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thirdwave

Uk Banks Fund Unofficial 'qe2'

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Banks buy bulk of £39.8bn of new gilts

Britain's banks have emerged as by far the largest buyers of Government debt in the last six months, as demand from other UK investors and foreign buyers fell away.

Banks bought 91pc of the £39.8bn of net issuance of new gilts with purchases totalling £36.1bn, compared to the £11.4bn of UK debt bought in the preceding six months.

The scale of the buying of UK Government debt was revealed in figures published on Wednesday by the Bank of England, which show the increased dependency of the gilt market purchases by the country's major banks.

Simon Ward, chief economist at Henderson Global Investors, said the actions of the banks was in affect delivering a second round of quantitative easing for the economy.

"The government has been able to continue to fund the large budget deficit at low interest rates in recent months because banks and building societies have stepped up gilt purchases. For the moment, bank are effectively delivering the QE2 stimulus sought by MPC [Monetary Policy Committee] arch-dove Adam Posen," said Mr Ward.

Mr Posen has made frequent calls for the UK to embark on a new round of stimulus for the economy and said last month that the injection of £50bn would help the recovery.

The increase in UK bank purchases of gilts has offset the fall in demand among overseas investors.

In the six months to the end of October foreign buyers bought £33.5bn of gilts, however over the half year to the end of April this more than halved to £12.4bn.

Mr Ward said the drop in demand among overseas buyers was likely due to reduced capital flight from the Eurozone's struggling peripheral economies, where UK government debt had been seen as a safer investment against holdings in their own sovereign's debt.

UK banks have traditionally been the largest buyers of gilts because of their need to match their large sterling liabilities with sterling assets.

However, the recent increase in their purchases is likely to have been partly due to increased regulatory pressure to maintain greater holdings of liquid assets.

On top of this, the reduced demand in the private sector for borrowing has also left banks with a need to find alternative ways to generate a return as holding large amounts of cash on their balance sheets is expensive for banks.

This has become acute since the financial crisis as the cost of banks' funding has increased as investors have required a higher coupon to buy their bonds as well as the impact of being required to maintain higher capital ratios.

http://www.telegraph.co.uk/finance/economics/gilts/8550716/Banks-buy-bulk-of-39.8bn-of-new-gilts.html

I wonder how long it's gonna be before there is a run on the GBP? Although purchases by UK banks are only a small percentage of overall government borrowing, they are nevertheless significant and the trend is definitely up..

Edited by thirdwave

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Aarghh, my brain hurts !

So... it's 2008 and the UK banks are insolvent, so the UK govmt gives them money to float, which is funded by the banks buying govmt gilts ?!

So the govmt is now funded by imaginary money from the banks which are only solvent because they received govmt imaginary money, which was used to float the banks because they had lost so much imaginary money in the first place.

So, um, what's actually real here?

Commodities? PMs? Houses? Yes

Cars? Consumer electronics? Yes, but depreciating

Physical cash? Possibly, but tenuous at best.

GBP? Sure as hell not.

Dang. If this aint a recipe for a run, or dare I say it, hyperinflation, then, then, then,... Aarghh!

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Aarghh, my brain hurts !

So... it's 2008 and the UK banks are insolvent, so the UK govmt gives them money to float, which is funded by the banks buying govmt gilts ?!

So the govmt is now funded by imaginary money from the banks which are only solvent because they received govmt imaginary money, which was used to float the banks because they had lost so much imaginary money in the first place.

So, um, what's actually real here?

Commodities? PMs? Houses? Yes

Cars? Consumer electronics? Yes, but depreciating

Physical cash? Possibly, but tenuous at best.

GBP? Sure as hell not.

Dang. If this aint a recipe for a run, or dare I say it, hyperinflation, then, then, then,... Aarghh!

I share your grief.

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I am afraid that this is not quite as exciting as it sounds, although I do have some concern that the banks have a serious concentration in gilts.

I would guess that the big banks, between them, hold something like £150bn of gilts. This is about 15% of the total outstanding, so quite a lot. They hold more now than they used to because they are a useful thing to have in an emergency - they can be sold quickly and easily for cash or they can be "repo'd" i.e. given as collateral in return for a loan from another institution. They are the next best thing to cash, but also have a yield. Also, as the banks can raise money fairly cheaply, it is not expensive to hold them. Gilts form a large part of the banks' collective war chest. As a result of this, the banks are quite happy to hold them and the FSA is happy for them to hold them too.

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I am afraid that this is not quite as exciting as it sounds, although I do have some concern that the banks have a serious concentration in gilts.

I would guess that the big banks, between them, hold something like £150bn of gilts. This is about 15% of the total outstanding, so quite a lot. They hold more now than they used to because they are a useful thing to have in an emergency - they can be sold quickly and easily for cash or they can be "repo'd" i.e. given as collateral in return for a loan from another institution. They are the next best thing to cash, but also have a yield. Also, as the banks can raise money fairly cheaply, it is not expensive to hold them. Gilts form a large part of the banks' collective war chest. As a result of this, the banks are quite happy to hold them and the FSA is happy for them to hold them too.

A certain Mr G Brown changed the rules so they have to hold the vast majority of their capital in UK Gilts.

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The increase in UK bank purchases of gilts has offset the fall in demand among overseas investors.

