Size isn’t the issue
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The Which? Future of Banking Commission, which was set up by a self-appointed consumer watchdog and a cross party group of populist MPs chaired by former shadow home secretary David Davies, made its recommendations last week.
The timing of the deadline is guaranteed to generate a lot of column inches ahead of the expected announcement this Wednesday that the Bank of England will take control of macro-prudential regulation.
That development will tilt the balance of power within the Tripartite Authority well and truly towards the Bank of England as it, and not the Financial Services Authority, will have the job of monitoring and responding to the growth of credit and bank leverage.
In a related development chancellor George Osborne is soon to announce who is to head up the government’s Banking Commission that will determine the future structure of the UK banks.
Whoever that may be, whether it is Sir Howard Davies who started up the FSA from scratch, or perhaps Sir David Clementi who like Sir Howard was once a deputy governor of the Bank of England, one wonders if they’ll pay much attention to the wishes of consumers as expressed through the like of David Davies, John McFall and media politician turned minister Vince Cable.
The problem with the Which? exercise is that the term Commission bestows upon it a bogus degree of legitimacy that it doesn’t quite deserve. That’s not to say that its intentions are not well meaning, nor to assert that many of its recommendation are not without merit, particularly those that relate to depositor protection.
However, David Davis’s assertion that breaking up the banks is essential to prevent a future banking crisis bankrupting the country is somewhat quixotic, especially if his view is founded on the belief that in a complex and uncertain world banks can stand alone without some form of government backing.
As Anatole Kaletsky points out in his new book Capitalism 4.0, government guarantees “cannot be replaced by regulations that force banks to divest of trading activities or reduce their size…Far from representing a tough response to the banking crisis, attempts to reduce government support for financial systems will merely allow banks to enjoy implicit guarantees without having to pay for them.”
Of course there’s nothing wrong with bashing the banks –I do it often.
The danger, in the context of banking reform is that it can divert our focus from the real issue which is that the banking crisis was a failure of regulation which might have been averted if Hank Paulson hadn’t pulled the plug on Lehmans in September 2008 when again, as Kaletsky points out, “the“economic fundamentals were if anything, better than they had been six months earlier, when Bear Stearns was absorbed by JP Morgan, with government assistance, inaugurating a period of relative calm.”
Curiously, Northern Rock wasn’t allowed to go the same way a Lehmans, not because it was too big to fail but because what its failure would signal to savers in other banks and building societies in the UK and because of the negative reaction it would generate around the world.
Lehmans wasn’t that big either, nor did it have any retail depositors, but it was at the centre of a complex web of global deals that were looking increasingly uncertain so when Paulson let the bank go to the dogs, the knock on affect was a financial disaster.
