Is something wrong with the banks?

 

              As readers of this site will know, I think the worst errors that led to the Credit Crunch were made by the banking regulators, the Central Bank and the government. It was lurching from too easy to too tight money and credit which brought the banks into stress. It was the decision to pump public money into bank shares which was the last straw for a public losing patience with the government and the banks. That was a needless folly, as there were other means of avoiding depositor loss or system collapse whilst ensuring shareholders and junior  bondholders took the hit they deserved.

            The Governor’s criticisms of the banks today claim that the banks do not offer good service to customers, and are all too ready to take advantage of gullible customers with high charges and poor products. I have heard numerous specific criticisms of banks in general, which revolve around the following main points.

1. Regional and national centralised banking for business,with computer and model based analysis of loan prospects, makes it difficult for small and medium sized enterprises in each town to attract finance and the personal support of the Bank Manager.

2. Margins between lending and deposit rates are high. The costs of credit card borrowing in particular are substantial.

3. Large global banks pay their Investment bankers large sums, and seem more interested in that side of the business than the basic commercial banking on the High Street.

4. Banks do not know and understand their customers sufficiently, failing to offer the range of competitively priced savings and loans products that people would like.

             Part of the current large gap between savings and lending rates is the result of the Regulator’s demand that banks make more money to put aside larger reserves. Part of it is owing to the very low official interest rates set. The banks would say that professional credit evaluation is crucial so they do not lose too much money in future. They deny that reasonable lending prospects go without an offer of a loan.

              It is clearly true that Investment banking arms attract the best and most highly paid people, and are usually very profitable. That offends some people who do not like high remuneration, but does not in a well run conglomerate bank make it more difficult for people to get a loan or good service from the local branch business. They are two different types of business, run by different people.

           The quality of service and the prices will be improved for customers if there is enough competition in the market. It is arguable that the past government and Competition authorities allowed too much concentration in UK retail banking, a process encouraged by the last government when it allowed margers in the boom days, and when it encouraged the merger of Lloyds/HBOS in the bad days.

              The last wave of cost and price reducing competition was the advent early in the last decade of the new web based banks. Since then there has been little to match the impact of Chinese competition on industrial products, or the aggressive price cutting of the food retailers and clothing shops on the High Street. If new banking capacity could  be created or brought on stream we might find new services offered at better prices. New banks might want to allow more decision making at branch level with an improved relationship with the branch manager. They might want to use more analysis of people’s accounts to offer a wider range of cost effective services relevant to each customer’s financial position. They might offer a better deal to depositors and not force them to keep moving accounts to keep up with the best rates.

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66 Comments

  1. lifelogic
    Posted March 8, 2011 at 7:07 am | Permalink

    The banks, on property lending, have switched from lending good customers 75%-80% of value at perhaps 0.8% over base .75% fee to around 50/60% at perhaps 2.5% fees (in and out) and perhaps 4% margin probably over a fixed libor rate in the region of 4.5% and perhaps only on a 10 year repayment. Businesses can be making say £500K pa only to have it all pulled back by the banks to get down to 50% LTV so they cannot reinvest it to finish of developments.

    Interest rates are certainly not low to small businesses. The effect of the above has been to pull back millions of pounds from perfectly sound businesses forcing them to stop building works, lay off builders, delaying sensible developments & investments and selling assets that they would not normally choose to sell.

    Best to borrow from a friend and cut out these robber bank middle men. I shall avoid banks in future at all. Why pay them such a huge margin between depositors and borrowers for doing very little. They are just pointless over priced middle men.

    Get some proper competition going please.

    The government should expend the “enterprise investment scheme” to encourage this and allow some sort of guaranteed return to investors (as is currently prohibited by the rules).

    • lifelogic
      Posted March 8, 2011 at 7:29 am | Permalink

      David Cameron in his speech yesterday? “We can’t make monetary policy any looser than it is with interest rates as low as they are”. Just look at the real after bank monetary policy (see above) this is what actually matters. It is far from loose with rates from about 8% minimum and that to very good small businesses and to 35% or more for credit cards with high fees too. Many banks just pulling money back for reasons totally unrelated to risk.

      And that is if you can get any funding at all.

      • lifelogic
        Posted March 8, 2011 at 4:25 pm | Permalink

        The basis bank problem is this: Bank takes £1Billion in deposits (all guaranteed by the government deposit protection scheme). They place it on red with they win they make £1Billion if they loose nothing the government looses £1Billion.

        So unless well regulated (as they certainly were not) and their risk profile is managed the DPS is the government just giving them an open cheque.

