Opinion: Shocking complacency in UK banking reform

In British politics there is one area of policy where popular sentiment and dire need strongly coincide. Banking reform.

Opinion surveys seem to suggest that it is Chancellor Osborne’s ‘Achilles Heel’. Indeed, senior ‘expert’ LibDems have expressed concern over the last three years about the pace of reforms. Now Labour has jumped on the bandwagon, and may reap electoral benefits. YouGov polling of a few weeks ago found…

… 67% thought [regulation] was ineffective. Only 18% were confident that changes to the banking sector over the last few years were enough to stop a repeat of the banking crash. The people running British banks were seen as bad at their jobs by 49% to 16%, and as people with fundamentally bad morals by 56% to 13%.

Some 15 years ago I attended a small meeting at the Bank of England. Presenting were US Fed Chairman Alan Greenspan, Governor Sir Eddie George, and the legendary Lord Eric Roll.

We discussed the monopoly position of some banking & financial institutions. What became clear was that the Bank of England’s logic on the UK’s banking industry was that a monopolistic sector was not only a benign characteristic but an actual policy.

The position was put that restricted competition in UK banking was a good thing; first because it made regulation easier and less cumbersome, and second because a concentrated monopolistic sector made for strong, stable and profitable banks – thus the sector should be ‘exempted from much competition law’.

Surprised as I was by the stark admission of such policies, the rest of the meeting room did not seem to suffer from the proverbial ‘raised eyebrow’ as I did.
A decade later the financial crash was upon us. One might say of the type of policies expressed a decade before … ‘well they didn’t work did they ?’

Now, here we are nearly 7 years from the start of the crisis and the underlying reforms to replace the previous ‘policy of monopoly’ are fizzling out. A monopolised UK sector was undoubtedly a major crisis contributor, and at the very least the complacency engendered led to the too-big to-fail UK banks being targets for holding the baby when the crash came, at UK taxpayer’s expense.

Reform proposals have been disappointingly watered down – those to ease new market entry, to allow small banks, specialist banks, and regional banks to become established and grow; to de-monopolise dominant firms; to hive off ‘casino’ banking; to restrict bonuses to schemes that do not include granting of shares; and to allow building societies to lend to small firms.

Even proposals to prevent directors colluding by being on the boards of many different banks, or to stop them unreasonably forcing themselves onto boards of customers so as to increase borrowing, are now both unlikely to be ever implemented. The same is true for special competition rules for ‘dominant’ banks.

Regulatory complexity was also a cause of the crisis. Proposals have been around for some time to avoid the problem of regulators chasing the ingenuity of the trading geeks with ever more complex rules. These include catch-all rules to ‘capture’ all hidden transactions, and a professional duty-of-care towards both shareholders and the financial system. All now sadly diluted.

Maybe one reason for all this fudge is the sticking plaster of printing money and using it to feather-bed the banks. Has this ‘quantitative easing’ become a substitute for reform ? This subsidy now approximates 400 billion pounds – getting on for a third of the entire annual UK economy.

A fair conclusion perhaps is that the LibDems should work closely with their own experts in the UK and European parliaments, and resolve to set out a distinct Party reform programme now. If we do not we might be leaving too much space on the bandwagon.

* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.

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  • Paul, I agree with all the points you make.
    On LDV a couple of days ago David Boyle commented on Miliband’s proposals “The big banks (are) bad at assessing and pricing the risk of lending to small businesses, and are consequently no longer geared up to do so.”
    Nothing has changed on this in the last three years, and there are no proposals from the government to do anything about it. An opportunity lost.

  • Eddie Sammon 20th Jan '14 - 10:56pm

    From my experience of financial services, I would say that the banks are in more trouble than the public think. I think you are right to say that they are effectively being propped up by QE (and I would add other state subsidies), which can’t last forever.

    For me, the big problem is not their balance sheets, but my opinion that their employees aren’t skilled enough. In terms of “what can the government do” – my answer would be not much, besides criminal prosecutions for miss-selling. They are becoming more skilled, but the worst thing the government can do is to start legislating very lengthy sales processes, which the customers don’t want and put the banks into even more trouble.

  • Very disappointing. The Lib Dems should be a party that tries to win votes by applying reason to our problems. Instead, they just go along with the status-quo conservatives and even the threat of another banking crisis is not enough to motivate them. I guess I should look for a smaller party to support in the general election

  • Paul in Twickenham 21st Jan '14 - 7:54am

    Whatever happened to Project Merlin?

    The opportunity for meaningful reform must now wait until the next crisis in the banking sector and the seeds of that have already been planted.

    In relation to the poll accusing bankers of “fundamentally bad morals” the evidence in the form of Fred the Shred,Gorgeous Bob Diamond, Richie Rich et al seems pretty overwhelming. Of course the best example is the Anglo-Irish guy who said that the bailout cost he had quoted to the Irish Government was “plucked out of my ar*e”.

    The bottom line is that we need to stop treating the bankers as rational human beings and instead see them as a group of high functioning sociopaths and legislate accordingly. But of course that will never happen.

  • andrew purches 21st Jan '14 - 12:07pm

    Labour will benefit from their proposals to create new competition in the High Street banking world, even though the suggestions made for this new policy are somewhat populist and ill considered. Changes are needed, and I personally it can be acheived by the rebuilding of the mutuals that were stripped apart way back in the nineties. The building societies that were absorbed by the Banks could be hived off and refinanced by those self same Banks, and in so doing recreate the old well established and honourable Building Societies and other co-operative mutual institutions. This could be a Lib Dem policy that the public at large would relate to ,particularly those climbing up or down the housing ladder. It is here that competition is needed, much more so than that needed in small business finance.

  • The ability to create money must be taken away from banks, and restored to the Bank of England.

    See here for why:

  • Paul In Twickenham 22nd Jan '14 - 9:49am

    It’s interesting to hear Richard Edelman (CEO of the world’s largest PR firm) at Davos just now commenting that it will take the banks 10 years to regain public trust. Given the increasing speed with which banks are churning through the boom/bust/bailout/recovery cycle, surely that means they can never completely regain the confidence of the public?

    It’s like some sort of second order differential equation without an analytical solution and it’s doing my head in!

  • Robert Wootton 22nd Jan '14 - 10:53am

    You cannot reform the Banking System. Its too entrenched in its way of operating.
    The only way is to create in EU law a new type of bank that operates in a completely different way, i.e. a fair and equitable and prudently and dual boot the whole economic system. Then new entrepreneurs will be able to start up the new banks and completely bypass the existing system. A completely new economic system architecture is needed.
    In my view, only the European Parliament MEPs have the ability to bypass the Establishment in this country and the Establishment in other member states.

  • Paul – I absolutely agree.

    Part of the difficult that the government now finds itself in is that banking is such a huge part of the economy – overseas earnings and tax revenues especially – that any change risks leaving a huge hole. Add to that the lobbying power of banking and reform is bound to be limp in the extreme.

    But … as you say public opinion is clear and would, I suspect, be even clearer were there a clear political lead based on hard-headed thinking and a sensible strategy to fix things coming from one or other of the political parties. Of course any party that did that would be vilified by the press to an unprecedented extent. On the other hand the Lib Dems are now so low in the polls that really there is little to loose. So, do the Lib Dems have the courage, the organisation and the leadership to argue for reform?

  • Paul in Twickenham 23rd Jan '14 - 3:56pm

    There is an article about the Royal Mail flotation price on The Guardian website at http://www.theguardian.com/commentisfree/2014/jan/23/royal-mail-sale-vince-cable. Dr. Cable famously described the rise in the share price after flotation as “froth” and said we should wait 3 months and then look at the price. Well it’s 3 months later and the price is over 600p, an 80% premium on float. Compounding this massive loss to the taxpayer we know that one week after flotation Goldman was advising its clients that the price would settle at 600p.

    As I said above you need a long spoon to sup with the bankers and if Dr. Cable now looks like he has been misled then that’s a high price to pay for his education.

  • Royal Mail privatisation not entirely Vince Cable’s fault. It was Ed Davey’s baby before he moved ministerial jobs to be Secretary of State for Energy.
    Any similarities between the bad deal on RoyaliMail and the bad deal on Hinkley C may therefore not be entirely coincidental.
    Bad deals for the taxpayer and Ed Davey’s ministerial career just seem to have gone hand in hand.

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