Unemployment nears 2 million

According to the figures released by the Office of National Statistics, unemployment in the UK rose to 1.97 million this January. This is marginally short of the 2 million predicted by many economists. But with the string of job cuts announced by many businesses like Barrats, Virgin Atlantic, JJB Sports, Royal Mail, this year, there is no doubt that the unemployment figures will bypass 2 million very shortly.

Not to be out done, RBS is doing its bit to add to the unemployment figures. It announced this week that it would be cutting 2,300 jobs. Yet, it is planning a £1 billion bonus package. Why? To retain their talent or they will go elsewhere. Where would they go, when most banks are reducing their staff numbers? When unemployment is increasing, to have a decent job itself is a bonus. Another reason being given to justify a bonus is to reward their staff who have worked hard. No doubt, hard work should be rewarded. But not using the £20 billion lifeline it has received from the taxpayers. And if bank employees should receive a bonus, shouldn’t the doctors and the nurses and the teachers and the army personnel and many others receive a bonus for their hard work as well?

To use the public’s money, which was supposed to be lent to the businesses, to remunerate staff is insulting to those who have lost their jobs and those whose returns on their savings have been eroded. If the head of the banks are indeed impressed and overwhelmed by the hard work of their employees, then they must reward them by putting their hands into their own deep pockets, not the taxpayer’s.

NatWest, owned by RBS, in recent months has launched a MoneySense advice campaign across its branches advising its customers how to manage their money and their debt. This is rather amusing. The very banks that lent more money than the value of their deposit base are trying to teach their customers how not to spend beyond their means. Perhaps the top executives at RBS and other banks should take some time off their busy schedule and pop down to their local NatWest branch and learn a thing or two about managing money and cutting their costs.

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HSBC to increase its lending

The World’s Local Bank HSBC announced on Monday that it aimed to lend next year roughly two times the amount it lent to homeowners in 2007. For this purpose, it has set aside around £15 billion. In an environment where banks are becoming increasingly reluctant to lend money, HSBC hopes to increase its market share by lending, thereby getting a huge slice of a, albeit, small market. It is also hoping that its customers will continue to bank with it even when the climate improves, because they will remember that HSBC was there for them when all the other banks closed their doors. This will mean that when the market does get bigger, they will effectively have a huge slice of a huge pie.

So, how can HSBC afford to increase its lending when other banks have had to be injected with capital by the taxpayers. HSBC is one of the few banks thathasn't gone to the taxpayers cap-in-hand asking for a cash injection, it is in fact well capitalised, according to its CEO Michael Geoghegan . According to its spokesperson, HSBC doesn't have to depend on the two main sources of finance that the banks that were bailed out depended on- the money markets and UK depositors. It will instead fund it internally using its reserves. The reason why other banks are lending less money is because they don't have enough money to lend.

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It is true that last Thursday the MPC (Monetary Policy Committee) cut the base rate by 1% to 2%-the lowest it has been for years. However, the primary source of finance for most banks is not by borrowing from the Bank of England, but from the money markets. The rate of interest in the money marketshasn't gone down at the same rate as the base rate. Hence, the cut in the base rate is unlikely to make the cost of borrowing money any cheaper. Another source of finance for banks is their customers' deposits. However, in recent years, the levels of savings in the UK is said to have decreased. The cut in savings rate by the banks is unlikely toentice people into put their hard earned cash into banks, except for those whom the interest paid is their income.

HSBC also announced a £1 billion fund for lending to small businesses. Small Businesses that are fundamentally sound and only experiencing cash flow problems are the kinds of businesses it is hoping to lend to. The reluctance of banks to lend to sound businesses has been it the news recently, forcing numerous businesses to cease trading just because they have a cash flow problem and not because their business model is fundamentally flawed. The increase in the number of small businesses going bankrupt no doubt puts the jobs of many people at risk and leads to fear amongst those that are in employment. Small business owners, no doubt, will welcome this announcement which will be akin to a lifeline being thrown at them when they are in dire straits.

It has stressed, however, that the lending criteria will still be strict. In other words, they are not planning to throw money at anybody who asks for it.

Even if this announcement does not completely restore confidence, any good news is welcome in these gloomy times. It is unlikely that any other major bank will come forward and increase its lending in the near future, no matter how much Brown, Darling orMandelson threaten or cajole them into doing so. In a way, one cannot blame the banks which have been bailed out for being reluctant or in their words, "careful", of lending. On one hand, they are the subject of many a joke and their "irresponsible" lending is being blamed for all this mess, and on the other hand, they are being pushed to lend at levels of last year.The money which has been lent to the banks on behalf of the taxpayers has not come cheap, the banks have had to pay a hefty price for it.

