Tuesday, August 4, 2009

Profits of Banks

After narrowly avoiding the need for Government bailouts, Barclays posted profits of £2.98bn in the first six months of 2009. HSBC also posted profits of $5bn in the first 6 months. This growth in profits was despite a rise in bad debts. International bad debts at Barclays rose from £2.54bn to £4.56bn. The best area of growth was from investment banking. Retail banking is still struggling from recession and rise in mortgage arrears.

Whilst these two banks didn't get direct funds from the government, they have benefitted from the taxpayers guarantee to the banking system. The government has agreed to underwrite the whole banking system with guarantees of over £100bn. Quantitative easing has also helped maintain liquidity at a time when interbank lending froze up.

Critics of the banks will say that there reckless behaviour created a crisis which required taxpayers to bail them out. Despite the record bailout, it wasn't enough for the banks credit crisis to avoid the deepest recession since the 1930s. Furthermore as the unemployment rate continues to rise, banks are going back to seven figure bonuses and making high profit.
"plus ça change, plus c'est la même chose"
There is also concern that the taxpayer bailout may give banks a false sense of security and in the long term, could see a return of risky / poor investment decisions which saw the previous credit crunch.

Also, there is concern at the increased monopoly power in the banking sector. The margin between lending rates and saving rates have increased, helping to raise the profit margin for banks at the expense of the consumer.

Typically, banks will say high profit is the sign of healthy business practises and that these profit levels are a good sign that the banking system, the UK's most important industry, is showing a return to profitability.

In one respect, the high profit of banks is good news. It makes taxpayer guarantees safer. It should, in theory, help to encourage more lending to private firms and individuals. The profit levels were certainly well received by sterling and the stock market, both of which rose yesterday.

Yet, it would be easy to forget the real source of the current economic crisis, and rising public sector deficit. Bank profit is not necessarily a bad thing, but, given the scale of taxpayer bailout of the industry, we have every reason to scrutinise the performance and profit of the banks.

Of course, the banks owned by the government are a different story. Northern Rock, posted losses of £724m in the first 6 months. But, that's OK, because the taxpayer was there to bail them out.

It just shows the old adage in banking - heads you win, tails the taxpayer loses.

In US, banks bailed out by the government are also experiencing large profits, including profits from clever investment practises.

Related


Rewarding Bad Actors - Paul Krugman at NY Times

Wall Street Profits from Trades with Fed at FT

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