By: Dr. Mike Campbell
The basic thing about banks (commercial banks) is that they make money by taking in deposits and offering loans. The interest on savings is always a good bit less than the interest payable on a loan, so banking is a profitable business. Of course, that harks back to the good old days of Frank Capra’s It’s a Wonderful Life; modern banks have extended their business portfolios considerably since then.
The global financial crisis is all about confidence (present tense because it isn’t really behind us yet); or rather the lack of it. Lenders will not advance money to borrowers at reasonable rates if they think that there’s much of a chance that the borrower will default on the loan. This applies to both banks and investors in government bonds as Greece, Ireland, Portugal, Italy and Spain will attest. The trouble is that for businesses to expand, preparatory to hiring additional staff, they often need access to finance and in the present climate, it is in short supply.
The central banks of America, Switzerland, Britain, Japan and the ECB have announced that they will act in concert to make it cheaper for banks to buy US Dollars (they are not acting to devalue the Dollar, this relates to dealing costs). The idea is that this will improve access to funds to business and householders, improving liquidity in the financial sector. The banks will also make access to other major currencies easier, hopefully stimulating much of the world’s economy. The operation is due to start next week on December 5th. The initiative has been warmly welcomed by the markets which have all closed significantly higher.
EU finance ministers met in Brussels on Wednesday to prepare the ground for an EU summit of leaders at the weekend where the Eurozone sovereign debt crisis and measures to contain it will again take centre-stage.