        • lola
          Posted March 8, 2011 at 5:50 pm | Permalink

          The basic bank problem is this: bank takes £1Billion in deposists all guranteed by the government [taxpayer]… and then set to an lend out £12Bn to £50Bn (depending on their capital ratios) that they just invent out of thin air. At the same time when those customers deposit that £1Bn it ceases to be – in law – their property and becomes the property of the bank. How does that work for demand deposits then? Two people cannot have equal claim to the same asset at the same time.

      • APL
        Posted March 9, 2011 at 7:56 am | Permalink

        Cameron: “We can’t make monetary policy any looser than it is with interest rates as low as they are”

        It never was about ‘loose’ monetary policy, it was always about bailing the banks by loans or gifts (bailouts) from the government (taxpayer) on the one hand and extorted funding from the consumer (taxpayer) on the other.

        The politicians are bailing out their chums in the banking sector at the tax payers expense.

    • lifelogic
      Posted March 8, 2011 at 8:48 pm | Permalink

      One good thing the government could do is allow delay payments on vat, tax, PAYE. They did this under Labour with the payment help line but are now very very unhelpful indeed and seem to prefer to close down businesses which is in no ones interest.

  2. Nick
    Posted March 8, 2011 at 7:25 am | Permalink

    The costs of credit card borrowing in particular are substantial.

    ==================

    And this is purely a function of the level of defaults. If everyone pays back their debts, then the rates fall.

    • Bazman
      Posted March 8, 2011 at 2:04 pm | Permalink

      You don’t seriously belive that do you?

      • lifelogic
        Posted March 8, 2011 at 4:13 pm | Permalink

        High credit card rates are not high due to defaults! It is related to what they can get away with in a market where there is total lack of and competition in lending.

        Even people who will never default are being ripped off.

        • Geoff not Hoon
          Posted March 8, 2011 at 7:10 pm | Permalink

          LIfelogic, If one could see through the PLC accounts in sufficient detail we would see the enormous sums being paid in franchise fees to say Visa or Mastercard etc. As you say the debt factor is not the cause of the high rates it is like the boss’s bonus it is what they can get away with as it is (sadly) completely legal. Well it is until I become PM!!!

  3. Antisthenes
    Posted March 8, 2011 at 7:26 am | Permalink

    The FSA has encouraged anti-competitiveness as well by making it impossible for small businesses to exist in the financial sector, they have regulated them out of existence. Partly I suspect it is because for them a few large organisations are much easier to police, so less work for them, than a myriad of small ones. Even then they are pretty inept at doing that.

    • lola
      Posted March 8, 2011 at 5:52 pm | Permalink

      You really mustn’t use those three letters after the second word in your post. You know that Mr Redwoood doesn’t like bad language on his blog.

    • lifelogic
      Posted March 8, 2011 at 8:51 pm | Permalink

      Agreed they have indeed.

  4. Ric
    Posted March 8, 2011 at 7:39 am | Permalink

    I own a small business, & I have no interest in borrowing from any bank at this time. Why?because they’re all to willing to sell me out to Big Brother Government overseers. All that centralization has led to a complete loss of privacy. Forget them!

  5. Electro-Kevin
    Posted March 8, 2011 at 7:56 am | Permalink

    I think many different organisations need to stop promoting kids too early. What was wrong with the Capt Mainwaring type banker who’d worked his way up slowly and remained in his area for life ?

    There is also a huge disparity between the punitive charges levelled against customers who make mistakes and the compensation offered when the banks make a mistake.

    Last year (owing to lax bank security) I was victim of ID theft. But while the bank thought it was simply me defaulting on repayments the interest and ‘professional’ charges racked up at a rate of hundreds of pounds a week.

    For the whole of last summer I was hounded by debt collectors through no fault of my own. My holiday was ruined and I ended up going to the doctors.

    I finally proved that the bank was at fault and they accepted culpability. Their compensation to me ?

    £100 … which I’ve still to recieve four months after they’d said they were going to send it.

    Papers are now with the Financial Services Ombudsman.

  6. Mike Stallard
    Posted March 8, 2011 at 7:57 am | Permalink

    Simplicity:
    Banks are about lending and borrowing money.
    Everyone knows that to do this successfully you have to know and assess the person or organisation which you are working with.
    Local banks therefore need a good assessor. In the past he was called the Manager.
    International Banks need to know exactly who they are dealing with.
    Without these simple ideals, banking turns into an inefficient swindle. Good old Mervyn! Well said!

  7. BrianSJ
    Posted March 8, 2011 at 8:20 am | Permalink

    The loss of the mutual building societies under the Thatcher government is being felt now everyone has forgotten the carpet-bagging quick gains.

    • lola
      Posted March 8, 2011 at 5:59 pm | Permalink

      Freedom is hard work. It wasn’t Thatcher that went for the money in forcing BS’s to demutalise. It was their greedy and short sighted members. For the avoidance of doubt, as a member, I voted against de-mutalising the Halifax, for various reasons. One, the members were not being offered the true value of the privatised entity. Two, I had seen how the TSB had gone after it had been floated in 1986 and I reckoned the management would eventually likely cock up the Halifax in the same way. Three, I undertsand the value of mutuality. If it was too big to be a mutual then it could have beeb broken up.

