Neil Collins’ Notebook – Whose bank is it anyway?

Barclays is the Bank That Lived A Little, in Philip Augar’s brilliant chronicle of decline from one of the world’s most valuable banks to a battered shell. From its peak of £7 in 2006, the share price had fallen to £2 in 2017 when the book was published. He tracked the dozens of non-executive directors, the constant changes of direction and the political infighting. It’s a great read.

He cannot have known that the worst was still to come. Today the Barclays share price is 110p and the bank is barred from paying dividends. Like its UK competitors, it is being forced to run as an arm of social security, making sensible analysis of the stock’s value almost impossible.

Almost, but not quite. Britain’s banks are facing the worst economic outlook in decades with capital reserves far above anything seen in those decades. Barclays’ own core capital ratio is 14.6 per cent. The new Stasi-style lockdown will hardly help on the bad debt front, but Barclays’ third-quarter results provided a pleasant surprise, with provisions much lower and profits twice the size that analysts had expected. The impairment reserve is £9.6bn. Meanwhile, at £19bn, Barclays’ market value is implying economic armageddon.

All the banks are now chafing at their own lockdown. They are willing and able to restart paying dividends, if only to highlight that share prices standing at less than half tangible net asset value are surely too low. For the long-suffering shareholders in Barclays, there is the added novelty of a convincing business case with a stable chief executive on top.

Jes Staley has resisted the pressure to follow Lloyds Banking and Natwest and get out of capital markets. That tricky business has been Barclays’ stand-out performer this year. More of a novelty, given Mr Augar’s grim history, Mr Staley has been in charge for five years, promising both a further “couple” and the prospect of an orderly handover.

That time horizon should soothe the regulator’s fears that Mr Staley might pay a bumper dividend and depart, leaving the bank vulnerable to having to ask for the money back again in a rights issue if things exceed the reasonable worst-case scenario (as current parlance has it). UK bank boards should be given back the right to decide what they can afford to pay, and allow the Barclays shareholders to live a little.

QE – ? Que?

So here’s how Quantitative Easing works. The Bank of England raises cash for the government by creating and selling bonds to the market. With QE, the Bank buys back some of those bonds for cash. The sellers, forced to find alternative investments, go and do something useful with it, which helps revive the UK economy.

This week the Bank launched another £150bn buy-back programme, taking the total this year to £450bn. Added to previous purchases, there will be £875bn on the Bank’s balance sheet, or about half of the UK government’s total non-index-linked debt.

These staggering sums dwarf the Bank’s reserves, but since it is owned by the state, the governor need not worry about paying its debts. The state can always print more pounds to meet interest and redemption payments. So the question that exercises economists everywhere is: if half the national debt is owned by the Bank (which is owned by the issuer of the debt), what is the true figure for the national debt?

There are no definitive answers. Common sense might suggest that this looks like a magic money tree, and governments that continually print notes to pay its bills will end up with Weimar or Zimbabwean hyper-inflation as the paper progressively loses its value.

Elsewhere, it has not worked out that way. In the decade since the banking crisis, inflation has stubbornly refused even to hold at 2 per cent, and today investors seem happy to earn less than 1 per cent lending to the UK government for 30 years, almost guaranteeing a long-term loss on their investment.

At some stage, the penny (and the bond prices) will drop, potentially imposing catastrophic losses on holders of government debt. Some of us have been predicting this for several years now, and have been proved impressively wrong. There is no sign of inflation; the world is awash with goods, cereal harvests have broken all records again, and rising unemployment is an awkward backdrop to wage claims.

The pain of this latest emergency borrowing is still a long way down the track, but it will bear hardest on those whose life prospects have already been damaged by the UK government which forbids them earning a living. You didn’t kill granny, but when taxes go up, prospects go down and the price of protecting her becomes apparent, you may wish you had.

Road works ahead

We were almost back to the good old days of motoring last month. New car registrations were marginally ahead of last year, as the effects of pent-up demand rolled through the market. Yet just as the motorway seems clear until it suddenly jams, there’s trouble ahead.

Pantheon Macro’s analysis concludes that the V-shaped sales recovery won’t last, judging by falling Google searches for the UK’s most popular models, and slumping consumer confidence even before the Guy Fawkes Day lockdown. As Sue Robinson of the motor trade body put it mournfully: “There is no evidence that dealerships have caused the spread of Covid-19 and shutting showrooms for four weeks can damage the livelihoods of the 590,000 people employed in vehicle retail as well as the 168,000 people employed in vehicle manufacturing.”

However, there is not so much a traffic jam as an almighty pile-up just down the road. The threat to extend London’s congestion charge may have been seen off, but the extension of the Ultra Low Emissions Zone to the north and south circulars next October threatens breakdown for the motor trade.

Older, non-compliant cars will be forced off the capital’s roads, to the benefit of the better-off. Ms Robinson and her members might dream of a bumper year as we all buy new cars. More likely is a simmering resentment from those who can neither afford to pay the charge nor trade up. It will not be pretty.