Friday, October 17, 2008

Credit crunch #2: Old banks for new

This might be a little off-topic for this blog but a) its a damn big story, b) says a lot about business and c) a lot of software developers are connected with banks. That’s my excuse so....

There are a couple of aspects of the bank rescue plans that trouble me.

First one: Now is the ideal time to open a bank. Does anyone have a few million to invest?

I say this in all seriousness because at the moment banks won’t lend to one another because they don’t know if the other bank is holding any “toxic” assets. The public is nervous about investing with banks because there have been several failures. Yet plenty of people still want to lend from banks.

Thus, my New Bank Ltd. will have no toxic assets because it has no assets to start with. We will ensure it takes on no toxic assets. Therefore, the public will save with us, other banks will lend to us and we can make loans (i.e. acquire assets) which other banks can only dream of just now.

Rather than prop up failing banks Governments should be encouraging new banks to set up.

Next: Banks which are too big to fail. So what do the we do? Merge them with other (bigger) banks, e.g. BNP buys part of Fortis, Lloyds TSB buys HBOS, etc. As a result we have one bank which is much bigger than the bank which just failed. So, if this bank gets into trouble...

See what I mean? If a bank is “too big to fail” and we put it with another big bank we have a potentially bigger problem.

Put these two ideas together and I think it makes sense to re-create the lost smaller banks. All the big banks are home to banking brands which are still remembered by the British public and I think the same is true elsewhere.

Royal Bank of Scotland could devolve Natwest - or even go further and recreate the National and the Westminster bank. Barclays could return Martins bank and the Woolwich, HBOS could spin off Halifax (as a mutal?) and Lloyds TSB could split back to Lloyds and TSB.

The parent bank would be left as a “Bad Banks” holding toxic debt and owned by their current shareholders. They would exist to manage what is left and salvage what they can. The reborn Natwest and TSB would be clean banks. And all these banks would be small enough to fail without bring down the whole system.

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