  8. A.Sedgwick
    Posted March 8, 2011 at 8:22 am | Permalink

    Excellent summary, I would emphasis the totally unsatisfactory fees for mortgages. It is akin to going into a shop to buy a bunch of bananas being asked one pound for the product and 10 pence arrangement fee – how do they get away with it Mr.Government and Mr.Governor?

  9. alan jutson
    Posted March 8, 2011 at 8:23 am | Permalink

    John

    What I cannot understand is why Banks, or any other business for that matter, do not try harder to keep existing customers.

    Trying to find new business/new customers is an expensive task, masses of advertising, higher initial rates, lower initial loans etc.

    I can only come to the conclusion that not enough customers shop around at the moment, so the savings made on the stick with it at all costs brigade, subsidise and more than cover the extra cost of attracting the new customers.

    Surely the cheapest way to run any business is to retain your existing customer base, and then try to expand and gain market share with new ones, not churn it over and over again, where customers have little loyalty.

    • StevenL
      Posted March 8, 2011 at 9:50 pm | Permalink

      No? The answer is quite simple really.

      You take £100 out of your bank to buy a new coat, the £100 leaves the balance sheet of bank A (both as an asset – cash – and a liability – a debt to you) and turn up on the balance sheet of bank B as an asset (£100 cash) and a liability (£100 debt to the retailer).

      If bank A needs more cash it just borrows it short term off bank B. If bank B needs to make some loans it can just buy some that bank A made off bank A.

      They don’t need to complete for your deposits or to make mortgages to you really, they can just buy and sell deposits and loans to each other as and when needed.

  10. Peter van Leeuwen
    Posted March 8, 2011 at 8:27 am | Permalink

    For me there is a missing aspect here: the banker.
    Imagine that in the food industry people could collect 10 x their salary in bonuses, and that at the time food regulation was to be withdrawn. What kind of people would be drawn to work in the food industry. How many decades would it take before there would be huge scandals with many consumers falling ill or dying?
    I see no reason why banking (i.e. working with other people’s money) couldn’t be run entirely without any bonus incentives. Differently motivated people would rise to the top and sensible regulations would not be resisted.

  11. Alte Fritz
    Posted March 8, 2011 at 9:14 am | Permalink

    You seem very relaxed about high risk investment banking sitting in the same structure as (largely) government guaranted retail banking. This seems to me to be the root of much of our banking problems over the past twenty years. It is hard to see what any regulator could have done to prevent the problems steeming from that commercial marriage.

    Bankers vehemently oppose any form of Glass Steagall solution because this would undermine their empires and the benefits which go with them. Banks are, the world over, successfully facing down governments. That can be no better than the democratic deficit run up by the EU.

    • lola
      Posted March 8, 2011 at 6:01 pm | Permalink

      Samll, but important correction. It’s not government guaranted retail banking it’s Taxpayer guaranteed retail banking

  12. lifelogic
    Posted March 8, 2011 at 9:22 am | Permalink

    In short the banks have sucked back capital from good business to sort their other problems. This has caused huge damage to the economy and too tight money for business. Now they want to claw back their lending at base plus 0.8% and re-lend it at the new huge margins and fees circa 2% and base plus 4% min to fill their black holes.

    Holes caused by their absurd incompetent gambling elsewhere.

    • lifelogic
      Posted March 8, 2011 at 10:57 am | Permalink

      Now I see TV adverts are encouraging personal injury claims by giving away free Ipads to people starting a claim.

      Cameron needs to sort this TV inspired litigation nonsense. We cannot all make a living suing each other. We still need some people to do something useful. Litigation needs a proper balance of risk and costs to discourage frivolous claims.

      Lawyers have organised the system largely just to meet the interests of Lawyers at the expense of the rest.

      The solution is to limit legal cost to say 10% of any final award and restrict claims to sensible limits for real damages suffered and make litigants put up risk funds for frivolous claims.

      Fewer lawyers in this area is in the interests of everyone.

      • lifelogic
        Posted March 8, 2011 at 4:17 pm | Permalink

        Is it really in anyone’s interest to allow these up front “inducements” to encourage people to bring no win no fee legal claims?

  13. Simon
    Posted March 8, 2011 at 9:28 am | Permalink

    5. Tax payer expected to underwrite risky activities which have no social benefit

    E.g. losses on synthetic credit default swaps .

    For the worst example of appropriation of public money look at the bail out of AIG to enrich Goldman Sachs .

    6. Old style bank manager no longer exists .

    Culture which created them has been swept away and would take decades to re-establish .

