Riskiness

Banks have a number of functions. They take deposits , they lend, they finance consumption, they finance working capital, they finance long term investment which includes mortgages, and all of this is offered to both firms and households. They multiply credit. They finance foreign trade. They provide a more complicated variety of financial services involving the transformation of term structure and riskiness.

They provide a payments system.

Which of these are still going on? All of them. But most of them on a scale so small, as they try to recapitalise their balance sheets at tax-payers' expense, and reduce their exposure to potential defaulters, that the nearest image of their activity is that of the human body retracting blood supply to the heart and brain and leaving everything else to take its chances with atrophy.

In their craving for liquidity it is the payments system that finds itself in the front line. Any entity facing a credit shortage delays payments. In Russia in the early 1990s payment arrears - of government wages and pensions, of government purchases that caused suppliers in turn to fail to pay their own wages and suppliers, reached forty percent of industrial output. Barter was rampant. Companies in England, in domestic and in foreign trade can engage in barter too. Quite possibly they are.

We, householders, cannot engage in barter with suppliers of gas, electricity, communication services, water; with local authorities, tax collectors, health suppliers, etc. Banks can delay payments with impunity, including wage and pension payments. For the denied potential consumer, though, there are penalties from fines, to withdrawal of service, to loss of reputation, to imprisonment.

Of all the failures of bank activities, it is the failure of a completely reliable payments system that will cause gross, immediate, disruption of every aspect of life in a country. We have never experienced what happened in Russia in the early 1990s. Last week a lot of pay rolls were not met due to a 'technical glitch'. There are reports that next week there is to be a further 'recapitalisation' of the banks in England. Perhaps we should think about this, rather than a minor stand off about gas deliveries that reflects the unpleasant internal politics of a former Russian satellite state.