Our bank­ing sys­tem is still so flawed

The Jewish Chronicle - - Business - ‘The nation needs a dif­fer­ent mix in fi­nan­cial pro­vi­sion’

FOUR YEARS have passed since the money mar­kets froze over on Au­gust 9 2007, caus­ing a credit cri­sis and the fail­ure of North­ern Rock. And it has been three years since the fail­ure of Lehman. Since then suc­ces­sive gov­ern­ments have fun­nelled £1 tril­lion into the bank­ing sys­tem in one way or an­other. Yet de­spite what the Gov­er­nor of the Bank of Eng­land, Mervyn King, de­scribes as the worst fi­nan­cial cri­sis since the late 19th cen­tury, there has been no thor­ough-go­ing in­quiry into the causes of this mas­sive fi­nan­cial fail­ure.

The Fi­nan­cial Ser­vices Au­thor­ity (soon to be re­placed) pro­duced an in­ter­nal au­di­tors re­port into the col­lapse of North­ern Rock. But big­ger re­ports, by out­side ac­coun­tants, into the mis­man­age­ment of Royal Bank of Scot­land, HBOS (be­fore its merger with Lloyds TSB) and Brad­ford & Bin­g­ley have still to be re­leased.

The Coali­tion gov­ern­ment has set up a ju­di­cial in­quiry into the me­dia fol­low­ing the re­cent Mur­doch hack­ing scan­dal, un­der the stew­ard­ship of Lord Jus­tice Leve­son. But there has been no such tri­bunal to look at the re­spon­si­bil­ity for the bank­ing col­lapse. Con­trast re­spon­si­bil­ity for the banks, is a done deal ful­fill­ing a Tory man­i­festo com­mit­ment. The In­de­pen­dent Com­mis­sion on Bank­ing, headed by Sir John Vick­ers (the re­sult of an ini­tia­tive by Busi­ness Sec­re­tary Vince Cable) has been seen by many as a po­lit­i­cal de­vice de­signed to head off more rad­i­cal re­forms at the pass.

The cen­tral rec­om­men­da­tion of the Vick­ers in­terim re­port was that the re­tail arms of the banks be ‘ring fenced’ from the in­vest­ment ac­tiv­i­ties. The goal is to en­sure that if the ‘casino’ or in­vest­ment arm of the bank makes a wrong call in fi­nan­cial mar­kets, or­di­nary de­pos­i­tors and small busi­nesses should not be af­fected. It is in­tended that this be partly achieved through ‘liv­ing wills’, which could al­low the col­lapse of one arm of the bank with­out de­stroy­ing the rest.

Op­po­nents ar­gue that this would make no dif­fer­ence. North­ern Rock was a con­sumer bank which col­lapsed and Lehman, a com­plex in­vest­ment bank.

What is for­got­ten is that North­ern Rock was run like an in­vest­ment bank. Its mort­gage loan book was se­cu­ri­tised and, like the casino banks, it was al­most wholly de­pen­dent on the whole­sale mar­kets, where banks lend to each other, for its fund­ing.

The real rea­son for sep­a­rat­ing re­tail banks from casino banks is far more prac­ti­cal. As part of a uni­ver­sal bank like Bar­clays, the re­tail arm will al­ways be the poor re­la­tion. The big prof­its are made in the ex­otic world of casino bank­ing, from for­eign ex­change trad­ing to fund rais­ing and merg­ers. The re­sult is that the best peo­ple are al­ways at­tracted to the in­vest­ment bank where the re­wards are far higher.

This leaves the re­tail banks as the poor re­la­tion. The fo­cus on the needs of con­sumers is poor and small and medium-sized en­ter­prises (SMEs) are too of­ten treated badly. De­spite lend­ing tar­gets agreed be­tween the gov­ern­ment and the banks as part of the ‘Mer­lin’ agree­ment ear­lier this year, SME groups still re­port that banks are un­re­spon­sive to their needs.

Since the fi­nan­cial col­lapse, the banks have de­manded ‘bells and whis­tles’ in terms of se­cu­rity — in­clud­ing charges over the en­trepreneurs’ homes — as the price of credit. More­over, de­spite his­tor­i­cally low of­fi­cial bank rates the com­mer­cial banks have in­creased the in­ter­est rate mar­gins.

The Vick­ers re­forms should make a dif­fer­ence. Lloyds Bank­ing Group will be re­quired to shed more than 600 branches or more and this should help to im­prove competition.

But as the re­port by the New Eco­nomic Foun­da­tion (NEF) “Good Bank­ing: Why we need a big­ger pub­lic de­bate on fi­nan­cial re­form” makes clear, the re­forms are sim­ply not ad­e­quate.

Many of the banks, in­clud­ing state-owned RBS, are still en­gaged in un­nec­es­sary risk tak­ing be­cause this is a faster way of mak­ing prof­its than of­fer­ing good ser­vices to cus­tomers.

This is per­haps not sur­pris­ing. Al­most all our high street banks are now run by for­mer in­vest­ment bankers in­clud­ing Stephen Hester of Credit Suisse at RBS and Bob Di­a­mond at Bar­clays.

We need a dif­fer­ent mix in fi­nan­cial pro­vi­sion. Among the ideas be­ing floated are bet­ter ac­cess to banks in the re­gions, the de­vel­op­ment of Amer­i­can-style mon­i­tor­ing of com­mu­nity lend­ing and de­vel­op­ment of a Post Bank. It is sheer mad­ness that Post Of­fice bank­ing is pro­vided by the Dublin-con­trolled Bank of Ire­land when the coun­try needs a net­work of cor­ner shop and ru­ral banks of­fer­ing ba­sic and sound ser­vices.

The pri­or­ity of this gov­ern­ment should be to in­no­vate rather than ac­cept the cur­rent flawed ar­chi­tec­ture. Alex Brum­mer is City Edi­tor of the Daily Mail

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