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.