Friday, Dec 25, 2009

Barclays’ CEO on banks liquidity and the current crisis

Greg Pytel: Will extra tax levy on the bankers' bonuses really "damage" the City?

Pytel published an exchange of arguments with John Varley, Barclays’ CEO. Mr Varley appears not to understand the basics of money multiplication (e.g. fractional reserve banking v depleting reserve banking) and ensuing liquidity risk levels. His current defence of bankers’ remuneration is not really credible. Bankers should go back to school to learn the basics not even of finance but rudimentary maths first before they ask for bonuses or any salary. The lack of basic competence is mind-boggling and truly dengerous. A possible loss of so-called “talent” from the City (resulting from high taxes on bonuses) will only bring benefits to the UK economy. The sooner the better.

Posted by ant @ 12:17 AM (1174 views)
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1. This comment has been removed as it was found to be in breach of our Blog Policies.


2. Magol said...

Greg Pytel does not understand banking. If you read his blog you will see he focuses on loan to deposit ratios and in his mind the effect of crossing 100% ltd ratio is key because it leads to an exponential rise in the quanitity of money creating "a pyrmaid scheme". Apart from the lack of any originality in these statements, they also completely miss the point, because the limiting factor on banks with capital market access is not liquidity but capital restrictions - equity and other core capital. Banks regularly have total loans in excess of deposit funding, particularly in emerging markets where deposits are not trusted as a source of funding due to their flightyness. As these funds multiply through the financial system (money multiplier effect) their multiplication is limited by the willingness of financial instutions to make loans. Willingness to lend is determined by capital and leverage ratios. Due to the limiting amount of equity bank capital banks can no longer make loans when their existing capital base can no longer support it in their/the markets opinion. Unfortunately the financial crises following a period of aggressive lending when numerous banks had high leverage ratios and low capital at the peak of the cycle.

Grey Pytel running around crying "pyramid scheme" and talking about infinite money loops in an attempt to garner attention is misdirection from the very simple crux of banking - its all about leverage (assets / equity capital) and asset quality. I would encourage people to read the excellent article posted on this site a month ago "Banking on the State" published by the Bank of England in November 2009

Friday, December 25, 2009 11:31PM Report Comment

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