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Meeting with Headteacher Darling

Since many of the banks had seemed to have failed to pass on the Bank of England’s very generous 1.5% cut in interest rate to their customers on the Standard Variable Rate (SVR) mortgages, the mischievous bankers were summoned to a meeting with the head teacher, a.k.a., Alistair Darling, the Chancellor of the Exchequer. They were told to pass on the interest rate cut to their customers, or else, face detention.

A standard variable rate is where the interest rate is tracked by the lender, solely at its discretion, to the base rate of the Bank of England or the LIBOR rate. So, the obvious excuse that the bankers gave for not passing on this cut was that the cost of borrowing money on the open market, i.e., the LIBOR rate, had not come down at the same rate. That’s true, although the LIBOR rate did drop by 1.07% from 5.56% to 4.49% on Friday. The lowest rate since May 2004, incase you thought why it was that significant.

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Bowing to pressure, Lloyds TSB, Halifax, Nationwide, Abbey, Royal Bank of Scotland, NatWest (part of Royal Bank of Scotland), Northern Rock and Bradford & Bingley have all cut the interest rate by a full 1.5%. Also, the fact that the LIBOR rate has fallen makes it hard for the banks to justify their reluctance to pass on the cut.

Usually, the banks are quite quick to match a hike in interest rate by the Bank of England because it allows them to justify doing so. However, they don’t seem so keen when the rate is cut.

The opposite is true for the savings rate. Most banks have been more than happy to cut the interest rates on their savings account using the recent cut in rates by the Bank of England as the justification. This hardly seems like the right thing to do when banks are desperate for funds to lend and one of the sources is the deposits by the customers, the other being borrowing on the open market. Since its expensive to borrow on the open markets, as the banks themselves are saying, they should be trying to entice customers to deposit money.

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But what’s amusing is that Alistair Darling and his advisors actually assumed that the banks would pass on the cut to their customers. Why would they? They are not charitable institutions that work for the best interests of their customers. They are financial institutions whose main aim is to make profit and make their shareholder’s investment in them worthwhile. Lets not forget that banks all across the globe have lost billions, if not trillions, of pounds in the financial crisis. So, it is but obvious that they would try hard as they could to make up for the loss.

No wonder then that people have literally started to stuff cash under their mattresses. The chief executive of G4S, the security transport company, Nick Buckles, recently said that the amount of cash in the system had increased since people are preferring to use cash instead of credit. It emerged recently that the number of £50 notes in circulation had increased by 20%.

He added, “People use it as a means of budgeting. They don’t like credit, so clearly there’s more cash transactions, more ATM transactions. And I guess the £50 note issue is people hoarding cash at home.”


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£37bn Bank Bailout

The UK Government announced on Monday (13 Oct) that it was going to lend £37bn to three of UK’s biggest banks with the aim of “unfreezing” the frozen credit market. The Royal Bank of Scotland (RBS) will receive the biggest cash injection worth £20bn. The Government will buy £5bn worth of preference shares and another £15bn worth of ordinary shares in RBS if they are not bought by ordinary investors, which will give it a healthy 60% share of the business. HBOS and Lloyds TSB will jointly receive £17bn in return for which the Government will receive approximately 43.5% of the merged business. Preference shares, as the name suggests, are given preference when it comes to paying dividends. This means that the Government will be paid the dividends, if there are any, before they are paid to the ordinary shareholders. It also means that the Government will have a say in the operations of the banks.

Although this announcement would have lead to a sigh of relief for some since the banks will get the cash injection they desperately need and give them stability, many investors are worried that the purchase of a huge number of shares by the Government will lead to a dilution of shares of the existing shareholders. Dilution basically means that since the total amount of shares of the banks will increase, this will mean that the existing shareholder’s ownership of the company in terms of percentage will decrease.

There has been support and opposition to the bailout plan proposed by the UK and American Governments. Many people are angry that taxpayers’ money is being used to pay for the mistakes of a few irresponsible bankers especially since most of the bankers got bonuses and left the general public to clear up the mess. However, the bailout is a necessary evil. This is because the credit crunch ultimately affects all of us. If banks are reluctant to lend to each other, it means that banks cannot lend to the general public, which means that the general public cannot spend this money which affects local businesses, this leads to a loss of jobs and goes on and on like a downward spiral. There have been reports recently that many small businesses have seen their overdraft facility severely reduced of even cancelled in certain cases. This has affected their cash flow. Businesses that were sound a month ago are finding it hard even to pay their staff.

The Economist (http://economist.co.uk/) described the lack of credit in an interesting manner by comparing it to air. We always take the air we breathe for granted because it is readily available. When we start drowning, we suddenly realise the true value of air because the lack of air hurts. Similarly, when credit is flowing, everything runs smoothly. However, the lack of credit leads to a lot of problems. The bailout plan is not a silver bullet that will solve all the current problems, but it remains to be seen what effects, if any, it will have in the near future.

The BBC website has an interesting article about past bailout plans and whether they worked. The link can be found below.

Have bailouts worked? http://news.bbc.co.uk/1/hi/business/7648330.stm

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