More banking lies and propaganda

Three-quarters of today's editorial in City AM is good stuff, he points out that the UK government (and many others) is simultaneously trying to encourage and discourage reckless lending/banking.

But he spoils it with this:

The result, as Sir Andrew Large explains brilliantly in his report on RBS published on Monday, lending to small and medium sized enterprises (SMEs), which tends to generate a return on capital of between 3-7 per cent, comes with a cost of capital that is often around 11-13 per cent.

Banks do not have a "cost of capital" of 11-13%, that is the targetted or expected return on share capital, as narrowly defined. These idiots cannot tell the difference between a "cost" and a "profit share" and they are not comparing like-with-like.

For example:

A bank has made loans of £100, on which it charges 5% interest and has 1% running costs, so the income available to pay to depositors and shareholders is £4.

This bank is funded by £90 deposits, on which it pays 3% interest = £2.70, and £10 share capital/shareholders' funds.

£5 interest income less £1 running costs less £2.70 paid to depositors = £1.30 net profit for the bank/its shareholders.

£1.30 divided by £10 shareholders' funds = 13%.

So the bank is perfectly happy making loans at 5% and making 13% profits for its shareholders. That 13% is not a "cost" it is a "return".