We can remember it for you wholesale

So how do you go about long-term value creation, then?

For one thing -- deposits. Packard's not happy here though -- on the view that all the customer loyalty guff in UK banks' new branding will backfire when they have to be nasty to depositors who verge into the red. That might leave deposit growth less sticky in the long term.

And when it comes to the future of UK banks' wholesale funding:

Ideally we think banks should be split up. But even if this doesn't happen both Lloyds and RBS need to reduce their reliance on Wholesale Banking... Lloyds particularly, is often seen as a play on UK mortgage margins. But Total Income from Mortgages and Savings was just £3.7bn in 2009 less than half the £8.9bn in Lloyds Wholesale Banking division...

We understand the argument that last year impairments in Wholesale Banking were at a cyclical high, and that as impairments fall there is potential for a huge uplift in profitability. But that assumes revenue is sustainable. (See chart below)

And well, revenues of that size probably aren't. But we'd point out that Lloyds in particular won't be able to walk away from wholesale funding markets for a while, given liabilities it will have to finance while trying to restructure its balance sheet.

So how do you sell one of Her Majesty's Banks these days? Answers on a postcard.

I added my three penno'rth to this by way of comment

There's a 'macro point' to mention here.

I remember seeing a graph - it was probably posted here - showing a secular system-wide decline in retail deposits and a commensurate growth in wholesale deposits in the last 10 years or so - it might have been 20.

The point is that in the last 30 years real returns to labour have been pretty much flat, while real returns to capital have boomed. ie the fruits of productivity increases over the past 30 years have mostly gone to capital. This redistribution to the top few per cent has been disguised by the long inflation - culminating in a bubble - in property prices.

The result has been that there simply has not been surplus income in the hands of the middle classes available to save, and retail deposits are simply no longer there. What surplus income there is goes to deleveraging, and of course the proposed austerity measures will fall mainly on the productive public and private sectors, rather than on the less productive or even anti-productive management and financial sectors. ie austerity can only lead to even fewer retail deposits than hitherto.

The outcome is - as it always has been for thousands of years when compounding interest combines with private property rights - a systemic and unsustainable imbalance of wealth. The situation now is that 90% of the UK population is in debt to the other 10%, and as Philippe Legrain pointed out in the FT not long since, 0.3% of the population owns 69% of the land.

There can be no solution to the current financial crisis without systemic fiscal reform. Unfortunately, the Con Dems (and New Labour to a lesser degree) are merely prescribing a double dose of the poisonous medicine that has almost killed the patient.

I was in turn followed by 'fxtrader' with a thoughtful post, pretty much agreeing, and pointing out that the discrepancy between allocation of returns to labour and capital is indeed unsustainable.

(from Martin Wolf): Thus, Prof Rajan notes that "of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households".

I have been thinking since the beginning of the crisis that the fundamental debate that needs to take place is the age-old "how to divide the returns of labour and capital."

It sounds quite a Marxist topic - but in fact, it's basic economics. Most economists (& politicians) over the last 30years (l think most would classified them as part of the "washington consensus) elevated capital as the Sun-god, the lifeblood of the capitalist system, and therefore must move freely, untaxed and all the goodness from capital would happen.

The fascinating thing is that even when these guys were given a free hand to build a perfect capitalist society - in Russia - their shock therapy miserably failed. And yet, that consensus was never really questioned. Ok, Sapir wrote a brilliant book re Russia in a "J'accuse" style and a few development economists raised questions but nothing like the soul searching that ought to have happened.

Anyway, I actually doubt much will happen - as the vested interests are simply too powerful & wealthy. (ie: this is why you have a VAT rise, but not a proper property tax, CGT is up, but is still much less than income tax..)

Nonetheless, I'm glad the likes of Martin Wolf and others are starting to raise those issues - which are fundamental in shaping society.

btw - re ChrisJcook point on lack of deposit: I think you are right - and the banks are aware of it: witness on how keen they are to build their "wealth management" businesses!