A “wunch” of bankers

Wunch, n.: a population suddenly expert in a highly technical domain in which the vast majority have no qualifications whatsoever.

It’s amazing how the media – if not the British people in general – have suddenly become expert on retail banking.

They’ve decided, for example, that bank charges for overdrafts must be much reduced. Maybe they’re right: maybe these charges are excessive. But they’re certainly a deterrent. I can’t remember anyone pointing out that it might not necessarily be a good idea to let people take on unlimited overdrafts until they go bankrupt (or their bank does). The alternative, of course, is to stop the account. This is what happened to me when I ran out of money as an undergraduate back in the Jurassic. My cashpoint card was swallowed and the machine ordered me to go into the branch (sadly long since amalgamated with a larger one – they kept the postal address for about a decade, for old times’ sake). I had to submit to a telling off from the bank manager. My personal finances were nationalised, my debt restructured and I was eventually allowed to return to the private sector. I’ve never exceeded my overdraft limit since, not just because I’m afraid of another “little chat”, but mainly because I’ve heard about the really very nasty charges I might incur if I did borrow money again without asking. Today, of course, with so much of our personal banking now totally automated, stopping an account would cost someone going overdrawn for a short period far more in failed Direct Debits and so on, than they would incur in bank charges. It’s all about striking the right balance. Maybe we should leave it to the professionals.

I really must stop reading the newspapers about the Northern Rock affair. Today there’s another nonsensical piece in the Guardian (Money section). To be fair, the columnist, Patrick Collinson, does make some original points and has provoked me to think a little more deeply about how the bank will be run after nationalisation. In a previous post, I suggested that “NR would be run in a similar way whether it was nationalised or not”. Patrick has clearly thought a little more about what this means. But he reaches a strange conclusion.

As Collinson points out, NR is currently offering rather generous rates to savers. But he seems to see these as a way of competing with the private sector, rather than a desperate attempt to rebuild NR’s balance sheet. Let me explain, Patrick. The idea is that banks and building societies charge an interest rate to depositors that is (say) 1% less than they can lend the money out for – to mortgagees, for example. That 1% pays for all the buildings, staff, bad debts and so on. Hopefully there’s a little bit of profit when all these things are paid for. If NR offers mortgage rates similar to those of the other banks and building societies, but continues to pay out 6.49% in interest rates (as also advertised in today’s Guardian), that would constitute what’s termed in the trade “pissing money away”. In this case, the taxpayer’s money.

In fact, strictly speaking, if NR really has a “100% government guarantee” and other banks don’t, it should be able to attract funds with a lower interest rate. Of course, the world now knows that their money would be safe – in terms of “liquidity risk” – in any UK bank of NR’s size or larger, because the BoE will not let such an institution fail unless it proves to be insolvent. The competition issues arise because the nationalisation solution implies the taxpayer is now taking on NR’s credit risk as well as the “liquidity risk”, a distinction the Times (writing about Japan) and the FT (Scandinavia) don’t seem to be too bothered with.

This is why the Government has been dishonest. The shareholders were quite happy taking on additional credit risk (via a rights issue), and a private sector solution would have left open the possibility of winding the bank up should it actually prove insolvent at some point in the future (in this event, as I’ve already pointed out, the taxpayer would be at least £700m better off than they are now). But I put “liquidity risk” in quotes because I think it (or at least the threat of bank runs) should be designed out of the system. It already is, to some extent, for high value interbank payments. UK banks, for example, can’t pay out more sterling through CHAPS than they have on deposit at the BoE. Next time the casualty might not just be too big to fail, like NR, but also too big to bail. Perhaps the BoE and other authorities (since many banks are now international) need to do some work on procedures for preventing or rationing retail withdrawals in the event of the next run on a bank, instead of treating depositors as a privileged class of people and rewarding them (bit of a “moral hazard” here, now). After all, if we’re talking about mortgages, the money is tied up in property. If commercial property funds in the UK are allowed to close to withdrawals for months (as they have), surely the same logic should apply to building societies?

One way NR could try to avoid “pissing money away” as it tries to rebuild its balance sheet, is to charge more for mortgages (to those coming off an agreed fixed rate). That is, it could raise its standard variable rate (SVR). But this really screws those unable to find a mortgage elsewhere, which will be a lot of people, as there’s a double whammy: banks are reducing their maximum loan to value ratios, and house prices are starting to fall. Of course, there’s a limit to how much NR could put up its SVR, as it makes no sense for any bank to push too many of its customers into default. But for a private sector organisation to hammer its most vulnerable customers in this way would be bad enough. If a nationalised NR does it, though, how is this going to go down with the public?