Posts Tagged ‘banking’

Why Labour should fear the blowback from its war on business

15/04/2014, 11:22:40 AM

by Samuel Dale

During his doomed leadership contest David Miliband said Labour could not afford to go into the 2015 general election with no business support.

One year ahead that election and that is exactly what is happening. Labour is at open war with business with signs it is about to step up the offensive rather than build bridges.

The list of proposed interventions into industry is dizzying with almost every major sector targeted.

I’m told Labour is planning a policy blitz on no fewer than eight sectors ahead of party conference later this year. It is part of an ambitious agenda to significantly boost consumer rights and hand power back to consumers and away from huge corporations. 

Ed Miliband positions himself as US President Teddy Roosevelt breaking up monopolies and boosting competition. His modern incarnation has been called many names from pre-distribution to progressive austerity or socialism with no money. In 21st Century Britain let’s see what Miliband is actually proposing in your crucial industries.


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

21/12/2012, 01:58:28 PM

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.


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Labour’s policy on banks shows how little politicians (and economists) understand the business

03/09/2012, 08:59:24 AM

by Paul Crowe

The summer break is over, the kids are headed back to school and in the business pages it’s as if nothing has changed: there’s another investigation into Barclays, this time over dubious “consultancy” payments to the Qatar fund that bailed them out in the crash; RBS is under fire over pay, this time a £3.2m golden hello to their new head of retail banking and Libor investigations continue to cast a shadow over all of our banks.

The banks need to be taught a lesson. It’s almost a self-evident truth in the current political debate. The Tories are too hamstrung by their donors and innate conservatism to take the radical action needed and Labour seems to have grasped the nettle.

In July, the two Ed’s launched Labour’s blueprint for banking. At the heart of the proposals for the retail market is a commitment to force our five biggest banks to divest some of their branches so that another competitor can be created.

It’s an extension of what the European Commission has forced Lloyd’s to do as the price for allowing their takeover of HBOS. In this case, 600 Lloyds’ branches have been spun off. They will be taken over by the Co-op bank to create a new institution that is large enough to compete with the big players.

This approach was also championed by the panjandrums of the Vickers commission and in theory Labour is onto something. Divesting branches in this way directly reduces the market power of the existing banks, increases competition and should improve services for customers.

Except that the real world does not quite operate by the simple rules of elementary economic theory.

If the Ed’s had looked a bit more closely at what has happened with Lloyds’ divestment, they might have arrived at a rather different conclusion.

Based on Lloyds’ experience, the real barrier to market entry for new suppliers will not be tackled by Labour’s proposal.

As the Co-op has discovered, the biggest stumbling block to competing in the big leagues is IT. Even though they are an established bank, they have found that their IT system cannot safely deal with the extra volume of customers from Lloyds’ 600 branches.

The result? They are likely to move all of their customers onto the same huge Lloyds system that is currently used by the 600 branches, a process that will cost them hundreds of millions of pounds and reflected in the low price that the tax-payer backed Lloyds received for their divested branches.

As financially strong as a potential entrant’s balance sheet might be, unless a supplier is able to build and run one of the biggest and most secure IT systems in the country, the regulator is quite rightly unlikely to allow them into the market – if this system goes down, so does the financial stability of millions of people who depend on automated direct debits, standing orders and bank transfers.

Just ask NatWest, RBS and Ulster Bank customers how they felt when an IT glitch meant their accounts were inaccessible for a few days earlier this year.


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The Sunday Review: the interim report of the independent commission on banking

24/04/2011, 01:00:13 PM

by Anthony Painter

There is nothing more British than an establishment fudge. And as establishment fudges go, the interim report of the independent commission on banking (ICB) is an absolute belter. It lays out the case for a fundamental reassessment of the UK’s financial sector, but proposes nothing like that. It is like a flood risk report saying that only a twenty foot high concrete wall will protect a town from flooding but then actually only recommends the installation of sandbags. And given that George Osborne is in compromising mood, it will be watered down further. Get ready for the flood.

Don’t worry, the UK might get lucky. Maybe there won’t be a flood at all. We didn’t think floods happened – or we forgot. Then one did. But still, they are rare right? Well, The ICB doesn’t seem to think so:

“There is an inherent uncertainty about the nature of the next financial crisis”.

