Anthony Hilton: Aside from the Basel III shortfall, pump-priming has served the banks well

 

At a private dinner a couple of years back I heard a former adviser to US President Barack Obama say that in 1982, after the Latin American banking crisis, several of America's biggest banks were technically bust.

He was head of the US Federal Reserve at the time and in a position to know, but he did not close them down. Instead the Government gave the banks access to unlimited artificially cheap money which they re-lent to customers at normal commercial rates. This business was so profitable that within five years they had completely rebuilt their balance sheets and were in rude good health.

Although it might not feel like it, the same thing is happening again. We have had several years of rock-bottom interest rates in this country, plus additional measures designed to pump the banks full of cheap money. And they are lending enough to make them hugely profitable in terms of day-to-day operations, although this is largely concealed by their still having to pay heavily for the mistakes of the past.

This is counter-intuitive because most of the media comment is about how weak the banks still are, how they need yet more capital and how vulnerable they remain to defaults in the eurozone. So for me, the most interesting development this week was the publication of a report by the Basel Committee on Banking Supervision which surveyed 101 very large banks to assess how close they were to meeting the 7 per cent capital ratio they will need by 2018 to comply with the tougher Basel III capital requirements.

Now the frightening figure, at first glance, is that as of last June they were still €208bn (£177bn) short of what they will need. But the much more cheerful figure was that the shortfall had itself been reduced by 43 per cent or €176bn in the preceding six months from December 2011, which is a truly remarkable rate of progress. The still outstanding €208bn is in fact less than half the reported profits of those same banks in the previous 12 months.

This would suggest to me that while there are still places where you really would not want to own a bank – Cyprus, for example – the system as a whole is getting much stronger. A return to normality may be closer than we think.

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