Osborne: Banks must rebuild balance sheets, and they must not

George Osborne says that banks must be stopped from paying bonuses as they need their profits to rebuild their balance sheets while at the same time it would be a bad thing if banks increased their profits to rebuild their balance sheets.

George Osborne’s speech on Tuesday contained an interesting conundrum.  He argued that:

“If the banking system remains undercapitalised – with so called ‘zombie banks’ – then the monetary transmission mechanism will be broken.

“As happened in Japan, lower policy rates will be absorbed by the banks in the form of higher margins and profits in order to rebuild their balance sheets, instead of being passed on to households and businesses.

“Monitoring bank margins and the extent to which lower interest rates are passed through to consumers should be a key focus of economic policy.”

But later he argues:

“Indeed, if banks pay out huge bonuses on the back of taxpayer support instead of using profits to rebuild their balance sheets, that is not only bad for the broader economy, it is bad for the City itself.”

So, banks must be stopped from paying bonuses as they need their profits to rebuild their balance sheets while at the same time it would be a bad thing if banks increased their profits to rebuild their balance sheets?

Meanwhile for all Osborne’s worries about banks absorbing the lower policy rates and not passing them on, Bank of England data shows this is not the case. The spread between floating rate mortgages and deposit accounts has actually fallen over the past year.

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