The Vickers review – 2 What do we want from a bank?

One of the reasons banks in the UK are so unpopular is poor perceptions of the service they collectively offer.

Small and medium sized enterprise can be frustrated by the apparent lack of interest in them. The branch bank Manager no longer seems to have the power to develop a relationship and make intelligent judgements about credit needs and risks. Regional centres pursue box ticking exercises evaluating credit risk based on numbers in business plans, which may make mistakes both ways. The banks are inclined to lend to the good business plan designer, which may not be the same thing as the successful entrepreneur.

Individuals can be frustrated at the short opening hours of branches, not designed to help those with busy jobs. Counter queues can be irritating. There is not the same personal relationship between branch manager and customer that used to prevail. Despite having access to large amounts of personal financial information, banks are often bad at deciding what additional service to offer a client, and bad at forseeing problems with solutions that might work. People get unhappy about fees and charges.

There should be economies of scale in banking, but there can also be diseconomies. If salary structres reflect the overall size of the bank, individual salaries might be high to run good value individual or small business banking service. If a bank’s business section can make mega fees out of the largest companies, working hard for small fees from small business may seem less worthwhile. Seeking to streamline small business services too much to cut costs can simply remove the necessary personal judgements and relationships which customers want.

There has been a lack of choice in UK retail banking for some time, made worse by allowing mega mergers in the last decade that has cut the number of potential competitors on the High Street. Barriers to entry are large, given the costs of setting up a branch network and accumulating the capital needed to back a sensible bank. The Review should examine the scope for allowing more competitors in the UK market. Most observers agree HBOS and Lloyds should not have merged,. Maybe this should be revisited. New competition guidance could make it clear that future mergers of larger UK High Street banks will not be welcomed. We need to revisit the rules and ease of setting up new banks in the UK, to ensure proper competitive challenge. There is room for improvement of current customer service.

There is also a problem over the availability of lending for small and medium sized enterprises. This is the result of the current regulatory vogue to demand more cash and capital at the wrong point of the cycle. The Regulators have lurched from demanding too little cash and capital during the boom, allowing banks to become too risky and unstable, to demanding too much cash and capital at the trough. This makes banks unwilling to lend money to smaller and riskier customers as they see it. More of their cash and capital is needed to lend to the government, as lending to government counts as a low risk activity, leaving them with a stronger balance sheet in the eyes of the Regulator. The sensible wish to increase cash and capital reserves has led to a dramatic strengthening of bank balance sheets in the last year. The Regulator should now delay demanding further improvements, until the economy has hown decent growth for a a year or more.

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12 Comments

  1. nonny mouse
    Posted September 11, 2010 at 9:59 am | Permalink

    You would think that the lack of banking opportunities for SMEs would present a market opening for a new entrant to the banking market. Of course, the risk is higher, but with a higher fee structure and some way of spreading the risk there should be a way of making money in this sector.

    What are the regulations for setting up a bank? A new provider would not have a retail presence but could use an online store front to attract business and keep costs low. Maybe a regional system where an account manager visits businesses at their offices instead of making them come to the bank would work, at least for the initial consultation.

    I can't believe that nobody has thought of the idea. If there is nobody willing to fill this gap in the market then either the regulations are too strict or the risk is too high.

    • David Price
      Posted September 13, 2010 at 2:02 pm | Permalink

      Zopa is an example of what you describe however it handles predominantly personal loans. Each of us "savers" is essentially a banker in the the sense that while Zopa do the ID and credit checks we set the interest rates we want.

      There is some SME lending but this is to PRIME borrowers, people who have been vetted by Prince Charles' charity.

      I would like to see a similar setup for wider SME loans but I suspect the issue is how risk is assessed and managed and by who. I did talk to an accountant who ran a local entrepreneur club but he wasn't interested unless the investor was willing to put up in the order of £300K.

      CONTINUED …

      • David Price
        Posted September 13, 2010 at 2:02 pm | Permalink

        … PART 2

        If you can crack the risk assessment issue I firmly believe the Zopa approach is the way to get more people investing in the SME economy. You need competition against what banking has become, not just individual banks and Zopa provides very good returns for the saver/investor where the highest grade borrower band is taking up loans for more than double the rates a saver would get from a high street bank.

