One-size-fits-all reform could strangle British banking
Ranald Michie |
The proposals of the Independent Commission on Banking (The Vickers Commission) have this week been endorsed by the Coalition Government. Implementation is scheduled for 2015 with banks given until 2019 to make all the arrangements required. The Vickers proposals have generated an all-party consensus, with any disagreement being confined to the practical details of how, rather than whether, they should be implemented. This reflects popular opinion that sees banks as the root cause of the global financial crisis of 2007-8. Greedy bankers and their bonuses remain the bogeymen throughout the media, with great sympathy extended towards anti-capitalist protesters. However, is a time of populist and media hostility towards banks the best climate in which to plan the future of the British banking system?
As banking is one of the few remaining successful sectors of the British economy its fate matters. In Barclays, HSBC and Standard Chartered, Britain possesses three banks that are major international competitors and survived the global financial crisis without support from any government. They were too big to fail because their size, diversification and business model gave them the resilience required to survive a financial crisis, unlike HBOS, RBS and the recently de-mutualised building societies. It is thus important to recognise the differences as well as the similarities between banks when introducing legislation that applies to all, though these nuances are generally ignored by both the public at large and the media.
There are historical parallels here. Throughout the 1920s there was sustained criticism of the British banking system, which was blamed for the problems in the British manufacturing industry. Envious comparisons were made with German banks at that time, which were seen as being more supportive of domestic business. The most famous outcome of this was the identification of the 'Macmillan Gap' in the 1931 report of the government inquiry into finance and industry, in which John Maynard Keynes played such an influential role. This supported the claim that banks were failing to provide the finance required by medium-sized companies, though evidence is lacking that the Macmillan Gap ever existed. However, in the wake of the 1929-32 global financial crisis, which forced the German government to rescue its banks, the British government took no action. The British banking system emerged largely unscathed, cementing its reputation for stability. British banks were too big to fail not because of some implied government guarantee but through the resilience of their individual and collective business models.
However, circumstances today are different. Britain is no longer the large and powerful economy it was then, and so British banks have to survive in a highly competitive global economy. To meet these challenges British banks cannot be subjected to legislation that undermines their ability to compete with other banks located in jurisdictions in which such laws do not apply. The purpose of the British banking system is not simply to serve the needs of British savers and borrowers, but also to operate global businesses, and so generate highly paid employment and tax revenues. That raises the question of whether politicians and their advisers possess the knowledge, expertise and vision to create a legislative framework that will allow the British banking system to remain globally competitive or, instead, restrict its ability to respond to the unknown. Unfortunately, past experience suggests that this is not where the strength of politicians lies. Once in government there is always a temptation to intervene in financial matters for some temporary party-political advantage. In 1997 the incoming Labour government abandoned direct controls over the setting of interest rates because of past manipulation. In 2010 the incoming Coalition government established the Office of Budgetary Responsibility to provide independent scrutiny of future tax and spending plans, because of past manipulation. Though measures to curb British banks have a strong populist appeal, now is not the time to enact them.
Britain needs a strong and robust banking system to see its way through the ongoing global financial crisis and its worrying implications for the health of the world economy.
Only when the current issues of economic, monetary and financial instabilityare resolved should the structure of the British banking system be tackled. It should not be forgotten that the principal threat to global stability today is not directly the British banking system, or that of any other country, though it is through banks that any crisis will manifest itself. The cause of current global problems lies with the Euro, which was the creation of politicians who believed that they could make economic fundamentals conform to their collective will. That belief has now been exposed as false but its legacy is numerous banks holding government debt denominated in Euros whose future value is uncertain. If the Euro does experience a disorderly collapse then governments the world over will be forced to intervene to save those banks that are most exposed. The alternative of not doing so is a repeat of the 1930s when all governments looked first to their national self interest, with disastrous consequences for the world economy. The result was that all suffered.Please note: Views expressed are those of the author.