    7. Banks too big

    Both to fail and to be bailed out again .

    8. No separation of retail and investment banking

  14. Gary
    Posted March 8, 2011 at 9:41 am | Permalink

    The problems with fiat fractional reserve banking are systemic and over time unsustainable. Never in history have these systems NOT utterly collapsed. It is a mathematic certainty that debt pyramided geometrically cannot be sustained. In a system where new money is always created for every loan and when it is certain that not all loans will perform, then you absolutely grow the money supply faster than you grow the economy. Inflation is guaranteed, and so is eventual collapse. Not to mention that the interest on the loan must also be paid out of the loan, regardless if the loan performs or not. This sucks cash out of productive enterprise, eventually starving them of cash. This cash accrues to the middleman, the banker, who created no wealth, whose sole contribution was to conjure money out of thin air and collect rent on it. We are 40 years into this latest incarnation of fiat, since Nixon deaulted on gold in 1971. Historically , this is about the maximum lifespan of these systems.

    • lola
      Posted March 8, 2011 at 6:02 pm | Permalink

      Brilliant and accurate and exact.

    • APL
      Posted March 9, 2011 at 11:43 am | Permalink

      Gary: “In a system where new money is always created for every loan and when it is certain that not all loans will perform, then you absolutely grow the money supply faster than you grow the economy. Inflation is guaranteed, and so is eventual collapse. ”

      I agree, but the collapse is usually just a recession every five or so years, that recession is simply the overhang of credit being corrected.

      The situation we are facing now is orders of magnitude greater, the politicians have tried to prop up the bankrupt banks with tax payers money thus exposing soveriegns to risk of default. The risk should have stayed with the private banking organisations. Private – should mean the risk of private gain AND private loss.

      • Gary
        Posted March 10, 2011 at 10:00 am | Permalink

        these periodic credit contractions are euphemistically called the Business Cycle. The problem is that the banks and govt wont allow proper restructuring ie liquidation of bad debt, and we have smaller contractions building to an eventual fatal contraction when the pent up bad debt engulfs the whole economy. This happens throughout history. Another term for these large waves is the Kondratieff Cycle. The bailouts solved nothing.

  15. D K McGregor
    Posted March 8, 2011 at 9:42 am | Permalink

    You do not mention the credit rating agencies ,who are still the paid for contractors of the banks , and who through their connivance/compliance created what became gold from base metal. Tell us what you propose for them , a few words on the coalitions view on them would be appreciated too.

  16. Denis Cooper
    Posted March 8, 2011 at 9:58 am | Permalink

    One could list multiple causes for this disaster, but I would attach little blame to Mervyn King and much blame to this lesser known man, Sir Callum McCarthy, the first chairman of the FSA:

    http://en.wikipedia.org/wiki/Callum_McCarthy

    I don’t agree with attempts to scapegoat the governor of the Bank of England, when responsibility for the prudential supervision of banks had been taken away from the Bank and given to the FSA.

    Just how catastrophically bad the FSA was at doing that job was shown up again yesterday with this article:

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8364907/RBS-crisis-FSA-wasnt-worried-as-the-storm-approached.html

    Apart from correctly apportioning blame to state institutions and their personnel I would blame the widespread practice of rewarding senior executives with large bonuses on the basis of their short term performance.

    However loudly Brown claimed an end to boom and bust it was always obvious that he couldn’t abolish the economic cycle, a cycle with a period which is typically about a decade but which is sometimes much shorter and sometimes much longer, and yet the bonuses for senior managers were (and still are) being arranged through so-called “Long Term Incentive Plans” running for just a few years.

    Until senior managers are incentivised on a multi-decadal basis, ie with most of their rewards determined by the performance of the business over a period much longer than the economic cycle, say twenty or thirty years, we’ll just have the same problems over and over again.

  17. Winston Smith
    Posted March 8, 2011 at 10:39 am | Permalink

    On investment banking profits I hear and read very little analysis of how they make their money. Investment bankers are paid huge salaries and bonuses because they make huge profits for the bank. They make these profits trading on various markets. I assume the margins are high because there are limited competitors and restricted access to the markets. Part of the profits are the exorbitant fees charged by the banks for handling client money. This is one area where the regulator must act to give better value to investors. I want to see the Govt investigate the industry in detail and recommend ways of opening up the markets and sharing the profits across a much wider range of people. Increased competition is essential.

  18. waramess
    Posted March 8, 2011 at 10:41 am | Permalink

    This of course is a big one. How to get growth when, for starters, the banks are not lending? Why are banks not lending now when only four years ago they could not be stopped from lending?

    Maybe you are right and the new liquidity requirements are restricting their capacity. Certainly Keynes seems to have been wrong: that bringing interest rates down to zero would conserve the availability of investment funds during a recession.

