Manish Singh: Setting up "Bad Bank" would have been a better solution

Manish Singh is an Investment Director at SG Hambros Bank Limited (part of Société Générale Group). He is also the Head of the Conservative City Future Research Group. Manish is a graduate of Indian Institute of Technology in Mumbai (IIT) andan  associate member of the CFA Society of the UK.

After talking up the idea of a ‘bad bank’ last weekend, the Government decided to create an insurance scheme that exposes taxpayers to all the downsides and no upside.

In my opinion, insuring the banks against potential losses from toxic debt is a solution but not an optimal one for Britain.

I have long argued that setting up a 'bad bank' on lines of Swedish experience is the correct way to directly deal with toxic assets and still believe so. That is why I am surprised this Government gave up on the ‘Bad Bank’ idea after talking it up last weekend. I hope there is a very good reason; however the reason seems only political.

The political opportunism is ignoring the right response. The reason the Government is not setting up a 'bad bank' is because 'price discovery' will blow some of the banks away, and the Government will have to commit huge sums of additional taxpayer's money up front -  an outcome which is not politically favourable to the Government given that the PM has already claimed to have  ‘...saved the world...'

Gareth McKeever and Manish Singh: The financial system is stabilised, but the real economy is in danger of a serious recession

Gareth McKeever is the Prospective Parliamentary Candidate for Westmorland & Lonsdale. Gareth has spent the last ten years advising investment funds on Japanese equities, most recently at Morgan Stanley. Gareth is a trustee for Honeypot children's charity and is an advisor for the Alpha Course.

Manish Singh is a graduate of Indian Institute of Technology. He is an Investment Director at SG Hambros Bank and is Head of Structured Products, advising clients on investments and asset allocation. He is also the Head of the Conservative City Future Research Group.

The Real Economy is Still at Risk

Let us make no mistake, the banking system may be stabilised but banks are not going to start lending at anywhere near the pace of recent years.

Increasing levels of debt have helped fuel economic growth and, for the foreseeable future, banks are going to be 'repairing their balance sheets', a euphemism for dramatically cutting back on loans to businesses and consumers alike.

We have already seen what a fall in mortgage loan growth does to the housing market and we should be prepared for a similar hit to business, with a subsequent sharp rise in unemployment, unless the government takes action fast.

One of the conditions for government support of the banks is that they start lending to businesses and providing mortgages to the consumer. However, there is much uncertainty as to what this means in practice and whilst the spectrum of products available may increase they will likely be offered at a much higher price. Furthermore, the government has a chequered history of white elephant capital projects and lending by government diktat is in no-one’s interest.