Bank regulation
This is obviously the be all and end all to avoiding another economic crisis, isn't it?
No, of course not, as The Governor of the Bank of England explicitly stated:
To explain: the banks will normally charge you a higher rate of interest if your borrowings are considered to be of higher risk (duh!!) or if they fund a bigger percentage - nothing different than you or I would do if asked for a few grand by a mate.
Where it all went wrong was that reward was being based on the loans being issued (more accurately the interest received, or expected to be received) and consequently the bankers persuaded the risk departments to lower the rating and hence the interest they were charging. Because, er, everyone else was doing it.
Bonuses flew out the doors as a common interest in ignoring reality meant extra special pay-days for the front -line staff and those tasked with keeping them under control.
Where banks will succeed in the future is in getting the risk pricing right.
Customers will always be there to draw down the borrowings and if Mr X and his risky new business gets two only offers of Base +10% and Base +15%, there will still be some who will pay that premium. But the bankers must be rewarded not just on the higher interest they earn, but also charged for the defaults that emerge,which means longer term incentive schemes and less focus on champagne by the case tomorrow.
This of course not a reflection on the real bankers in the real branches who deal with real money and who we see in the street every week, but instead the nation of spivs that have been created over the past 20 years.
Rant over. Clients with good businesses unable to renew or extend overdraft facilities as the banks are lending any money, despite the promises to do so; excessive security demands from risk departments that have gone from tarts to prudes overnight.
No, of course not, as The Governor of the Bank of England explicitly stated:
Mervyn King said it was a "delusion" that tightening regulation could stop banks' most risky activities from failing and leading to huge losses.The real secret to avoiding losses in in risk pricing, and bank regulation and stopping the biggest bonuses won't stop the same happening again. They might slightly mitigate the risk, but that is going to be insignificant, unless the risk pricing is directly related to the bonuses.
To explain: the banks will normally charge you a higher rate of interest if your borrowings are considered to be of higher risk (duh!!) or if they fund a bigger percentage - nothing different than you or I would do if asked for a few grand by a mate.
Where it all went wrong was that reward was being based on the loans being issued (more accurately the interest received, or expected to be received) and consequently the bankers persuaded the risk departments to lower the rating and hence the interest they were charging. Because, er, everyone else was doing it.
Bonuses flew out the doors as a common interest in ignoring reality meant extra special pay-days for the front -line staff and those tasked with keeping them under control.
Where banks will succeed in the future is in getting the risk pricing right.
Customers will always be there to draw down the borrowings and if Mr X and his risky new business gets two only offers of Base +10% and Base +15%, there will still be some who will pay that premium. But the bankers must be rewarded not just on the higher interest they earn, but also charged for the defaults that emerge,which means longer term incentive schemes and less focus on champagne by the case tomorrow.
This of course not a reflection on the real bankers in the real branches who deal with real money and who we see in the street every week, but instead the nation of spivs that have been created over the past 20 years.
Rant over. Clients with good businesses unable to renew or extend overdraft facilities as the banks are lending any money, despite the promises to do so; excessive security demands from risk departments that have gone from tarts to prudes overnight.
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