    No doubt the government has crowded out the private sector with liquidity requirements but bringing interest rates down to a false level of zero has not helped either. How can a bank realistically set a value on its asset security if it has absolutely no idea where interest rates will be in a couple of years time? Where will house prices be if interest rates rise to eight percent? Where will a companies earnings be with an increase in interest rates to five percent in the short term.

    We are livng in a Keynesian nightmare presided over by a Conservative government and if it is not brought to a halt then the nightmare could go on for far longer than the Japanese experience and it could get a lot worse.

    Osborne risks making Brown look like the good guy.

  19. English Pensioner
    Posted March 8, 2011 at 10:44 am | Permalink

    I still remain convinced that ordinary retail banking and investment banking should be separated. Had this been so, rescuing the retail banks to protect people’s savings and keep day-to-day business life running, would probably have had public support. If investment banks had “gone to the wall”, it wouldn’t be the end of the world, and perhaps they would have learnt to be more prudent in the future. As it is, exactly the same could happen again, particularly with governments urging banks to lend more. It’s difficult to have both “prudent lending” and “more lending” at the same time!
    The regulators need a new approach; the “tick box” mentality, which is almost universal through government regulation simply doesn’t work in banking or elsewhere.
    In a NHS hospital recently, a friend of mine complained about the ward cleaning, the “nurse administrator” looked at a list and said the cleaner had been in twice as required, so all was well. But no one checked the job was correctly done as no tick box required that.
    And I suspect it is exactly the same with banking regulation.

  20. Michael Read
    Posted March 8, 2011 at 10:45 am | Permalink

    You’ve arrived at the same positon, via a different route, that the existing bank structure has to be broken up.

    The scale problem, as in too big to fail, also means that new entrants are precluded from entering the market because of the large elephants already there.

  21. StrongholdBarricades
    Posted March 8, 2011 at 11:16 am | Permalink

    In a UK where 1% of the population fills 25% of the government coffers, I really wonder where your economic reforms are going.

    The Coalition has now been in place for nearly 10 months but all we get is bleating over the “banks” situation.

    In a world of honesty, and for extreme clarity, this government should publish everything about the 3rd Way, and all the documents about the bank bail outs, all the correspondance (assuming Labour didn’t just do it from the sofa), and the exact situation that faced them.

    Then maybe the Coalition can actually bring forward some ways of ensuring that the UK has competitive banking by giving more licences

    But before you do anything else, you have to enshrine in law that those people who run the banks, and supposedly take those huge risks for that enormous pay, are personally liable for their governance both now and for a period into the future after they leave. All banks can fail, so lets pull the comfort blanket off them.

  22. forthurst
    Posted March 8, 2011 at 11:23 am | Permalink

    The repeal of the Glass–Steagall Act was a ticking time bomb. The British financial establishment were caught totally unawares when financial terrorists smuggled ‘financial weapons of mass destruction’ into the heart of the City and planted them in the portfolios of our banks whilst destracting their attention with lavish hospitality and promises of great (unearned) wealth.

    Before the ‘Big Bang’, the City had stockbrokers, stockjobbers, High Street Banks, Merchant Banks, Commodities traders etc, then after, one-stop-shops, many of which were now American owned. As a country are we better off when now we have a small number of too-big-to-fail ‘banks’ in which conflicts of interest and temptations for insider trading must be extraordinary and where the r & d and manufacture of financial materiel is maintained round the clock?

    Banks should be the servants of the Capitalist system and not the masters and they should not be allowed to hold governments and taxpayers to ransom and it is up to the British government to ensure that whatever the financial (word left out) fraternity of the USA deploy in the future, that the people of this country will not be taken for suckers again. If that means breaking up the banks, then so be it.

  23. sm
    Posted March 8, 2011 at 11:38 am | Permalink

    You mean whats wrong with banks and politicians and regulation- potential conflicts of interest seem to abound tied up with inflation of the money supply.
    A lot more transparency and simplicity is needed where public good and funds are at risk.

    Too big,too few,too complex, too big a risk to the markets they work in by virtue of their size and trades.

    1) Banks big bondholders/creditors are not subject to capitalism and failure nor were the senior management.
    2)Fractional reserve banking.The create debt money based on a multiplier and hold small reserves ‘share capital’ hence the potential runs on banks. When they lose money by debt deflation they have little alternative but to shrink or risk a run.
    3) They are big enough to move markets to extremes, it can prove of short term benefit on an upswing to inflate a particular asset as long as you trade out quickly.
    Even short term governments can benefit reaping short term higher taxes and debt fuelled GDP growth.
    4) Large powerful risk banks seem to have captured regulators and the states captive state taxpayers (forced loss bearers). Bankers seemingly moving at ease between positions of huge influence.
    6) Simpler banking structures would allow individuals more choice and protection about who they place money with. Banks should not be able to lend money they cant afford to lose, bondholders/capital must take the complete hit. If the capital structure cant take the full hit they must be broken up and downsized. This would allow a risk approach by customers and regulators. eg self funded building societies funding local <25 year repayment mortgages from local savings would be less risky.
    7) Many smaller independent investment banks should be encouraged and allowed to operate and fail.Their capital structures should ensure the risk/reward remains with the risk capital.

