If we are serious about growth, Labour should reject today’s banking commission report

by Paul Crowe

Another day, another report telling us we need to be tougher on the banks. Today it’s the turn of the parliamentary commission on banking standards. In case you’re getting confused about which review is reporting now, this lot were set up by the government in response to the Libor scandal in summer.

The commission is a mish mash of MPs, peers and assorted others like Justin Welby, the soon to be archbishop of Canterbury. The top line of their report calls for the ring fence between retail and investment banking to be “electrified.” A vivid turn of phrase, yes, Helpful? Hardly.

For two years now there has been incessant legislative hand wringing about what to do about banking. The Vickers commission, the select committee and now this new banking commission, all speculating on the laws required to make sure the crash will never happen again.

Here’s a newsflash: ring-fencing and its associated regulations would not have stopped what happened in2007 and 2008 in the UK.

HBOS, Northern Rock and Bradford and Bingley went down without having major investment banking divisions. Bad property deals are what brought down British banking.

Rarely has so much political and economic consideration been expended on laws that fundamentally fail to address the avowed purpose of the exercise.

If the net results of commissions such as this latest one were just a couple of forests felled to print hard copies of the final report, and some talking heads ventilating on the media, then the impact would be relatively harmless.  A waste of time, and some resources, but nothing to hurt the fundamentals of the British economy.

But this isn’t what has happened.

These legislative deliberations have placed all of banking under a cloud of uncertainty, about what will and will not be permissible, the viability of current business plans and the business case for major future investment decisions.

For the banks, the road back from 2008, hard enough already, has been made much tougher by this political dithering. Share prices have collapsed by double digit margins while tens of thousands of workers have lost their jobs.

For the country the impact has been truly calamitous.

Last week an interesting set of statistics emerged from the treasury that show just how hard the national economy has been hit by the damage to our financial services industries.

If we remove north sea oil and gas, and financial services, from the national economic data, then since 2010 the economy has grown at over 2% per year.  Yes, grown.

In other words the double, potentially triple, dip recession is entirely the product of problems in these two sectors of the economy with financial services sector contracting by 12% since 2008 while north sea oil and gas has shrunk by an enormous 38%.

As a corollary, this also goes some way to explaining why employment has continued to rise while overall growth as plummeted: financial services and energy are two of the highest productivity industries. Each worker in these sectors proportionately adds more to GDP than if they were employed in other areas such as manufacturing or agriculture.

These statistics have profound implications for Labour in terms of our policy on banking.

If we want the economy to return to growth then financial services must recover. Other sectors of the economy are already growing, and energy is subject to global market fluctuations, but finance is the one high productivity area where government can have a direct and immediate impact.

Reports such as that of the banking commission fail to address the issues underpinning the crash for UK banks and undermine the prospects for future growth.  Rather than throwing away our competitive advantage in financial services with strictures such as ring fencing, we should be working to support the banks to return to robust profitability as quickly as possible.

Forget ring fencing and the various clumsy legal fixes that are mooted. Our policy should instead focus more on making the new system of financial regulation, that has broadly been welcomed across the political spectrum, work effectively.

Better regulation, less legislation: these should be the guiding principles of our policy on banking.

Lifting the cloud of legislative uncertainty would free the banks to plan, to leverage their profits from investment banking expand their retail operations, to hire new staff and increase the range of their services.

If we, as a party, want to step beyond glib slogans and actually drive national recovery, then we need to grow up about banking.  To stop reaching for easy scapegoats and look at the economic facts.

Broadly, what is good for British banking is good for the British economy. Yes there must be vigilant, flexible regulation but if we get Britain’s banks growing again then employment, tax revenues and national economic growth will all follow.

Paul Crowe is an entrepreneur and Labour Uncut’s business columnist.

He is a director of a business placed amongst the top 40 fastest growing British private companies in the Sunday Times Fast Track 100 and has worked across the banking industry.

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5 Responses to “If we are serious about growth, Labour should reject today’s banking commission report”

  1. Nick says:

    About the only sensible article on this entire site all year.

    1. Stop taxing capital. Every pound off capital means 10 pounds less to lend.
    2. Increase interest rates. Not only does it mean more money to lend, it controls inflation.
    3. Encourage peer to peer share investing.
    4. Discourage peer to peer lending. Peversely it means less lending. Each pound lent P2P means 9 pounds pulled from overall lending.

    5. Cut regulation – its just another tax. It’s a barrier to new entrants. Want to set up a new bank? Think again, its going to take you millions just to do the paperwork.

    If you don’t like it, ask yourself what are you going to cut as a consequences of not getting the tax revenues?

    60 bn a year of cuts. Then another 150 bn for the deficit.

    Then how do you pay for the off the book debts such as the 4,700 bn state pensions debts.

  2. e says:

    Surely ring fencing isn’t to stop banks failing re: HBOS NR & BB 2007. Don’t forget failing private business models are an integral aspect of a functioning capitalist economy. Indeed, isn’t the opposite true, ring fencing and associated regulation is designed to allow banks to go down, however without harm to the State/tax payer? In other words, to ensure private banks/investors shoulder the downside consequences of their risk assessments and not just the profits.

    And if this is so, doesn’t this bring us to question if any and all growth is equal in ‘worth’ – of long term sustainable benefit? Doesn’t the history of the finance sector make clear a point has been reached indicating beyond all reasonable doubt that business as usual for this important utility is not an option?

    As for whether or not the banking commission is being tough enough, personally I doubt it, I would have preferred to have seen a judge led inquiry and for the remit to have been wider, but in any case, who’s listening, we shall see…

  3. McCurry says:

    This is a good article and tells the truth. I get fed up whenever I hear a Labour politician try to blame everything on the banks. It’s just avoiding the real problems.

  4. Paul J says:

    Wow, it’s always 2004 for Paul Crowe. You know, those halycon days before the wheels fell off.

    Guess what guys? It didn’t work. Having a “robust, globally competitive” financial sector turned out to be a f*king disaster for the UK economy.

    Believe me, I was bang up for it back in the day. It seemed to make great sense. Use the profits from the City to fund public services. However, it DIDN’T WORK. It turns out that it had a gigantic, unstated, uncosted tax-payer guarantee, which crippled us.

    We need a smaller, less leveraged, more highly regulated and less politically powerful financial sector.

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