RLAM’s CIO, Robert Talbut, proposes three point plan to strengthen financial system
Friday, 14 November 2008
It is correct that governments around the world have moved to assist in recapitalising their banking sectors. Without this we were facing an increasingly bleak prospect involving the wholesale loss of confidence in the industry.
However what has occurred so far should only be seen as a first step and further significant action is required in order to provide a comprehensive solution.
The essential problem for the banks remains their capital positions. The current capital injections are helping to alleviate part of the problem by slowing the need for the banks to deleverage their businesses. This is being done as regulators are asking for these businesses to be run more prudently and as the organisations recognise losses from previous activities. The results of these actions will be that the banks will not be generating any new regulatory capital for the foreseeable future and, as we head into recession, their capital position will only worsen. Hence as things currently stand the banks are not in a position to re-start normal levels of commercial activity such as providing funding to companies or lending to individuals, and this situation will only deteriorate unless further action is taken.
I propose the following three point plan to further strengthen our financial system in order that good risks within the economy are supported. Firstly, we need the parts of banks' balance sheets that contain the most toxic assets to be ring-fenced and transferred to a new government backed entity, but in which the banks would still retain an interest. Secondly, this entity should look to realise these assets over the medium term with the government getting the first return of any profit. Thirdly, the banks should work with the regulator to agree on the degree to which their regulatory capital positions had been improved. Where sufficient progress had been made some of this capital could be made available to fund future activity throughout the economy. I'd expect that some form of this plan will need to be implemented in many countries around the world given the widespread shortage of regulatory capital.
It is important to appreciate that this is not a further bail out of the banks but instead should be seen as a facility through which healthy activity can be supported throughout the corporate and consumer parts of the economy.
Without this further significant step the danger is that the impact of the appropriate fiscal stimulus on the economy will soon peter out given that the banks will remain constrained in their ability to support follow-on demand.
We are entering a significant downturn following a period of very strong growth and it is increasingly clear that unconventional policy actions will be required to mitigate the strains that are being created. These suggestions given above, potentially in conjunction with government guarantees on bank loans, have formed part of the solution during previous bank crises. In combination, they recognise the scale of the problem which still exists and attempt to formulate a comprehensive and durable solution.
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For further information:
RLAM
Stephen Watchorn
Tel: 020 7506 6582
Stephen.watchorn@rlam.co.uk
Quill Communications
Jo Stonier
Tel: 020 7758 2230
Jo.s@quillcommunicate.com
Editor's notes:
Royal London Asset Management (RLAM)
was established in 1988 and specialises in providing investment management solutions for both the Royal London Group and a range of external institutions. These include FTSE 250 companies, local authorities, universities, charities, wealth managers, financial advisers and private clients. RLAM manages over £30bn of assets, employing more than 50 experienced investment professionals in our London based office.
Royal London Group
, is a specialist financial service provider. Its businesses focus on those sectors of the market which value quality propositions, operating through a number of brands:
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Scottish Life – UK pensions market
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Bright Grey – UK protection market
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Scottish Provident – UK protection market
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Phoenix Life Assurance Limited – provides life and pensions products to Abbey's national branch network
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Scottish Life International – offshore investment markets
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Scottish Provident International – offshore investment markets
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RLAM – fund management
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RLCM – specialist cash and liquidity management for UK onshore clients
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RLAM C.I. – specialist cash and liquidity management for offshore clients
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RLAS – life and pensions administration Fundsdirect / Ascentric – funds supermarket; Wrap platform
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £32.2 billion. Group businesses serve around 3.5 million customers and employ 2,900 people. Figures quoted are as at 30 September.