Thursday, November 24, 2011

British banks are a 'dumb' investment

A Guardian article quotes the head of Royal Bank of Scotland explaining why banks have a tough time raising capital in the current environment.

Royal Bank of Scotland's share price tumbled on Wednesday as the chief executive of the bailed-out bank suggested that investors thought it was "dumb" to put money into in the banking industry.
Actually, it is very smart of investors not to put money into the banking industry.

As the Bank of England's Andy Haldane observed, banks are 'black boxes'.  Because of a lack of adequate disclosure, investors cannot assess the risk of what they are buying and are not investing (at a minimum, this shows that investors learned something from their experience buying opaque structured finance securities).

According to Dallas Fed President Richard Fisher, adequate disclosure would be ultra transparency.  Banks would disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
Appearing before the treasury select committee, Stephen Hester was responding to criticism that banks were blaming tougher regulation regarding capital reserves for restricting lending to customers, when in fact they could be bolstering their reserves by cutting bonuses or raising more funds from shareholders. 
Hester, who was parachuted in to run the bank when it was bailed out by the taxpayer in October 2008, told MPs: "I would be interested to see the investor who wants to put more capital towards UK banks at the moment. They are thinking it is a dumb place to put more capital." 
The bank's shares, which had been under pressure all day amid anxiety about the ongoing eurozone crisis, took a deeper lurch down and eventually ended almost 6% lower at just above 17p after Hester's comments. 
The shares were already at their lowest level since January 2009. Taxpayers have invested £45bn in RBS shares, but at the current price that stake is worth less than £30bn. One analyst said: "It doesn't exactly encourage people to buy the bank's stock."

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