As reported by Harry Wilson in a Telegraph article, the policy that is making the UK banks riskier is requiring the banks to fund themselves in the capital markets and not turn to the Bank of England as lender of first resort.
Apparently, the UBS analysts prefer that all central banks maintain a policy of subsidizing their banking systems by providing below market rate funding.
For its part, the Bank of England clearly prefers a return to pre-August 9, 2007 when banks funded themselves from the private sector. A not unreasonable preference.
Comparing the BoE’s policy to that of the European Central Bank, UBS analysts warned the lack of an emergency scheme to support the UK banking system in the event of a new crisis already led to rapidly rising funding costs for lenders.
Pointing to bonds sold by Barclays and Lloyds Banking Group since the start of the year, the analysts said both banks had to pay a very high price to access the debt markets.
Barclays had to offer investors a rate of 2.15pc to sell a 10-year covered bond, which is secured against assets of the bank. This is nearly 1 percentage point - or 100 basis points - more than the equivalent estimated borrowing cost for the UK government.
French banks, by contrast, can issue debt cheaper despite recent market concerns over their solvency due to the ECB’s recent opening of a new three-year borrowing facility for eurozone lenders.
The impact of this on the economy has been profound. UBS says five-sixths of British private sector workers are employed by companies with no access to the bond market, while bank lending to the UK economy continues to decline.
Noting recent Bank of England figures showing a decline in Britain’s foreign trade deficit, UBS said the authorities were ignoring “the lost GDP from inappropriately high cost of debt”.
“That the trade deficit is mainly shrinking thanks to people not taking holidays abroad any more. That certainly smells less of rebalancing; more of the nation just getting poorer,” said UBS.
Government attempts to make British banks safer are also panned in the UBS report, with the increased cost of funding and the collapse in the share prices of major lenders cited as “clear signs of distress” in the sector.
“For all the billions put into bank capital by taxpayers and stockholders; and for the all the dramatic reversals in wholesale funding needs and liquidity positions, no durable equilibrium looks close,” said the analysts.The fact that no durable equilibrium looks close is a direct result of the opacity of the banks.
Until market participants have access to each bank's current asset, liability and off-balance sheet exposure details and can confirm for themselves the solvency of each bank, market participants are simply not going to trust that the banks are solvent.
If market participants aren't comfortable with a bank's solvency, they are not going to lend it money. An example of this is the frozen interbank lending market in the Eurozone.