Jeremy Warner's Outlook: It ill becomes bankers who complain of lack of liquidity to be paying bumper dividends
Dunstone: talking his book on broadband; Stagflation makes an unwelcome return
Tuesday 15 April 2008
Bradford & Bingley has become the latest bank to deny that it is planning a rights issue to address issues of capital adequacy. Yet, though no one wants to be the first to take the plunge, it may be just a matter of time. It only requires one, and they will all come charging into the water behind.
As things stand, all British banks appear to meet capital adequacy standards relatively comfortably. But there is a debate around just how much leeway there is. Any further rise in bad debt experience as a result of the credit crunch or the fast slowing economy might tip several of them over the edge.
What is not in dispute is that, by American and continental standards, British banks are relatively thinly capitalised. Any shortfall in capital will quite severely constrain ability to lend, particularly in current circumstances, where many of the mechanisms used with such abandon in recent years for off-balance sheet lending have been closed down.
Already, a number of banks have entered that phase of the cycle where they are looking to shrink the amount of business they do, rather than expand it. Capital adequacy among banks therefore has implications for the economy as a whole, threatening to starve it of the loan finance which is the very lifeblood of growth.
Yet still none of the big British banks seems prepared to contemplate the idea that it needs to raise more capital from shareholders. What they do ask for, on the other hand, is massive quantities of central bank liquidity to shore up funding difficulties.
Without this, they will tell the Prime Minister at a meeting today, it may be impossible fully to hand on the benefits of lower official interest rates to borrowers. The credit crunch means that the cost of funding in the markets is abnormally higher than that of the Bank of England base rate.
Liquidity and capital, though related issues for banks, are also quite different ones. A bank can be technically perfectly solvent, yet have extreme difficulty laying its hands on the ready cash to pay off depositors and other lenders on demand. The same is occasionally true the other way around.
Yet the public reasonably has some difficulty in making the distinction. There is something distasteful in bankers demanding further liquidity from the authorities to help ease funding difficulties on the one hand while continuing to pay out record dividends and bonuses on the other.
Bankers and their shareholders must reconcile themselves to taking some share of the pain if they expect to be repeatedly bailed out in this way. In demanding that more must be done to pass on interest rate cuts, this is one of the messages that the Prime Minister and the Chancellor will be conveying to banks over the next week.
Given what has happened, it was just plain daft of British banks to raise their dividends by 10 per cent-plus in the recent reporting season.
By adopting a principled stand on moral hazard, the Bank of England has handled the credit crisis quite badly, yet, by the same token, the Governor, Mervyn King, is entitled to question why he should be providing any support at all to banks that while demanding funds from the taxpayer in one breath merrily pay it out to shareholders and key workers with the other.
At least two FTSE 100 companies have struggled to pay declared dividends in recent weeks because of the banking system's inability to deliver the readies. With the payments system as close to breakdown as that, banks should not themselves be paying out bumper dividends.
Yet once one had declared a big dividend hike, the others felt they had no alternative but to follow suit in a macho display of capital virility. Freezing or cutting the dividend is the easiest way there is to conserve capital, yet no British bank was prepared to contemplate such a rational approach to the problem as long as no one else was doing it.
As I say, eventually someone will break cover. But it maytake another crippling round of write-offs to shake the British banks out of their present state of denial.
Dunstone: talking his book on broadband
Charles Dunstone, chief executive of Carphone Warehouse, is a brilliant entrepreneur who talks much sense across a range of issues. Yet he's also got profits to make and a business eventually to sell, and he's talking only self-interest in arguing that the price BT is allowed to charge for the use of its lines by rival broadband operators should be for ever frozen at the present relatively low level.
BT is far from perfect and a lot more could no doubt be done to improve its efficiency. However, it faces substantial infrastructure investment to give Britain the broadband network it needs to be fully competitive in the 21st century. The copper wire that provides the backbone of the local network in Britain is already full to bursting point. It no longer has the capacity to deliver the sort of services that broadband users demand without substantial new investment.
News that Kangaroo, a new video-on-demand service jointly owned by the BBC, ITV and Channel 4, has hired Ashley Highfield, head of new media at the BBC, as chief executive, serves to highlight the nature of the problem. Such services use up oodles of bandwidth, hogging available capacity, which in turn restricts access and quality for others.
Massive new investment in fibre-optic wiring is required to give broadband Britain the speeds and capacity it needs for the future. Yet the present pricing structures give no incentive to invest.
Britain enjoys one of the most competitive broadband markets in the world, with unparalleled numbers of providers, charges pared to the bone, and consequent exceptionally high levels of penetration. Yet it is not a charging structure appropriate to the massive new investment needed.
The dispute with Mr Dunstone and other "unbundlers" is for the time being about the ageing copper wire network. As part of the regulatory settlement a couple of years back, it was agreed that BT would be allowed to make a 10 per cent rate of return on this network. The company has never achieved this number, and is therefore trying to persuade the regulator that the charges were set unrealistically low. Yet the same arguments apply to investment in "next generation" infrastructure.
Current rate of return price regulation at BT is based on an asset base of £8bn. The cost of running fibre-optic cable into all UK homes is reckoned to be £15bn. Unless Britons are prepared to pay more for their broadband, they won't get the infrastructure they deserve, and the lead in media and communications innovation will be lost to others.
Stagflation makes an unwelcome return
Mervyn King, Governor of the Bank of England, used to have quite a put-down for those who raised the idea of "stagflation" with him. Anyone who remembered the 1970s, he would say, would not recognise the "stagflation" that then reigned in today's relatively settled economic conditions. There was no comparison.
Perhaps not, yet levels of inflation now coming through the system are starting to tweak the memory cells none the less. Last month's 6.2 per cent year-on-year rise in factory gate prices is the highest in 17 years. The gobsmacking 20.6 per cent rise in input costs is meanwhile the biggest on record. For the time being, business is desperately trying to shield consumers from the full force of this price inflation, brought about by surging commodity prices and the weak pound. Yet to be cutting cost into slowing demand is a formula for economic disaster.
I knew when they nationalised Northern Rock that the 1970s were making an unwelcome return. These latest numbers seem to confirm it.
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