How to get banks to come out of their shell

I wish I could come up with a better tag line, maybe be
‘more of the same’, it doesn’t have the same attraction as ‘the song remains
the same’, maybe ‘same day, different skit?’ We will see if that passed the

What’s the month, oh yes, October, must be risk on
then.  One of these days we will see a
trend take hold again and we can get out of this range trading. 

At the time of writing the euro was having a stellar month,
managing to pick up a 5.5 per cent gain, only to be outperformed by the Aussie
dollar with a whopping 7 per cent gain month over month. The euro is still down
on an annual measurement, off nearly 9.5 per cent, but the Aussie dollar is
topping the charts again with a 9.5 per cent gain.

The last fuel to the fire was the Fed coming out with
another accommodative statement, keeping their foot firmly on the gas pedal and
hoping to clear the gaping chasm ahead of them by building enough speed…I’m
thinking Sandra Bullock in Speed. 

The market already has near zero interest rates so there is
very little the Fed can do to trim overnight rates any lower. They could reduce
the rate of interest paid to banks for reserves held with them to encourage
them to take more of a risk, i.e. lend, to customers. The trouble with that is
banks are still in defensive mode: they are only lending money when they have a
good expectation of getting it back, think top credit customers, larger
deposits and stable (if there is such a thing) employment.  They want to make sure they get there money
back, go figure. So, a drop in reserve returns will have no impact on lending
practices, banks (in the US and UK) will not lend money as they once did.

will take a lot more to prise open that purse. Without lending house prices are
likely to come under pressure. I’m not about to predict 30 per cent falls in
value, but without money there is no housing movement, a phrase often used is
‘mortgage prisoner’. The borrower wants to move and finds that they can’t
release enough equity from their house sale to meet the newer deposit
requirements. The Fed is then left with an expansion of its Treasury portfolio,
by having an open ended discretionary programme rather than a large one-time
purchase target they will be able to keep long term rates lower for longer and
provide an incentive to banks to lend.

I think they should put interest rates up. Think about it:
banks would earn income faster, rebuilding balance sheets from income. Once the
balance sheets are healthier the purse strings will loosen, or at least that’s
the theory. Look to the countries whose banks performed best: Australia with
rates now at 4.50 per cent, New Zealand 3 per cent, even Canada, which is
normally lock stepped with the US, have rates at 1 per cent.  As long as banks are making money they will
lend; if they stop earning they withdraw.

It’s about time for radical thinking. Trouble is, it’s the
same as a turkey voting for Christmas, to get the economy going, lending
restarted and keep the housing market from a melt down (again), I am voting for
paying the banks more in interest. Maybe easing is the way to go.



Phil Turnbull, Butterfield Bank