Outlook: Another day, another hammering for bank shares. I've no more idea than anyone else where the rout will end. Nationalisation is certainly a distinct possibility, which is one of the reasons share prices keep falling, making it an almost self-fulfilling prophecy.
Yet the Government has stated that it doesn't want nationalisation and it's easy to see why. Northern Rock is one thing, but it would be impossible to nationalise a major UK bank without compensation. None of these banks is demonstrably bust. A recession so long and severe that it would make them so, though far from impossible, still doesn't look the way to bet. It would have to be really, really bloody to wipe out their capital entirely.
As it is, the Financial Services Authority is reducing the minimum core tier one capital ratio down to 4 per cent, which for all five major high street banks gives a very considerable degree of leeway before a second round of recapitalisation would become necessary. There's a strong case for nationalisation, which I'm not going to repeat here, yet it would also be politically humiliating for the Government because it would be tantamount to admitting that last autumn's banking rescue, when Gordon Brown declared that he had saved the world, had been a failure.
Ignoring the philosophical debate over whether it is right to put the politicians in control of credit allocation, the other big downside of nationalisation is that it might in its own right cause a major panic and a run on the pound. If the Government is nationalising, it is reasonable to conclude that things must indeed be catastrophically bad. Despite yesterday's confirmation that the economy is deep in recession, this isn't yet the case. Rather it is confidence that is shot to pieces. If the Government is serious about not nationalising, then it must do more to underpin confidence. A number of major fund managers I've spoken to say they would be buyers of bank shares at these levels but for the fact that the Government, for political reasons, seems as keen on penalising the banks for past mistakes as getting them back on their feet.
The best way of restoring confidence in the banking system, so that it can begin borrowing and lending normally again, is to get the big institutions to start buying the shares. Once share prices begin unambiguously rising, it will send a powerful message to the capital markets more generally that the bottom of the banking crisis has been called. As I say, there are plenty of investors who would buy at these levels if they could be certain they weren't about to be wiped out by nationalisation or an alternative fresh round of recapitalisations.
The Government must do one thing or the other. Either it must nationalise and be damned, or it must become part of the confidence building process that will bring investors back into banking stocks. But for that to happen there has to be a greater acceptance politically of the realities of a recession, which cannot be magicked away simply by forcing the banks to provide a lot more credit. Both the banking system and the economy have to be allowed the catharsis of a painful shakeout.Reuse content