    8) The limited liability structure should not be abused to allow for excessive risk, which overspills to others (well ran banks) and particularly taxpayers.

    9) Any institution taking public money or subsidies should be precluded from any dividends or bonus distributions or payrises above CPI. If bonuses need to be paid they should spinout the 'profitable part' into a seperate entity with no public support.

    Keep interest at ZIRP with QE and consequent inflation tax and which bubble pops next? Clean out the stables please but not with taxpayers money.

    • lola
      Posted March 8, 2011 at 6:04 pm | Permalink

      Seconded

  24. Stuart Fairney
    Posted March 8, 2011 at 11:40 am | Permalink

    Slightly OT but the irony of this one is hilarious, check the job title and the remuneration

    http://jobs.guardian.co.uk/job/4271238/international-director-publish-what-you-pay/

  25. John Broughton
    Posted March 8, 2011 at 11:55 am | Permalink

    John

    You say

    “That was a needless folly, as there were other means of avoiding depositor loss or system collapse whilst ensuring shareholders and junior bondholders took the hit they deserved.”

    It isn’t often that I disagree with you but I do here as regards shareholders. For example my mother preferred to hold her investment in the UK clearing banks via equity rather than by deposit.

    Depositors, as we know, are protected [to a certain level] whereas shareholders are not. I cannot see any justification for protecting depositors in any circumstances.

    It would be interesting to have your thoughts on this rather artificial prop for bankers.

    Reply Deposit protection helps depositors, but not bankers if the shareholders lose their money and the bank goes down.

    • sm
      Posted March 9, 2011 at 12:00 pm | Permalink

      Equity is sharecapital and is known as risk capital. This is more of a choice based on preference for risk/reward.(Even though they look at first pass low risk).

      Money is legal tender you must accept it , and what should a normal person do with it? Deposit money was protected by a known scheme, perhaps a small element of risk would be efficient. Guarantee’s only work if they are trusted.

      The guarantee arguably does help the bankers probably inadvertently. They know the money is protected. The regulators know this. The government know this. Potential moral hazard dilemma and selective bonuses for failure at shareholder/taxpayers expense.

  26. Gary
    Posted March 8, 2011 at 2:03 pm | Permalink

    John, would it not be more effective to publish my posts even if you disagree with them, and allow the others to point out any perceived folly in my points than to axe them ? If there is no legal liability in my posts then i must presume that you are censoring them, with all that that implies. Thanks Gary

    Reply: I do not censor views, but do cut out libels and allegations against people and institutions that might be difficult to prove. If you place such comments in a post it slows down posting as I need to consider it and amend it.

  27. Bazman
    Posted March 8, 2011 at 2:27 pm | Permalink

    What you dealing with is an aristocracy who believe they above the law and do not have to talk to people who have less money than themselves let alone justify themselves to any government body. “What can we get away with and how long can we get away with it.” Is a very common practice in large political and business monopolies with their apologists and sycophants helping the every step of the way. The little fish being given a few crumbs to rubber stamp any paperwork. The Soviet union was sold off by small time bureaucrats for peanuts and you can be sure Communism, at least for the rich, is alive and well in Britain. The evidence is all around as the banking, MP’s Pay and local governments modus operandi scandals prove. British governments wring their hands an say there is nothing that can be done, but the fact is they are the government and can pass laws to do what they like given a consensus. If this was not true then Britain would be still in the middle ages. Toodle pip. I blame it all on the BBC and the unions.

  28. Winston Smith
    Posted March 8, 2011 at 2:41 pm | Permalink

    Hilarious! They claim they are non-governmental funded, but a quick look at the myriad of organisations, quangos and charities that fund their funders, who fund them…..show numerous government departments around the World. Also, if you look at the Open Society Foundations you will see they have moved a long way from George Soros’ original intentions to concentrate on the familiar Marxist agenda of political correctness, multi-culturalism, regulation and control. I wonder if he still funds it?

  29. Richard
    Posted March 8, 2011 at 4:54 pm | Permalink

    An major underlying problem is that there is nowhere near enough competition in the banking industry or the financial services industry as a whole.

    The barriers to entry into this market are huge and I cannot think of one new entrant for years, other than big foreign banks moving into the UK market.

    My old economics master used to say “all business tends towards monopoly” and it seems we are approaching that position in this sector.

