An Awkward Corner : banks

Bank Nationalization Redux

Niranjan Rajadhyaksha — Tue, 20 Jan 2009 11:53:00 GMT

The number of economists and commentators saying that the Western financial system should be nationalized is swelling.

1. Paul Krugman thinks it is unfortunate that "Washington remains deathly afraid of the N-word --- nationalization.

2. Willem Buiter wonders what needs to be done to make banks lend again. He says it is time to take "all the banks into public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard."

3. Even The Economist --- gasp! --- asks: Why not nationalize? "Time to quit mucking around and make with the nationalisations."

4. Felix Salmon says nationalization is the best alternative. "It's transparent and easy to understand: if a bank is insolvent (and the FDIC is good at making those determinations), then simply nationalize it. That's what the Swedes did, and that's what we should do too."

5. Chris Dillow says nationalizing banks is not a bad idea. "The simple case for nationalizing banks is that they would be able to raise cash much more cheaply and easily than they can now; before today’s Bank Rate cut, 3 month Libor was 3.8% whilst the 3 month T-bill rate was just 1.7%. This would almost automatically allow them to increase cheap lending."

6. Chris Wood of CLSA: "In the US and Britain most of the big banks have now become a weird hybrid of public and private sector, given growing government equity stakes in these banks. This raises the issue of the deeply flawed policy response to the crisis. This is that if the authorities are not prepared to let insolvent financial institutions go bust, which would be the quickest, most effective way to correct excesses, as the Lehman precedent demonstrates, the next best way is to nationalise the, in effect bust, banks outright."

Note: Thanks to Gopi who pointed me to the Chris Wood piece.

Of course all these worthies want banks to be nationalized to restructure them and ease the credit crisis. They agree that privatization should follow a few years down the line.

The debate is about temporary nationalizations rather than permanent public ownership of the lending function.

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Cold Callers, RIP

Niranjan Rajadhyaksha — Tue, 11 Nov 2008 08:01:00 GMT

Despite the vocal claims of Indian industry about a credit crunch, bank credit is growing at a torrid pace. See latest RBI data here

But I suspect that most of this money --- most of the "non-food" part, that is --- is being lent to companies rather than individuals. I haven't been in the market for a housing or car loan for a long time. But does anybody out there have personal experiences to suggest that banks have shut the lending window for individuals?

All I know is that it has been many weeks since I was last pestered by cold calls from banks trying to sell me a new credit card, personal loan, money against shares etc, etc, etc.

Not that I am complaining.

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Banks Are Not Charities

Niranjan Rajadhyaksha — Sun, 09 Nov 2008 15:11:00 GMT

There has been a lot of valid criticism about the way the finance ministry has been arm-twisting banks to reduce lending rates.

Here's a quick recap.

"A day ahead of the interaction with public sector banks, Finance Minister P Chidambaram today assured industry that he would persuade bankers to cut interest rates, even as chambers saw more measures from the RBI to ease money supply."

Source: Business Standard

That was on 3 November. The next days the main public sector banks fell in line and agreed to do what the FM reportedly asked them to during their meeting with him.

"Loans for companies and individuals are set to become cheaper with India’s state-owned banks promising to cut interest rates by up to 75 basis points after a meeting with the country’s finance minister P. Chidambaram..."

Source: Mint

Should banks offer more and cheaper loans to a rapidly-weakening economy? That's something for bankers to decide, not ministers or bureaucrats.

Chidambaram has a record of dictating to banks what to do with depositor money. But now he has company.

A report in the Daily Mail tells us that UK Business secretary Peter Mandleson has warned banks to pass on rate cuts or risk public anger. This after the head of HSBC defied a call from UK Prime Minster Gordon Brown to cut lending rates.

But more banks seem to have joined the rebellion.

The Sunday Times says that UK banks continue to defy Gordon Brown over new interest rate cuts.

"The banks have warned the chancellor they are “not charities”. They said they could not afford further to reduce mortgage payments and interest rates to businesses if, as expected, the Bank of England continued to cut rates as the economy fell deeper into recession."

The point is not the reasoning behind this show of defiance. The point is that banks in the UK can defy their government. We see no proof of it in India.

Mint has written an editorial in July on an interest rate blunder Chidambaram had forced down the gullet of the banking system.

Counterpoint: Yves Smith has this to say about the UK showdown.

"One could contest the banks' view. They enjoy a unique role, protected by special licensing requirements, of taking customers' deposits. And as we have seen, at least for large players, large banks are not permitted to fail. Losses are socialized."

That leaves two questions unanswered:

1. Why have banks at all? Why not socialize all borrowing and lending?

2. Less dramatically: Can such guidance work at all in economies such as India where rules often matter less than personalities?

Personally, I think the government should leave pricing of loans to bankers who have a better understanding of business risks.

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