cancel2 2022
Canceled
Here are the views of my good friend Alan Oscroft who writes for Motley Fool on the UK banking bailout. This equally applies to the US bailout.
The Banking Bailout Was A Bargain (Source)
By Alan Oscroft
The bailout of the UK's banks, such as Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), could end up costing a lot less than originally feared.
That was the view of Lord Turner, the chairman of the Financial Services Authority, when he spoke to the Treasury Select Committee on Tuesday.
The total overt costs of the public rescue -- equity injections, liquidity support, funding guarantees, etc -- may turn out to be considerably less than 5-10% of GDP, he told the committee, adding:
"But these overt costs, while significant, may turn out to be small relative to the overall costs of financial instability. Central bank liquidity support is provided at market or penal rates and may turn out to be profitable: guarantees are provided for a fee and may well not be called, and the equity stakes may rise in value in future."
The boom times
However, Lord Turner did also say that both the banks and the regulator had been led astray by the seemingly never-ending boom days that preceded the banking crisis, and had taken their eyes off the ball, not noticing the underlying weaknesses in a banking model built on complicated mathematical rules.
We have seen how those rules, and the accompanying lack of clarity, led to the rise and rise of ever flakier derivative products, which in many cases turned out to be nothing more than bad loans in the property markets. But now that's in the past, surely it can't happen again, can it?
Lord Turner clearly thinks it could, saying "History tells us that it could happen again", and pledging that the FSA would re-examine the regulation of financial products. It seems unlikely that the FSA will go as far as to ban banks from "proprietary trading" -- taking gambles on the financial markets with their own money -- but higher capital requirements for banks wishing to do so may be the way to reduce risk.
We got away lightly
I expect a good few taxpayers might feel a bit troubled by the suggestion that we got a bargain, and similarly miffed by bankers apparently continuing to receive nice bonuses (even though we undoubtedly need to retain the genuinely talented people who are going to turn things around).
But Lord Turner is right. The alternative, allowing banks to go bust, bringing about the collapse of the UK's banking sector, and probably proving catastrophic for the whole world economy, was unthinkable. We escaped total economic collapse by the skin of our teeth, and 5% of GDP is a small price to pay for that.
The Banking Bailout Was A Bargain (Source)
By Alan Oscroft
The bailout of the UK's banks, such as Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), could end up costing a lot less than originally feared.
That was the view of Lord Turner, the chairman of the Financial Services Authority, when he spoke to the Treasury Select Committee on Tuesday.
The total overt costs of the public rescue -- equity injections, liquidity support, funding guarantees, etc -- may turn out to be considerably less than 5-10% of GDP, he told the committee, adding:
"But these overt costs, while significant, may turn out to be small relative to the overall costs of financial instability. Central bank liquidity support is provided at market or penal rates and may turn out to be profitable: guarantees are provided for a fee and may well not be called, and the equity stakes may rise in value in future."
The boom times
However, Lord Turner did also say that both the banks and the regulator had been led astray by the seemingly never-ending boom days that preceded the banking crisis, and had taken their eyes off the ball, not noticing the underlying weaknesses in a banking model built on complicated mathematical rules.
We have seen how those rules, and the accompanying lack of clarity, led to the rise and rise of ever flakier derivative products, which in many cases turned out to be nothing more than bad loans in the property markets. But now that's in the past, surely it can't happen again, can it?
Lord Turner clearly thinks it could, saying "History tells us that it could happen again", and pledging that the FSA would re-examine the regulation of financial products. It seems unlikely that the FSA will go as far as to ban banks from "proprietary trading" -- taking gambles on the financial markets with their own money -- but higher capital requirements for banks wishing to do so may be the way to reduce risk.
We got away lightly
I expect a good few taxpayers might feel a bit troubled by the suggestion that we got a bargain, and similarly miffed by bankers apparently continuing to receive nice bonuses (even though we undoubtedly need to retain the genuinely talented people who are going to turn things around).
But Lord Turner is right. The alternative, allowing banks to go bust, bringing about the collapse of the UK's banking sector, and probably proving catastrophic for the whole world economy, was unthinkable. We escaped total economic collapse by the skin of our teeth, and 5% of GDP is a small price to pay for that.
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