    • Geoff not Hoon
      Posted March 8, 2011 at 7:22 pm | Permalink

      Richard, whoever was in power when BICC failed approx. 20 years ago said we need fewer but bigger banks to avoid this happening again. Their wish has come true but in the meantime the number of proper building societies has dropped by around one third, couple this to ‘only’ 4 banks is it any wonder there is nothing to choose from—it is a virtual monopoly whether the MMC say so or not.

    • Gary
      Posted March 8, 2011 at 9:25 pm | Permalink

      in free markets, all business tends to Schumpeter’s Creative Destruction of constant renewal. It is only through govt legislating protection and bailouts that monoplies grow and become entrenched.

    • Gary
      Posted March 9, 2011 at 10:04 am | Permalink

      Since we are discussing what is wrong with banking, and I contend that it is the fiat fractional reserve money system that is the actual problem, it may be illustrative to see what Schumpeter said of the anti-fiat, gold.

      Schumpeter recognized the implication of a gold monetary standard
      compared to a fiat monetary standard . In History of Economic Analysis he
      stated the following :
      An ‘automatic ’ gold currency is part and parcel of a laissez- faire and free-
      trade economy . It links every nation’ s money rates and price levels with the
      money – rates and price levels of all the other nations that are ‘ on gold . ’ It is
      extremely sensitive to government expenditure and even to attitudes ork
      policies that do not involve expenditure directly, for example , to foreign
      policy , to certain policies of taxation , and, in general , to precisely all those
      policies that violate the principles of [classical ] liberalism . This is the reason
      why gold is so unpopular now and also why it was so popular in a
      bourgeois era . It imposes restrictions upon governments or bureaucracies
      that are much more powerful than is parliamentary criticism . It is both the
      badge and the guarantee of bourgeois freedom — of freedom not simply of
      the bourgeois interest , but of freedom in the bourgeois sense . From this
      standpoint a man may quite rationally fight for it , even if fully convinced of
      the validity of all that has ever been urged against it on economic grounds .
      From the standpoint of etatisme and planning , a man may not less
      rationally condemn it , even if fully convinced of the validity of all that has
      ever been urged for it on economic grounds .
      — Schumpeter , History of Economic Analysis

  30. Kenneth
    Posted March 8, 2011 at 6:48 pm | Permalink

    I agree with all your points Mr Redwood but would amplify the point about the lack of competition in the retail banking sector.

    Poor customer service and other shortcomings are often symptoms of a distorted market or a monopoly. The retail banking sector feels to me like a cartel, with the government being the ringmaster.

    The more regulated the banks become, the higher the hurdles for new players, the more cartel-like the sector becomes. Regulations tend to force banks to work in the same way, stifling innovation and creativity.

    This means the competition is not about attracting the most and best customers but it is about how to comply with the regulations at the least cost. Banks are increasingly working to rule and the more rules that are introduced the poorer their performance will become.

    Attempting to micro-manage banks is self-defeating and is making the situation even worse.

    I believe we have a choice: we

    EITHER

    prune the regulations to allow real competition (and perhaps force the break up of the biggest players to simulate real market conditions): we will end up with a greater number and variety of banks but will have to accept occasional failures.

    OR

    we nationalise retail banking and forget trying to have a free market.

    The current closed shop, protected by an ever growing rule book (and a government that is happy to see the differential between BoE rates and real rates re-fund this near cartel) is the worse of all worlds.

  31. Martin
    Posted March 8, 2011 at 7:34 pm | Permalink

    Part of the problem is defining where casino banking and retail banking start and finish.

    Is a new widget factory in a high tech sector casino or retail banking?
    Is trading in wheat future contracts casino or retail banking?

    What percentage of shareholders funds should be invested in single sectors/projects?

    I can’t help but think that strong long term shareholder governance has to be part of the answer.

  32. Jon Burgess
    Posted March 8, 2011 at 8:12 pm | Permalink

    It’s easy to see now after the event, but the biggest mistake was bailing out Northern Rock, which should have been allowed to fail. But that would have meant letting down all those Geordie Labour voters. Oh, and then you’ve got Lloyds being railroaded into a merger with HBOS to er… avoid HBOS going under and letting off all those Scottish Bank workers. So you could argue that Britain has it’s debt mountain to save the face of a few Scottish and North East Labour MPs.

    But then the coalition could have changed the landscape by vigorously cutting expenditure, encoraging enterprise by loosening the taxation stranglehold, raising interest rates, cutting the money supply – all those conservative things that have to be re-introduced after a sustained period of socialism.

    But they didn’t and won’t, hence my contention that Labour still govern. Instead we have QE, Government stimulus, increased spending, increased taxation, virtually zero interest rates, increasing inflation, etc etc. Where did all the (small c) conservatives go?

