Anorak | You can’t have safer banks and more spending at the same time

You can’t have safer banks and more spending at the same time

by | 4th, September 2013

ONE of those little conundrums of life, that you can’t have two desirable things at the same time.

I think we’d all agree that we’d like to have safer banks. You know, ones less likely to go tits up when the gamble away some fraction of their money. Excellent, that means that they have to have more capital.

I think we’d all also agree that we’d like banks to be lending more to people. For banks lending to people is what pulls us up out of recession. However, it’s really very difficult indeed to have both at the same time:

Europe’s smallest banks will have to undergo the biggest transformation by 2018 to meet the new Basel III regulations, according to research by the Royal Bank of Scotland.

Up to €2.6tn will need to be cut from the balance sheets of smaller banks in Europe, which could potentially lead to another contraction in lending to small and medium-sized businesses.

However, Europe’s largest banks will also have to shrink their assets by €661bn and raise a further €47bn of capital to meet the regulations.

For a bank assets are the amount of money that they have lent out. So, if you want safer banks you need to have a higher ratio of capital to assets. Or, for any given level of capital, you can make fewer loans.

So, as you can see, if you want to have more loans you have to have less safe banks: or, if you want safer banks then you must have fewer loans.

There is one way out of this, that the banks should go ask their shareholders for more capital. Which is fine: but that will make the loans more expensive. At which point there will be fewer loans for of course people buy less of something that is more expensive.

There really isn’t any way out of this. We can have more loans, we can have safer banks, we can have more expensive loans. But the one thing we cannot have is what we actually want, which is safer banks and more and cheaperloans. It’s just not possible to have all three.

Posted: 4th, September 2013 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink