12 Comments

• toryboysnevergrowup 25th Mar '11 - 2:58pm

  The concept of having “banks that are not too big to fail” really is something of ideological construct of free marketeers which fails to understand that the concept of perfect markets made up of small entities all operating efficiently, on which they base their theories, really isn’t possible in the real world. Yes you can have banks “that are not too big to fail” but I’m afraid you will also have banks which are not big enough to compete with others on the world stage or to achieve the economies of scale that are necessary to offer decent services to their customers. If you look at most develioped economies and certainly all in Western Europe – you will see that they all have some concentration in their banking sector and there are always some banks where the state would have to step in were they too fail. I don’t think that any of our competitors are going to contemplate having banks that are too big to fail – when I see the Germans proposing to break up Deutsche Bank or the Americans saying they will break up Citibank, or the Chinese looking to break up the Bank of China – then there might be some argument for the UK doing similar – in the meantime Clegg and Cable are just engaging in pointless kite flying.

  If they were serious about banking reform then they would focus their efforts on improving the regulation and governance of the banks and financial sector (which also includes the fund managers, insurers, hedge funds and private equity) we have so that the mistakes of the past are not repeated – rather than allowing the Tory deregulators just allowing the bankers to carry on with business as usual under the pretence of the moving the deckchairs around exercise of breaking up the FSA an moving the bits to different places.

  In two years time – I predict that breaking up the banks will be of the agenda on the grounds that we do not want to hamper the international competitiveness of an important sector of the UK economy and it will just be business as usual in the financial sector.

• toryboysnevergrowup 25th Mar '11 - 5:47pm

  As we can see here http://www.bbc.co.uk/news/uk-politics-12865117 Clegg isn’t exactly on top of his brief is he?

• David Evans 25th Mar '11 - 6:00pm

  The aim must be not to have banks that are big enough to beggar the country. Gordon Brown allowed that to happen and we are all paying.

• toryboysnevergrowup 25th Mar '11 - 8:52pm

  David

  It is what the banks do and how they are run and governed, how regulation works and perhaps more importantly how the shareholders exercise control that is important rather than the size of individual banks that is important. If you have lots of smaller banks all doing the same stupid things then then you will still have problems.

  Yes Labour when it was in power was too hands off when it came to regulation and in dealing with the appalling fund management sector in the UK – but I didn’t hear the Tories and LibDems arguing against deregulation, and while Labour has now gone some way to acknowledging what went wrong the Coalition isn’t really doing much of any substance – look at what has happenned with bonuses and the Remuneration code and this wittering about breaking the banks up, which as I’ve explained above will not happen to any degree.

  If you really want to understand happened with banking – rather than using glib slogans which attribute it all to Gordon Brown there are a number of books around that provide the details – Fool’s Gold by Gillian Tett of the FT is pretty good as a starter. Think of the financial sector as a herd of animals, which quite frequently gets stupid ideas, and you will get the general idea.

• Liberal Eye 26th Mar '11 - 11:19am

  For once I agree with Nick Clegg – all power to him and Cable on this.

  toryboysnevergrowup

  The TBTF banks are not some “ideological construct of free marketeers”. Rather, I suggest, they are the result of free marketeer thinking that says that whatever the market delivers must be perfect and that regulators should therefore keep hands off. This is, of course, total rubbish and we need good regulators who are politically empowered to get a grip on the self-serving propaganda of the very powerful banking lobby.

  As for needing TBTF banks this too is wrong. Repeated studies have shown that the optimal size is actually surprisingly small. See for instance:

  http://www.nakedcapitalism.com/2011/03/do-we-need-big-banks.html

  The likely reason for this slightly counter-intuitive result is that the big banks are conglomerates of very diverse activities and that the span of control difficulties arising from this defeat normal human powers. In simple terms, they are unmanageably complex.

  And the TBTF banks don’t even offer nearly as much value to their customers as they would have us believe. Take fund-raising for instance. Big firms can go to the money markets but SMEs rely on banks. Yet all they really do now is lend on property against computerised tick box criteria. It’s simple and low cost for the banks but pretty useless for growing firms.

• toryboysnevergrowup 26th Mar '11 - 5:54pm

  Liberal Eye

  It is a nice debate as to what is the optimal size for banks – but the realpolitik is that big banks are not going to disappear in the rest of the world and I suspect that even if we were to have smaller optimal sized banks (from an ease of management perspective – which is what the studies say) they would not be able to complete with the bigger banks elsewhere who would probably have cheaper funding and would use their clout to close access to more lucrative markets (especially the likes of the Bank of China and Sberbank). In the meantime this debate about breaking up the banks – which I beleive is bound to fail – will end up diverting attention from the imposition of effective regulation and market discipline on the London (and international markets). The end result will be business as before the deregulators of the financial sector – in which camp I’m afraid Osborne, Cameron and Laws are enthusiastic flag wavers. I’m afraid Clegg and Cable really are showing their naivety by picking the wrong battles – we have already seen their effective defeat on bank bonuses.

  PS Even the free marketeers have to slighly modify their arguments in light of what has been the massive failure of the financial markets to price credit risk properly which led to the crisis in the first place.

• Liberal Eye 26th Mar '11 - 7:37pm

  toryboysnevergrowup

  Sorry, but your argument simply doesn’t stack up and falls into the trap of repeating debating points that the TBTF banks would very much like everyone to believe.

  You say we need to focus on the “imposition of effective regulation …”. I agree. And what’s the first order of business for the regulators? Why getting to smaller banks. Why? Because a bank that is TBTF is by very definition not possible to properly regulate. The blackmail possibilities inherent in the fact of its size guarantee that. Moreover, the same factors that make the really big banks too complex to manage simultaneously make them too complex to regulate. So this isn’t a mere debating point – it goes to the heart of the matter.

  As for the international dimension we should ask what the banks are for. If it is to bestride the globe waving the flag while all pumped up with testosterone then you have a point. If it’s to service UK commerce then they are failing badly. The great expansion of the US economy was all done without benefit of megabanks as was the earlier UK economic expansion. If they have an advantage over their smaller bretheren it regulatory in origin – funds that are raised more cheaply because of an implicit TBTF government guarantee (that is very far from cost free for taxpayers as we have seen).

  While there might be an issue if foreign megabanks set up in the UK and used their weight to gain agvantage but that sort of issue is precisely what regulation is for. We could, for instance, impose a cost penalty on banks over a certain size wanting to do business here even if other countries continue to host these cuckoos.

  Does anyone seriously believe that they really contribute real wealth creation to the nation pro rata to their share of value added? Banks over a certain size become predatory on their host economy, mechanisms for wealth extraction for the benefit of a few at the expense of the many. They should be put back in their box.

  Yes, the realpolitik is that the TBTF banks are here awhile yet. But the fat lady hasn’t sung yet either.

• Geoffrey Payne 26th Mar '11 - 11:42pm

  An interesting debate here.
  Vince Cable is very clear that there are very serious market failures in the banking sector and that the state has a role in restructuring the banks so that they are smaller and that they should be properly regulated.
  I very much doubt that ToryBoy was paying attention when prior to the banking crises Vince Cable was opposed to the demutualisation of the building societies, one of the main drivers in recent times towards bigger banks.
  In short as far as the Lib Dems are concerned there is no free market fundamentalism here.
  All these issues will be sorted out when the Vickers commission reports later this year. It is anticipated they will recommend reforms along the lines that the Liberal Democrats support. It is likely the banking lobby will lobby against their recommendations and it would be interesting to see how the coalition deals with it. The Lib Dems could go for broke on this issue, knowing that the Tories would not want to face a general election with banking reform as a top general election issue.

• toryboysnevergrowup 28th Mar '11 - 10:00am

  I’m sorry Liberaleye its your arguments that just don’t stack up – and the point that Geoffrey makes about demutualization of the building societies really reinforces my point that is effective regulation and market discipline that is of more importance than pursuing the objective of breaking up the banks that will just not be achieved in practice.

  First of all Liberaleye you “While there might be an issue if foreign megabanks set up in the UK and used their weight to gain advantage”. Well unfortunately Liberaleye the issue has been with us here in the UK for rather a long time – the foreign megabanks are here and they are pretty dominant players in corporate, investment and wholesale banking which is where all the problems have originated. You may want to argue that that they still do not dominate retail banking – but even that is changing. One of the problems is that the investment banks have been driving the industry in recent years – this is where securitization came from – and the standard view has become that the retail markets are just cash cows to be milked for the investment banking machine. I’m sorry that the big banks now bestride the world – and the likes of the Bank of China and Sberbank will not change the picture, but you are not going to get this particular genie back into the bottle. The Americans tried to do so in the past with their anti-trust legislation, and all I ask is that you look at Wall Street and the oil industry today.

  Geoffrey you are not correct about Cable being opposed to demutualization of the building societies when it was actually happening – he wasn’t even in Parliament when the Building Societies Act was passed in 1996 and the last demutualization was in 2000. But then it is worth looking at what actually happened to the building societies which converted, and what you will see is that is the Societies which were not taken over by big banks and tried to carry on as independent entities which are the ones which actually failed and where the State needed to step in to protect depositors and to encourage bigger banks to take them over i.e. the Halifax, Alliance and Leicester, Bristol and West (via the Bank of Ireland), Northern Rock, Bradford and Bingley, Abbey National, Birmingham Midshires and the National Provincial (via the Abbey). And why did they fail – I would argue that it was poor regulation that allowed the building societies to expand into new areas and grow rapidly (supported by a lax capital regime) even though they didn’t have sufficient management resource to do so. And don’t you think that there might be a repeat if some of the big banks are broken up. My guess is that at this very moment there is someone merrily putting all Lloyd’s rubbish into the bits that are required to be sold off – which then might be sold to a new market entrant which doesn’t have the necessary management skills and which will try to grow their business rapidly in order to achieve critical mass.

• Liberal Eye 28th Mar '11 - 11:24am

  Several points. First, Geoffrey is right that the LibDems have clean hands when it comes to their policy stance at critical periods in the run up to the bust. Clearly Vince Cable was an important part of that but not, I hope, the only reason we got it basically right. However, I don’t interpret the demutualisation of the building societies as a one of the main drivers in recent times towards bigger banks. Sure, it was coincident in timing but I suggest it was just another manifestation of the same underlying market fundamentalist belief that the market should be allowed to do whatever it wanted. And what it wanted was naturally to book as profits as big as possible as soon as possible, pay everyone concerned monster bonuses out of (very often) fictitious profits never mind how unstable or unsustainable the resulting corporate structures were (the converted building societies that failed being a perfect illustration of this).

  The US had great success with its early anti-trust legislation, breaking up such behemoths as Standard Oil. The main driver towards bigger banks (and globalisation generally) was the progressive dismantling of anti-trust legislation and the various depression-era regulations that had been emplaced to control the banks. We have our ‘Big Bang’ moment, but actually this was just part of a global trend that extended over several decades. Now it’s failed and the question is what to do about it. Greater regulation of the financial sector – yes indeed. I think we are agreed about that; where TB and I differ is that I think that to be effective this must include restrictions on the size of banks and the range of their activities irrespective of were they are headquartered. Without such restrictions we are only debating the small change and substantive regulation will be dead on arrival.

  That is not to say that it will easy to achieve this. It will be very difficult – but also very necessary.

• toryboysnevergrowup 28th Mar '11 - 12:05pm

  And in the meantime next to nothing happens with regard to regulation and improving market discipline – apart from moving a few deckchairs around between the FSA and the Bank of England. What stance do you think the UK Govt is taking in Basel 3, Solvency II or the regulation of Hedge funds – talk about fiddling while Rome burns. You will only get the restriction you talk about at an international level – and I see little or no enthusiasm for such moves – do you seriously believe that European banks which have free entry to UK markets would sit around doing nothing while UK banks were being broken up.

  So the Standard Oil behemoth was broken up and replaced by what? Strangely enough I don’t see an oil industry not dominated by multinationals. Multinationals and globalism are facts of life now I’m afraid – the only effective counters to them are sovereign states and multilateral state bodies. The LibDems are allied with a party that realises this and has no intention of making such a challenge – and is quite happy to tolerate all this futile talk of breaking up the banks as a fop to keep them quiet while meanwhile doing very little about the issues that actually matter.

• Liberal Eye 28th Mar '11 - 5:12pm

  I said nothing along the lines of “in the meantime nothing happens”. In fact, it’s clearly implicit in what I wrote that I see breaking up the banks as the end point of a process of re-establishing effective regulation that would tackle the problem over a wide front and include many smaller steps of which you would no doubt approve.

  If banks continue to be above the law then we no longer have a fully functional democracy so we should not shy away from the problem of TBTF merely because the international dimension makes it more difficult.

  I fear you are probably right about one thing though – that Cameron and Osborne have no intention of being tough with the banks if they can possibly help it. But is that any reason why we should not take a different position and point out the dangers to people? And, as I said earlier, the fat lady hasn’t sung yet. We shall see.