        The difference is that instead of some MBA chancer making excessive bonus from risking my money I am getting a very good return, currently double the cpi inflation rate.

        I suggest the politicians stop pandering to the bankers who if they didn't cause the crash certainly profited at our expense. By all means promote an environment that facilitates a financial industry but also open up ways for true competition that encourages savers and investors to to directly and simply invest in UK commerce and industrym without the army of middle men. For a start, there is less risk of the mass of savers emigrating than the small number of greedy prima donnas.

  2. THE ESSEX GIRLS
    Posted September 11, 2010 at 11:28 am | Permalink

    John – as responses to your blogs have been a bit light recently (Mr Hague – 97- excepted!) may we interject with a brief word on the David Kelly matter?

    Like so many others we hope that a decision will be made to conduct a proper Coroners’ Inquest as this is said to be the first and only time that the process has not been conducted. Further fuel to the conspiracy theories is the result.

    With respect to Dr Kelly’s widow and family the principle must take precedence over personal anguish; the circumstances surrounding all sudden deaths are traumatic in our experience. Indeed one of our group members was employed and closely involved in this unhappy subject.

    CONTINUED BELOW

  3. THE ESSEX GIRLS
    Posted September 11, 2010 at 11:29 am | Permalink

    CONTINUED FROM ABOVE

    We were always concerned that the family so readily accepted Lord Hutton’s verdict of suicide when in our experience, without a letter from the deceased or very strong signs in advance this is the last decision a family wants to hear. We do wonder if the government of the day, wishing to close down the matter, made any arrangements at the state’s expense to compensate the widow and family if there was a life policy in existence.

    The whole situation remains murky and we do hope that the Attorney General and the Justice Minister reach an early and justified decision to re-open the matter.

  4. @pperrin
    Posted September 11, 2010 at 11:47 am | Permalink

    I know hardly anyone who really dislikes their high street bank. Money goes in is kept safe and comes out as required (direct debit, cash point etc). Occasional admin errors, but thats just statndard 'customer service' stuff.

    Main conflict is where customers think banks are there to 'invest' in them or their business rather than just lend money at a profit.

    Basic money lending is pretty easy – investing is hard (just look at the recently failed credit unions).

    The only reason people don't like 'The Banks' is because they blame 'The Banks' for taking millions of pounds of taxpayers money, instead of blaming the idiotic government that handed our money over to them.

  5. Gideon Mack
    Posted September 11, 2010 at 12:39 pm | Permalink

    The banks are collectively seen as being owned by the public (not all are) yet they show no loyalty to the public nor do they pay themselves (public perception) in relation to their worth.

    The government (previously Labour and the current mongrel party) seem to roll over and show their pink under bellies to the bankers – you all are culpable.

  6. Alan Wheatley
    Posted September 11, 2010 at 12:57 pm | Permalink

    There is a definite need for more competition. Perhaps what SMEs need is a SME bank.

    There is also a need for more enterprise. For instance, compatible with on-line banking would be an on-line bank employee with whom it would be possible to book an appointment and conduct a face-to-face meeting using video conferencing.

  7. THE ESSEX GIRLS
    Posted September 12, 2010 at 12:42 am | Permalink

    We were perplexed this morning to hear on Radio 4's 'Money Box' Mr David Hartnett, the Permanent Secretary at HMRC, try to take an aggressive stance on the latest problems in the department.
    We were then totally gobsmacked that he felt a letter of complaint or query from on average 1 'customer' in 'only' every 44 was a satisfactory record.
    Just how long does he believe that the Chief Executive of a supermarket group or an airline would survive with a similar customer complaint level?

    We understand that tonight he has been forced, quite rightly, to issue a more conciliatory statement but it doesn't alter the way he obviously feels and runs his department and we wonder (what the future holds for -ed)Mr HARTNETT (after-ed) his woeful outburst and even more dreadful track record.

