Thursday, 11 October 2012

Lloyds Bank Can Fund Investment

By Michael Burke

A number of media reports suggest there is a dispute between the management of Lloyds Bank and its regulators at the Bank of England and the Financial Services Authority (FSA). The dispute centres on Lloyds’ estimated profits, which one set of City analysts forecasts will be £800 million. Management wants to use the profits to pay out dividends to shareholders. The regulators argue that prospective losses at the bank in future years mean that the profits should be retained, and used to bolster the bank’s capital.

Lloyds Bank is 43% owned by the state following the bail-out in 2009. In common with all deposit taking banks operating in Britain, it can only function because of government guarantees. It also benefits from liquidity provision and Quantitative Easing. Without these Lloyds Bank would collapse. The government is also the major shareholder and therefore has the capacity to determine the policies of the bank.

The attempted payout to shareholders is not the first instance in which bailed out Lloyds has used taxpayers’ funds to benefit either capital or the rich. Over the 3 years to 2011 Lloyds has paid out £1.385 billion in bonuses. It made a big fanfare of clawing back just £2 million in bonuses to former executives.

SEB has previously shown that the driving force behind the recession is the refusal of firms to invest. Capital is being hoarded rather than invested. Non-financial corporations alone currently have £391 billion on deposit at banks that report to the Bank of England. Retaining capital for prudential reasons is clearly preferable to wasting it on shareholders who have little inclination to invest and will simply increase those deposits. But Lloyds Bank adding to the cash hoard and then waiting for its existing loan books to deteriorate under the impact of the economic slump is hardly much preferable.

Instead, new investment would provide a return on investment for state-owned Lloyds and so reduce the risk of another bailout. The regulators could insist that profits cannot be used for either bonuses or shareholder dividends. An instruction from the government as the major shareholder to invest the profits in productive investment, say housing, high-speed broadband or rail would have a number of positive effects. It would boost economic growth and provide jobs. The effect of that would be to reduce the government deficit, without a penny of increased government borrowing.

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