The authorities are veering toward a new protectionism

BOTTOM LINE

IT is a bizarre paradox. The Bank of England has often rightly stressed the need for open borders and international cooperation to keep the world economy moving.

Yet at the same time it now injects notes of protectionism and populism into its decisions, as witnessed yet again yesterday.

It wants banks to focus on UK lending, as politicians insist, thus cutting back on overseas operations. It also wants investment banking operations to face tougher restrictions even though such operations have been cut back dramatically, have traditionally been a major source of wealth creation for the British economy, have helped diversify banking groups and did not cause most, if any, of the UK’s bank failures (and certainly not those of HBOS, Northern Rock or Bradford and Bingley). You might understand why a demagogic politician might endorse such politicians – but why is the Bank also doing so?

The authorities are engaging in low-level banker bashing – one favourite of the Governor is to call on banks to cut dividends and squeeze bonuses to retain profits to build capital levels.

Yet the two banks that the Bank of England believes are most in need of extra capital – Lloyds and RBS – both made losses last year.

There are no profits there to retain. And the pair had the lowest bonus pool, between them totalling less than £1bn, well short of the £25bn required. So where can it come from? Cutting down foreign lending might help. But RBS has led the way in cutting back overseas, so little extra can be done. Domestic lending seems set to take a knock.

The banks know the rhetoric is not really believable, but more of a political balancing act that aims to fulfil the Bank’s stability mandate while placating politicians. They compare the situation to a driver slamming one foot to the floor on the accelerator while pulling harder on the handbrake.

Although that has not hit lending everywhere, bankers are worried they will have no choice but to cut back in their core markets – the British households and firms the Bank professes to be backing. Investors might welcome the increased certainty on capital levels – shares in Lloyds jumped 2.2 per cent yesterday. But they will not be happy with a steady flow of contradictory policies and attacks on international lending and investment banking.

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