  8. Peter T
    Posted September 12, 2010 at 1:05 am | Permalink

    I know that it not just the banks fault but their treatment of savers is appaling. It should be noted that any pensioner with a government cash ISA supposed to help savers is, in effect being cheated. No bank would expect a return of less than 0.5% on monies lent by them although this is the sort of return the bank gives to its investors in cash ISAs. This is unfair in every way and I had expected our new government to rectify this injustice.

  9. Mark
    Posted September 12, 2010 at 3:10 pm | Permalink

    Yesterday I had to queue for 3/4 hour to be served at the local branch of my bank. While I was waiting, I was treated to continuous advertorials on their plasma screens for the bank's products, including such gems as "get on the property ladder with our mortgages" (probably not available currently, and not good advice in the face of likely price falls). As the adverts for another bank imply, most banks consider how to try to take a slice of every possible activity of their customers, however inappropriate that may be: they effectively regard retail customers as professional counterparties, who should be capable of evaluating an interest rate swaption using the latest derivative models that require degree level stochastic calculus and fast computers.

    Most retail customers need fairly plain vanilla banking at low cost. Many of them need impartial financial advice on such matters as house purchase, pension provision and insurance. Impartial advice is hard to come by, especially from retail banks. Perhaps we have lost too many mutual institutions who were unable to compete with highly geared banks – a level playing field on mortgages to tried and tested mutual standards might help.

    We used to have specialised merchant banks that dealt with business banking needs who diversified their lending and fund raising through marketing new bond and equity issues across industries. These have been swallowed up. Almost the only specialised banks that remained were purveyors of mortgage finance to narrow sectors of the property market based on short term wholesale financing and packaging of MBS. The banking risks have emerged in precisely the assets that Basel II regarded as safest: government bonds and property.

    Banks have become risk warehouses, selling themselves as marketplaces of instruments that allegedly help to complete markets by offering trading opportunities in contingencies that were not previously traded. Closer analysis suggests that the instruments developed have been motivated more by serving the needs of the banks to navigate rules based regulation, or to promote a contract where they have a competitive advantage through greater insight than their customers. In the mean time, the ability to command the flows of large sums of money through markets millisecond by millisecond produces oligopolistic outcomes.

  10. Socrato
    Posted September 14, 2010 at 3:16 pm | Permalink

    The whole deal about a review is that it accurately establishes facts, apportions blame where due and proposes changes that will overcome shortcomings. The central point to remember with the crisis was that nearly ALL parties, central banks, regulators, investors, acted in concert in a pro-cyclical manner. Not one fulfilled any semblance of the counter-cyclical policy (during the build-up and in the aftermath) required to cool booms and mitigate the worst effects of busts. The fact is one can review all one wants but the genesis of the problem has more to do with incentive structures than anything else. I recently saw an old speech by William McDonough, a design guru, who said that the state and its machinations essentially represented a 'Guardian' function – slow moving in nature, ill equipped to move at the required speed, but retained the power to write law. In contrast the Business function was fast moving and efficient, based on trust (you wouldnt be in business if your customers had no trust in you or your products etc). The problem he argues is that when business gets involved in the Guardian function – we have the worst of all outcomes and similarly when the Guardian becomes involved in the business function similarly bad outcomes arise. Sticking to the banking sector story (though this can be seen industry-wide)- its clear that lobbying of politicians etc by the business groups – in this case banks both on Wall Street and in Europe effectively silenced (or drugged) the Guardian function and worse still really co-opted it. This is really why we have the problems we have. It can also be seen in other sectors and activities of economy and society. My feeling is that we need to act consistently – else we will set into motion events which will have other dire consequences – such as risking the primacy of our financial sector (if we have not already done irreparable to it). In the words of Mr. McDonough, regulation represents design failure. The plethora of regulation attests to this. But then again, we didn't really design this system as such. It has evolved in this fashion, and become particularly troublesome for everyone now largely due to this interference from the business function in the guardian function. Instead of looking for more piecemeal, incremental and systemically inconsistent action, why can't we think about the bigger picture? Basically it will all have to be redesigned anyway – whether its basic social contract between governments and constituents, pension arrangements, work and lifestyles, health, the environment, externalities and energy/resource usage.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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