View more on these topics

Ex-FSA chairman Davies urges Govt to take stakes in banks

The former chairman of the FSA Howard Davies has urged the Government to take 10 – 20 per cent stakes in banks prevent them from having to be fully nationalised at a later stage

Speaking on the BBC Radio 4’s Today programme this morning Davies, who has also been deputy governor of the Bank of England, said there were two options to help protect value for taxpayers as the Government moves to sure up the banking system.

He said that one option was for the Government to buy up under valued mortgage assets that banks cannot currently afford to hold but which might be able to generate value at a later stage.

The second option was for the Government to buy up stakes in banks in order of between 10 and 20 per cent in order to send a signal to the market that it is behind the institutions.

He said that such a move might prevent the need for full-scale nationalisation of further institutions at a later stage and which removes them from the open market and can make them less competitive and harder to sell on when markets return to normal.

Davies also warned that the decision of the Irish and German governments to guarantee deposits will force other Eurozone countries to follow suit. He said it was unfortunate that European countries have had to adopt this “beggar my neighbour” approach.

Davies does not believe it will even solve the financial problems the countries are facing as the real issue is lack of wholesale funding.

He said: “I actually think that the retail deposit point is not the crucial one because what is really of concern is that banks remain reluctant to lend to each other and it is the wholesale markets that are the real problem.”

He added: “I suspect that if countries like Germany are going to guarantee all deposits, if that is really what they are doing, then there probably won’t be much choice but for firms and certainly Eurozone countries to do the same.”

But Davies does not believe that guaranteeing deposits will address the root cause of the problem, which is the lack of lending in the wholesale markets.

Davies said he would favour a different approach using convertible stock.

He said: “I think governments are going to have to take a leaf out of the Warren Buffet book. Buffet, with Goldman Sachs invested convertible stock. He did so on the basis that it could convert into common equity in the long run, so if the bank stabilised he could buy it back but he would make a profit by doing so. I feel that Governments are going to have to do something like that in order to signal to the wholesale markets that they stand behind those institutions and that the Government has got some skin in the game.”

Recommended

McDonald takes a macro view

Cazenove co-head of multi-manager Robin McDonald believes the current market benefits managers with overall market views rather than asset or geographical specialists.

Our man in Moscow

The Neptune Russia & Greater Russia fund is down sharply over recent months amid falls in the Russian market. Fund manager Robin Geffen has recently come back from visiting companies in Moscow and I have spoken to him on several occasions, so this is an opportune time to update you.

Firms wait for ECJ ruling on Heyday

UK companies could stop offering insurance benefits to employees if the European Court of Justice rules in favour of the Heyday case, warns Ron Wheatcroft.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment