"Any bunch of politicians can bash the banks, chase the headlines, court the populist streak”, George Osborne said on Monday in a keynote speech on banking reform. “But what good would that do?” he then asked.
Little good indeed, yet it doesn’t seem to have deterred the Chancellor, who went on to indulge in a little gratuitous bank bashing himself. Less than two months ago, the Government specifically ruled out “electrification” of the ring-fence on the grounds it would create “massive uncertainty” to reopen the debate on banking reform.
But, “oh sod it”, the Chancellor must have thought since then. There are no votes in being easy on the banks, so let’s show the public we mean business. It seems to be all part of the Government’s new, daring, bolder and decisive approach to politics a change in mindset that has already seen the Prime Minister promise a referendum on Europe and may well see the Chancellor temporarily loosen austerity in next month’s Budget with unfunded tax cuts and capital spending increases. No point in being sensible and cautious if the fruits of your endeavours are only going to be handed on a plate to Labour to take advantage of at the time of the next election.
Electrification is an idea that the Chancellor has been bounced into by the Parliamentary Commission on Banking Standards. Set (KOSDAQ: 027040.KQ - news) up in the wake of the Libor-rigging scandal, even the Chancellor’s aides privately admit that the beast he created is now essentially out of control, charging around the place like a bull in a china shop and straying into areas which are outside its original remit. For better or worse, the committee seems to have determined that its function is to rewrite the banking reform agenda.
Personally, I doubt that adding the threat of enforced break-up for banks that infringe the ring-fence will in practice make an awful lot of difference, but it’s hard to argue it makes no difference at all. It’s yet another Government U-turn, and at the very least, it adds an extra layer of regulatory uncertainty to a banking system already beset by uncertainties on all sides.
Much obviously depends on the conditions which are set for exercising the nuclear option. If narrowly drawn, then this is no more than a political gimmick with quite limited impact but, if set widely, then the regulator will have the opportunity to act in a more trigger-happy way.
Either way, it is plainly going to make it somewhat harder for banks to raise more capital, and far from underpinning London’s position as Europe’s pre-eminent financial centre, it is almost bound to make it less attractive for inward investors.
It is somewhat ironic that Mr Osborne chose to make his speech on JP Morgan premises, given that the bank’s chairman, Jamie Dimon, is among the most outspoken critics of ring-fencing. Britain is alone among major economies in imposing such structural reform, though admittedly, others are thinking hard about following suit.
All that said, the banks only have themselves to blame for the current backlash. The moment they tapped taxpayers for a bail-out, they surrendered their rights to self government. The Chancellor also deserves some applause if he can deliver that holy grail of banking reform a less monopolistic payments system, making it easier for customers to switch providers. Many have tried, all have failed. I’ll believe it when I see it.
In the round, however, the messages on banking and the City are becoming ever more mixed. Regulators urge banks to raise more capital while simultaneously making it harder for them to do so. Criticised for lending far too much during the boom, bankers are now told that they are not lending nearly enough even as the capital requirements governing higher risk forms of small business lending are raised ever higher.
Royal Bank of Scotland (LSE: RBS.L - news) is told that it must axe bonuses this year in punishment for the Libor scandal, but by doing so it only floors the bit of the business investment banking - which is making all the money, thereby depriving RBS of the profits it needs to work off its bad debts. The Government wants a business it can sell back to investors at a profit, but seemingly it undermines this endeavour at every available opportunity. Again, the City is celebrated by the Government as a British success story on the one hand, but is demonised on the other for allegedly wiping 10pc off the country’s wealth (Osborne’s figure). Politics is a mass of compromises and contradictions, I know, but for heaven’s sake make up your mind.
The problem with much of the banking agenda is that it has become fixated with the rear-view mirror, or the problems of the past. It is perfectly reasonable that governments should want to bulletproof the system against a repetition of the events of four or five years back. We cannot have taxpayers held to ransom again by too-big-to-fail banks.
But the immediate focus should be not on the failings of the past, but on restoring the banking system to health so that it can play its proper role in providing credit and galvanising growth. Instead, we have a whole raft of pro-cyclical measures which only conspire to make a bad situation even worse.
Ask the Government what’s wrong with credit and it cites lack of supply. Ask the banks and they say lack of demand. Ask the small business lobby, and it says unduly onerous terms apparently incredibly loose monetary policy isn’t getting through to the real economy.
In fact it is all these things, but above all, it is lack of certainty and loss of confidence. Much has been written about the mountainous cash deposits of big companies, but a similar story is told by SMEs, which in the year to last June saw their cash deposits net of borrowing swell from £8bn to £20bn. This hoarding of cash, or reluctance to borrow, is incredibly destructive of investment and growth.
In normal times, banks create deposits by extending loans. In bad times they do the reverse; they destroy money by shrinking their loan books. Quantitative easing (central bank money printing) has succeeded in keeping the quantity of money nicely topped up, but lending has lagged money creation, so it’s not clear that QE has actually benefited the real economy by very much. Both business and household lending remains deep in the doldrums.
Banks arguably lent far too much in the run-up to the crisis ; by the same token, however, they are now lending far too little to allow for a functioning economy. Credit easing of the type being trialled through the Government’s “funding for lending scheme” promises better outcomes than QE, but it is probably not big enough to provide the kick-start credit creation really needs.
There is lots of pent-up demand out there, both in the mortgage and SME markets, but you are not going to get the banks to answer it by effectively trying to close them down. Let’s first get the banks working again. We can worry about reforming them later.