So we are not dealing with “ifs” here; we are dealing with “when”. This staggering statement, buried in section 4.173 comes after a long section on the need to protect the competitiveness of the UK financial sector. It provides jobs and £50 billion of tax revenues, after all (though £10 billion or so are from the retail operation, which presumably isn’t going to be off-shored any time soon). That is not insignificant. As we have discovered, that is not a cost and risk free income. In fact, it is highly risky and costly.

This graph helpfully provided on p.22 of the report tells us why:

In financial terms, the UK is more flood-exposed than any other nation. It may not feel this way given the massive output loss, fiscal disaster, and unemployment, but the UK was “lucky” this time. For Ireland, it was far worse:

“Had the asset quality of UK banks turned out to be as bad as that in Ireland, the hit to the UK’s fiscal position would have been significantly worse than it was”.

Oh, those Irish with their junk investments. How silly of them. Only it’s not quite like that. Financial crises don’t generally occur because people are buying junk. They occur because people are buying high quality assets that turn out to be junk. If people are buying junk then investors notice. If it’s AAA grade prime then they are relaxed. The global financial crisis occurred in no small part because AAA assets turned out to be useful only for composting.

At enormous cost, it’s all been quarantined, sanitised and disposed of now right? Perhaps. But there’s still lots of other risks that may be underpriced. An obvious example is the sovereign debt that banks hold. What happens if governments start to default on their debt just as owners of subprime mortgages started to default on their repayments?

Calamity is what happens. If Greece, Portugal, Spain, or Ireland were to default then suddenly the bonds held by German, Dutch, British banks et al are turned from prime to subprime in an instant. Mark Blyth on Crooked Timber has war gamed the shock that would be sent through the European economy. Fantasy? No actually, it’s a completely plausible scenario. The eurozone crumbles but, worse than that, the fiscal hit will be tremendous. What on earth will the Royal Bank of Scotland’s balance sheet look like if that happens and how will we keep a flow of credit to the real economy?

According to the ICB report, there are four functions of a banking system:

• providing payments systems;

• providing deposit-taking facilities and a store-of-value system;

• lending to households, businesses and governments; and

• helping households and businesses to manage their risks and financial needs

over time.

Its measures only aim to safeguard two of them: keeping the payments system going and providing deposit-taking facilities. In the event of another flood, it means that lives will be saved which is clearly a good thing. However, the damage and economic cost to the unprotected town will be enormous. If the flood is a eurozone flood, then governments will need to fiscally intervene once again if credit and lending are to be maintained (and we do have a £141billion deficit to finance as well a businesses and mortgages to finance). The question is – again one posed by the ICB – at what point does “too big to fail” become “too big to save”?

The harsh reality is that we have a financial system that would be too big to save if the flood were big enough. It is a bigger weight on our shoulders than that any on other country’s. We have broad shoulders, but they can’t take unlimited pressure.

And this is the real issue with the ICB interim report. It lays out the evidence that UK may face a financial catastrophe even greater than was experienced in 2008. And then it defaults to the traditional defence of the UK financial sector’s competitive position as an unarguable good. It has been criticised for not doing enough to promote further competition (and our banking sector is monocultured and uncompetitive), or to separate casino from utility banking. In a sense, these criticisms – though fair – miss the point also.

The UK economy and UK taxpayers may not be able to sustain the risk of a financial sector this large at all – even with better regulation. Actually, “competitiveness” may be economically calamitous. So the ICB should have been more honest with us. It should have said:

“We are recommending a 20-foot high concrete wall. This is expensive and it will cause much pain but that is our honest assessment of what it will take to protect us from the flood. It is not unreasonable if we do want to protect ourselves from what could be an adverse event that we see in the not too distant future. This needs a bigger debate than the one we are having. It is about the whole way we run our economy and requires real long-term vision, explanation, and courage. This is a choice but we don’t feel it is a choice that should be brushed under the carpet because of vocal interests or political compromise. We have experienced a calamity but it may only have been a warning. Next time we may not be able to cope at all”.

It didn’t say that. It said, it’s bad but let’s not overact. For that reason, the report is a failure. Meanwhile, Bank of England figures show lending to small and medium sized businesses falling again and the cost of finance increasing. And consumers are starting to borrow to consume more once more.

Here we go again. And did I mention the flood risk?

Anthony Painter is an author and economist.

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