Good Banking

In the light of an apparent return to business-as-usual in the financial sector, NEF organised a banking summit in response to growing public dissent about the conduct of the banks, and to address the too-narrow remit of the Independent Commission on Banking (ICB), also known as the Vickers’ Commission.

Three years on from the full outbreak of the banking crisis, a unique range of leading figures from academia, finance, politics, the law, consumer and civil society groups gathered in London, alarmed at the failure of banking reforms so far. Over 100 experts representing more than 60 organisations attended to address the question: ​‘what would a good banking sector look like and how do we get there?’

The context for the summit was set by government inaction, and a range of other disturbing trends and factors including:

• Stepping back from the full separation of retail and investment banking, in which retail deposits are not used in any way to underwrite the activities of higher risk investment banking, and considered by many across the political spectrum to be an essential reform to build a safe and useful financial system. The Chancellor, George Osborne accepted the interim proposal of the ICB to ring-fence retail from investment banking functions. It was the first sign of awareness from government that structural reform of the banking system is necessary. Ring-fencing, however falls short of such reform.

  Global retail banks will still be large, complex beasts, and ring-fencing will not address the ​‘too big to fail’ problem, with its costly public underwriting. Retail banks will also still be able to make a range of high risk investments, and unless there is scrutiny of the balance of assets they are allowed to hold, they could still represent a major public liability. For example, the financial writer John Kay suggests that retail banks should be forced to hold 90 percent of their assets in the form of relatively safe business loans, residential mortgages or government bonds, which would also give positive help to the economy.

  Even under ring-fencing, capital can still be moved between the subsidiaries of investment and retail banks, as long as the capital held in each subsidiary stays above a certain level. That means again that taxpayers’ guarantees will still, to some extent, be subsidising casino banking.

• The absence of proposals sufficient to change the culture of excessive remuneration, itself evidence of surplus profit generation and lack of competition
• A misunderstanding by the Commission of the implications of modern money creation which exposes the system to endemic instability, and which further leaves the public purse out-of-pocket
• The tolerance of continued risk taking for the disproportionate benefit of a few, underwritten by public guarantees
• Failure to resolve the issue of large financial institutions being ​‘too big to fail’ and consequently presenting systemic risks. Failure to address the impact of ​‘too big to fail’ public guarantees that generate substantial private profit for which the public finances are not compensated. The unfair competitive advantage this circumstance gives to large over small banks, which further entrenches barriers to market entry.
• Inadequate measures to ensure that businesses have access to adequate credit on appropriate terms
• No sufficient remedy to consolidation within banking since the onset of the crisis given the sector’s already high degree of concentration, and the perverse nature of this outcome considering the high degree of concentration existing prior to the crisis.
• A failure of the banking system to adequately serve all areas of the UK
• A lack of consumer choice and universal service in high street banking, meaning that, as with utility companies, all citizens need a banking service and should be provided for even though some customers will be loss-making to the provider.
• No consideration of how the banking system can be rebalanced towards productive investment from its current bias toward speculative trading and blowing asset bubbles, and the consequent damage to the UK’s international competitiveness
• A failure to promote concrete policies to build a more plural, diverse and resilient financial system.

In particular, the Summit noted two issues that have been barely addressed at all, including:

• the role in the crisis of the accountancy firms and credit rating agencies
• the influence of financial lobbyists on the direction of proposals for reform and the work of the ICB

The Good Banking Summit was opened with presentations by Victoria Chick, Emeritus Professor at University College London, Chuka Ummuna MP, Shadow Minister for Small Business and Enterprise, Alex Brummer, City editor of The Daily Mail, and Will Hutton of the Work Foundation. Highlights from these can be found toward the end of the report along with a full list of attendees.

Three things quickly became obvious at the Summit. First, that within its scope, the Independent Commission on Banking (ICB) was under great pressure from financial lobbyists and, second that its interim findings suggested measures that were unlikely to succeed in their stated aims of reform. Thirdly, it was clear that the scope of the Commission was far too narrow, and therefore incapable of advocating reforms that would produce stable, safe and useful banking.

It is hard to see how any process of reform can be successful without first answering the question ​“what do we expect the financial system to deliver?” The question has not been properly asked, let alone answered, by the government or the Vickers Commission. The following definition is offered by nef:

To facilitate the allocation and deployment of economic resources, both spatially and temporally, to ecological sustainable activities that maximise long-term financial and social returns under conditions of uncertainty

Asking such questions reveals the underlying and still unchallenged free-market dogma of Vickers and the government. Social and environmental considerations are excluded, and, despite all the evidence to the contrary, the belief in the supremacy of the free-market sets artificial boundaries around what reform proposals are even admissible for consideration.

This is a reform process that not only lacks vision, but has its eyes half shut.

The Governor of the Bank of England, Mervyn King, famously commented that: ​“Of all the many ways of organising banking, the worst is the one we have today.”

A simple summary of the Summit’s findings would be that the ICB is not going far enough on key issues within its remit, like the separation of retail and investment banking, and that if the ICB cannot extend its remit to address the other areas for essential reform alluded to in King’s comment, there needs to be another process to investigate the vital issues outside its scope.

The Good Banking Summit explored what would provide the foundations for a safe banking system that is also fit for purpose. It addressed areas including:

• Breaking up the banks: why and how it should be done
• Pay, risk and perverse incentives
• Optimal taxation: the quid pro quo for public underpinning of the banks
• Monetary reform and capital controls: understanding the implications of money creation for bank reform and reconciling issues of democracy and the markets
• Reform and implementation: addressing the influence of the Bank lobby
• Universal obligations and fair finance: how to meet everyone’s needs
• New institutional arrangements: from a Post Bank to a Green Investment Bank, what new banking architecture is needed?
• Localisation and competition: for business and industry needs, are banks fit for purpose?
• Banking for economic transition: are banks fit to finance current major challenges like the rapid transition to a low carbon economy?
• Assessing the assessors: addressing and correcting the role of accountants and credit ratings agencies in bank failure