Banks Have to Make a Profit

As the politicians all start to bash the banks for not passing on the full rate cut, Guido asks how can the recapitalisation of the banking system be successful if they don’t make a profit? This is the danger with quasi-nationalisation – once you start putting political considerations before commercial imperatives, banks will be perpetually loss-making burdens on the taxpayer.

The fact is the banks have to earn a spread from the rate they lend against the rate they borrow, otherwise you get into the Northern Rock position with the cost of borrowing exceeding the return on lending. Politicians will nevertheless huff and puff regardless of reality.

UPDATE : The government is going to force banks to double their holdings of government bonds, supposedly to increase their “liquidity reserves”. Handy when the government is desperate to find buyers for gilts to keep itself afloat. If they have to buy gilts, it will make it even more difficult for banks to extend credit to corporate borrowers… doh!


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