Saturday, 18 July 2015

Banks are fully funded

The Bank of England has published a blog post asking if Quantitative Easing boosted bank lending

The language in that piece isn't helpful. But it is written in the expected format of its intended audience (those who believe in the BLC theories) without being wrong. I thought it might confuse a few people.

All banks are fully funded, as I've indicated before

There is a persistent dynamic drain towards Gilts and National Savings which the banks must always counteract. They do that by selling equity and their own capital bonds - which have a higher cost. They are referred to in that article as 'market funding'.

Deposits are cheaper than that because:

  • they tend to have a lower interest rate generally; and
  • they have no specific collateral requirements (i.e. they are unsecured).

Deposits generated by QE have an additional advantage - they come with an equivalent amount of central bank reserves that pay an income directly from the Bank of England.

All of that reduces the net amount the bank has to pay out on its liabilities side and reduces its 'funding costs'. It also eases the capital and liquidity ratios that the bank is subject to.

And since that impacts everybody in the lending market place it means that somebody ought to be able to generate a competitive advantage by dropping their lending prices and getting more trade.

It didn't work for two broad reasons:

Firstly banks operate as a function oligopoly. In other words bankers are a tight knit lot and operate as a class of people. They have their own groupthink. They are more likely to move in unison than individually. An effect that has become much greater as the banks have moved their headquarters, to 'financial centres' so they can play casino games.

And secondly there was no demand at any price - which of course neo-liberals refuse to believe because in their religion supply creates its own demand.