So, this is what we've been waiting for isn't it? Johney foreignor will no longer buy our debt...equals we must devalue?

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I am afraid that this is not quite as exciting as it sounds, although I do have some concern that the banks have a serious concentration in gilts.

I would guess that the big banks, between them, hold something like £150bn of gilts. This is about 15% of the total outstanding, so quite a lot. They hold more now than they used to because they are a useful thing to have in an emergency - they can be sold quickly and easily for cash or they can be "repo'd" i.e. given as collateral in return for a loan from another institution. They are the next best thing to cash, but also have a yield. Also, as the banks can raise money fairly cheaply, it is not expensive to hold them. Gilts form a large part of the banks' collective war chest. As a result of this, the banks are quite happy to hold them and the FSA is happy for them to hold them too.

Isn;t this just open market operations?

However by selling to the banks, isn't this destroying base money supply?

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I am afraid that this is not quite as exciting as it sounds, although I do have some concern that the banks have a serious concentration in gilts.

I would guess that the big banks, between them, hold something like £150bn of gilts. This is about 15% of the total outstanding, so quite a lot. They hold more now than they used to because they are a useful thing to have in an emergency - they can be sold quickly and easily for cash or they can be "repo'd" i.e. given as collateral in return for a loan from another institution. They are the next best thing to cash, but also have a yield. Also, as the banks can raise money fairly cheaply, it is not expensive to hold them. Gilts form a large part of the banks' collective war chest. As a result of this, the banks are quite happy to hold them and the FSA is happy for them to hold them too.

Maybe this is sea change in the mind set of foreignors? Maybe they've seem the writing on the wall for the UK? So if the banks want their money back who will buy these gilts?

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. As a result of this, the banks are quite happy to hold them and the FSA is happy for them to hold them too.

Well in fairness the FSA is forcing them to hold more gilts by raising their capital requirements.

You can keep rates low if you can order the banks to buy gilts.

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Well in fairness the FSA is forcing them to hold more gilts by raising their capital requirements.

You can keep rates low if you can order the banks to buy gilts.

If banks are having to stump up money to buy the gilts in order to meet higher capital requirements.. doesn't this reduce the amount they have available to lend?

[Edit to add.. looks like we are all wondering the same thing]

Edited by libspero

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Surely this mean less lending by the banks.

That's what I thought.

So the banks have some money.

They lend it to the government rather than to buyers of property or businesses.

Presumably then the government inflates so that tax receipts go up and they can pay the gilts.

Assuming tax take rises with inflation, as unemployment falls, businesses can't borrow to grow, and can't invest abroad because the pound is weak.

All of this cannot be good for house prices. Am I wrong?

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If banks are having to stump up money to buy the gilts in order to meet higher capital requirements.. doesn't this reduce the amount they have available to lend?

Totally yes.

It used to infuriate me when this all kicked off in 2009 watching labour politicians bashing the banks for not increasing the amount they are lending with one face, while ordering up their capital requirements with the other, knowing full well that but being forced to buy gilts the government got to avoid having to slash spending like they should (the gilts are loans to government so they can deficit spend).

Politicians love to banker bash, but will never actually act against the banks because they know they are funding their spending and the MMS or Joe Blogs ever bothers to probe one inch behind the BBC headlines.

In return for being verbally shate on every week the government holds down interest rates which are such fantasy rates banks can lend at base+4% which is a much higher spread than they normally get so banks get tidy profits.

Of course a lot of that money gets cycled back into government spending, but the banks still take their cut on the way thus why bonuses are up. Ultimately it not the case that evil banks are profiting from us, because without government setting up the perfect scam conditions spreads on capital would fall sharply. The truth is that voters only vote for politicians who say they will give them free stuff, so politicians agree to provide free stuff, then steal that money from taxpayers as much as they can tolerate in taxes, and then even further through the system that few can understand. Voters have only themselves to blame.

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That's what I thought.

So the banks have some money.

They lend it to the government rather than to buyers of property or businesses.

Presumably then the government inflates so that tax receipts go up and they can pay the gilts.

Assuming tax take rises with inflation, as unemployment falls, businesses can't borrow to grow, and can't invest abroad because the pound is weak.

All of this cannot be good for house prices. Am I wrong?

I would suggest reading the Telegraph comments section, lots of differing opinions on what this all means.

It makes me think that I should change the 10% of my money that's still in Gbp to something else.

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All of this cannot be good for house prices. Am I wrong?

Actually high inflation for a sustained period could well mean that house prices never fall in nominal terms.

If you are saving for a house you should put your money in inflation linked national savings bonds (NOT regular bonds) £15k, use up your ISA to buy funds in high yielding blue chip companies, and buy physical gold coins.

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We had threads discussing this over a year ago. I don't understand why this is news?

The banks were recapitalised and then bought the gilts. It's been happening all along.

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We had threads discussing this over a year ago. I don't understand why this is news?

The banks were recapitalised and then bought the gilts. It's been happening all along.

That doesn't mean it makes anymore sense now than previously though.

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We had threads discussing this over a year ago. I don't understand why this is news?

The banks were recapitalised and then bought the gilts. It's been happening all along.

Have the banks ever bought on this scale (36.1bn) before without being recapitalised?

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Have the banks ever bought on this scale (36.1bn) before without being recapitalised?

I have no idea, but I always thought it would fund deficit spending with printed money, via the back door.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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