Neil Collins’ Notebook – Extreme gesture politics will be costly for the banks

Dividend Tough luck, you little old lady waiting for your Lloyds Banking dividend. You won’t be getting it, because the money is needed instead for our national emergency. We’re sure you understand, and will not mind joining the queue for social security, or selling your shares at a loss as your contribution to overcoming the country’s difficulties.

This absurd caricature serves to illustrate a central problem with big banks: do they belong to the shareholders, or can the Prudential Regulation Authority just tell them they cannot pay their owners, even if they believe they can afford to do so? The PRA must ensure that banks are sound, but if anything, Britain’s big banks are over-capitalised. They are miles away from the level which might justify the authorities vetoing a payment.

It is a racing certainty that the bad debts from the loans they are currently being told to make will make craters in their capital ratios, but even with revenues under sustained pressure, the UK banks could quadruple their provisions and still stay inside the rules. Besides, the declared dividends would make very little impact on their capital position. So does the PRA see such dire straits ahead that they must conserve every penny?

In the conventional model, should a bank see trouble ahead, the shareholders are in the front line to fill the hole – but not quite like this. This diktat means that the equity capital markets are effectively closed to banks – why should shareholders put up fresh capital when the authorities can decide the balance sheet fails some new test they have just made up?

As Bank of America analysts conclude: “We believe that a pre-emptive cut in dividends undermines confidence in the regulatory capital framework that has been built since the financial crisis.” Banking is the ultimate expression of confidence, and the dividend ban implies that the PRA does not have confidence in its own prudential regulations. Worse still is the precedent this sets. Will the insurance companies be obliged to follow, or can any government agency now demand suspension of any company’s dividend with the money used instead for some greater good?

With luck, it will not come to this, but the damage to London banking has already been done. You may not like them (nobody does) but this ban is extreme gesture politics. Such gestures are always expensive in the end.

Don’t be DafT, Grant

Grant Shapps wants to hear from you. At least, he says he does, but since he is living in his own little bubble at the Department for Transport (DafT), it’s unlikely that he’ll pay you any attention. Last week, when we had rather more pressing concerns, he slipped out a 76-page work of fantasy entitled Decarbonising Transport, another of those documents which give the current minister a nice warm glow from some far future sunlit upland, without the slightest hint of how we get there.

By 2050, in Shappsland, we have mostly ditched the car in favour of “a convenient, cost-effective and coherent public transport network”. We cheerfully go about, knowing that “clean, place-based solutions will meet the needs of local people.” All vehicles will be zero emission, “our goods will be delivered through an integrated, efficient and sustainable delivery system” and Britain will be the envy of the world.

No wonder Mr Shapps is smiling. He must have found it well-nigh impossible to keep a straight face for his picture. Nobody has any credible route to this happy place, other than those who think the current lockdown is good for us as a taste of a post-hydrocarbon future.

We have been here before, many times. Andrew English dug out a fine example from John “Two-Jags” Prescott: “We have had to make hard choices on how to combat congestion and pollution while persuading people to use their cars a little less – and public transport a little more,” he wrote in a transport White Paper in 1998.

The Shapps version purports to be a serious look forward to transport nirvana, but is nothing of the sort. There is no mention anywhere of hydrogen as a possible energy intermediary (except on trains), electric bikes or scooters, ride-sharing or how the buses will magically reverse the long-term decline in their use outside London. The car, of course, is cast as principal villain.

It would all be quite a good joke to keep us entertained during our confinement were it not for the dire straits the car industry is already in. Production has almost stopped, Ford’s debt has been downgraded to junk, and European manufacturers are gasping for government help. That is before the little matter of the rules on CO2 emissions per car tighten again, to a level which nobody seriously thinks the manufacturers can meet, with the prospect of near-bankrupting fines if they fail.

Even pre-Shapps, the UK had found its own way to turn the screw further. We had been urged to buy diesel cars, because they get more miles per barrel of oil, but diesel is now dirty, and from next year only new ones will be allowed into London without a stiff penalty. Other cities are threatening to follow suit.

Then there is the modern version of hire purchase. Personal contract plans cover nine of every 10 new cars sold to private buyers, typically enabling the “buyer” to take the car back to the dealer after three years and walk away. If instead he elects to keep paying, he gets a shiny new motor.

Even before coronavirus, this process was running out of road. Now showrooms have closed, while car use is brutally curtailed. Shares in dealerships have collapsed. To many, the rollover is an expendable luxury, threatening a car crash of slumping second-hand prices and bank debt defaults.

So there’s much for Mr Shapps to do, if he can drag his eyes down from his utopian vision. Does this government want a car-making industry in Britain? How do subsidised electric cars replace the £29bn a year in fuel duty paid by conventional cars? Answers on a postcard to Transport Decarbonisation Plan, Great Minster House, 33 Horseferry Rd, London, SW1P 4DR. Do not expect a constructive reply.

Neil Collins used to write the Inside London column for FT Weekend for many years, and before that was City Editor of the Daily Telegraph. 

He writes a Friday blog at neilcollinsxxx.wordpress.com