefore the banks' costs have no relationship to their charges, simply to their profits.