Unholy alliance

It appears that Angela Knight, head of the British Bankers' Association, thinks that now is not a good time for structural reform of the banks to make them less dangerous to life and liberty in the event of their failure.

It also appears that John Cridland, chairman of the Confederation of British Industry, thinks the same.

Knight argues that reforming the banks now, when the economy is dodgy, the stock market is volatile and the Eurozone is imploding, would delay economic recovery. She wants banks to concentrate on making money so that they can "pay taxpayers back".  Implementing structural reform to reduce risk can come later, apparently.

That's bonkers. We are facing a banking crisis that could make Lehman look like a minor flurry. The imperative to reform banks to ensure that they can fail safely has never been stronger. Delay economic recovery? Disorderly failure of unreformed banks wouldn't just delay it, it would cancel it for a generation. And how come paying back taxpayers has suddenly become so important? It hasn't been exactly high on banks' agendas for the last three years.

Now, I am by no means convinced that the reforms proposed by the ICB will have the desired effect of making the banking system safer. I think they are half-baked, to be honest. I have written about this extensively, most recently here.  But to leave things as they are is the worst possible option. The ICB's recommendations, weak and flawed as they are, are better than nothing.

Knight's opposition to reform is no surprise, really. She speaks for the banks. The banks don't really want to make any changes that mean they will make less money.  So this is simply the latest in a long line of attempts to derail the process of reform. 

What is more surprising is John Cridland's support for her views. According to the Guardian, he fears that introducing a retail ring-fence will "stem the flow of credit to businesses".

Amazing. So he fears that the banks won't be able to raise the extra capital they need to reduce the risk of catastrophic losses from dodgy lending, so will have to stop lending - not that they were doing much anyway. Maybe he thinks (hopes?) that bank lending isn't dodgy any more, so there's no need to make it safer. Or has he bought into bank scaremongering? They have argued from the start that retail ringfencing and higher capital requirements will reduce the availability of credit. I dispute this. I see no reason why ring-fencing should reduce lending - unless, of course, banks can't raise the extra capital required. Higher capital requirements do increase the cost, of course. But that's already happening: banks have already increased the spread between borrowing and lending rates to enable them to retain more profits without reducing shareholder dividends.

Whatever the reasons, Cridland's objections are as specious as Knight's. And there seems to be a distinct shortage of common sense around.  Yes, the economy is fragile. But the risks to the banking system are the single greatest threat to economic recovery.  Some sort of reform - even a half-baked one - is urgently needed. The Government should ignore both Knight and Cridland and get on with the job.


  1. Will Vince be the champion for change?

  2. Doubt it. He's still stuck in the 1950s. And the banks don't want any change at all. I will be amazed if anything very constructive happens.

  3. How about this as a way to regulate banks.

    1. Scrap quite a bit of the current regulation designed to protect the financial system. This is done because after what follows we won't need so much.

    2. Prohibit Banks from directly paying Dividends to shareholders and/or excessive pay to employees. By excessive pay I mean a simple multiple of median earnings. I would suggest 4 or 5 as a suitable multiple.

    3. If Banks want to pay Dividends and/or high salaries it works like this. Suppose megabank wants to pay £5bn in Dividends and 'excess' Salaries. It goes to it's lead regulator's government (e.g the UK Treasury) and gives them the £5bn. In return, the bank receives £5bn of 30 year government bonds. The bank sells the Bonds and uses the money as it sees fit.

    BUT, there is a catch. The bonds have a provision in them that, if the bank needs a bailout at any time the bonds are converted into equity at an unattractive rate. The government then injects capital into the bank equal to the value of the bonds.

    The beauty of this is that in the event of a bailout the funds come from the bank's own shareholders and highly paid employees. And any bank that wants to pay high salaries and dividends has to convince the market that it will still be around in 30 years otherwise it will have a real problem selling those bonds.

    Prudent, transparent, well run banks will be rewarded.

    Opaque and risky banks will find it very difficult to pay out profits until the market is sure that they are real.


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