    • Denis Cooper
      Posted March 9, 2011 at 12:50 pm | Permalink

      Northern Rock operated postal and internet accounts across the UK, so it wouldn’t have been just Geordies who were affected.

  33. stred
    Posted March 8, 2011 at 8:59 pm | Permalink

    I find M.King’s idea- that banks are ripping gullible customers off- a bit out of date. They always have. My grandmother lost her inheritance to the Midland Bank, as she trusted them to act as paid trustee when her husband died. The lot was swallowed in charges. Put it under the bed.

  34. Geoff not Hoon
    Posted March 8, 2011 at 9:24 pm | Permalink

    Sorry should say BCCI (Bank of Credit and Commerce International).

  35. Mark
    Posted March 9, 2011 at 12:15 am | Permalink

    Yes, most banks are reliant on bailout money and subsidy (the BoE reckons they subsidise UK banks by £100bn a year – see Chart 5.9 of the December Financial Stability Review). Banks have squeezed their business customers and their unsecured household borrowers. They live in fear of default from governments from PIIGS downwards. In the UK they await the unwinding of the property bubble with its inevitable consequences of repossessions that fail to cover the sums lent.

    Yesterday you castigated Mervyn King for pointing out some of these problems. He was late in doing so, but then he was not responsible for banking supervision (and he still isn’t). However, I am not sure that his ideas for solving the problem are the best, because he seems to think that banks can only operate with extremely low gearing ratios. King is plainly still very scared by what he sees. The BoE managed to go between Overend, Gurney and Northern Rock – about 140 years – without seeing a bank run. King needs to re-read his Lombard Street by Bagehot. Still, I’m not sure that replacing him with someone from the tainted banks themselves is for the best.

    It is to be hoped that Mr Ben Broadbent turns out to be a good replacement for Mr Andrew Sentance – the MPC member with the best anti-inflation track record in recent times. It is also to be hoped that what is good for the MPC is not decided on the basis of what is good for Goldman Sachs or other banks, but on the basis of controlling inflation. Goldman will have the advantage of knowing their man and which way he will most likely blow in any case, simply because he has worked there so long. It’s not an easy conflict of interest issue to solve if you believe that he is genuinely the best candidate available.

  36. Javelin
    Posted March 9, 2011 at 7:38 am | Permalink

    Starting with the gap between loans and deposits. The cost of a loan represents the risk + the interest. So if I lend to you at 10% and interest rates at 2% then the 8% represents a function of risk. The question should be, why are risks so high of a business or person going bankrupt?

  37. J leslie smith
    Posted March 9, 2011 at 9:47 am | Permalink

    I have just read a US Report that states that the UK State and Public Sector pays out 44% of the TOTAL salary and remuneration, of the whole Economy. Therefore, we have a Private Sector Payroll at some 54% and a Public one, all based on Taxes and Government Debt of 44%. Surely, this is not sustainable, and must drop to about 30% for the Public Sector. That means even bigger cuts yet to come, if we are ever going to grow out of Recession, by supporting international growth of our exports from the Private Sector. A 44% Public Sector Payroll, is close to what was the ratio of the Old Communist States of Eastern Europe, I would imagine.

    Reply: The figures are not as they appear. The state employs 6 million and the private sector 24 million. Then there are those on benefits and pensions etc

    • Winston Smith
      Posted March 9, 2011 at 2:42 pm | Permalink

      A significant proportion of that 24m private sector employees are work for businesses reliant on Government spending; they are effectively on the State payroll

  38. John Ward
    Posted March 9, 2011 at 10:21 am | Permalink

    There are two types of banks these days – retail and investment.

    The investment banks grew on the back of retail deposits. Then they forgot about attracting the right money, and started to gamble-lend.
    Today, people like Bob Diamond talk openly about divesting themselves of the retail branches. People having no disposable income left thanks to their megalomanic idiocy, this makes sense to a beancounter.
    But socially and commerrcialy, it is a disaster about to happen. Again.

    Lest anyone should forget, there have traditionally been eight depositors for every lender. That way, banks and mutuals could be certain of having enough liquid cash to survive even the worst run. The regulators want those liquid reserves upped massively for very good reasons. The day Lehman fell, it had 13.5% liquidity. Diamond wants his to be less than that. It should really be 20+%.

    Regulation as a word is beginning to be used by bank apologists in the same way that Left-wing students used to shout ‘Fascism!’ when I was a student. Regulations exist because people break the rules.

    Mr Redwood asks is there something wrong with the banks? My answer is yes, on three simple bases:

    1. Without retail customers using loans to better themselves, what possible social purpose are banks fulfilling? (And please don’t say ‘tax paid to the Treasury’: the Treasury was emptied by these people in the first place).
    2. The culture of investment banking is largely about insane, testosterone-fuelled betting in the derivatives market. Not only does this serve no purpose for the rest of the economy, it has created an interest-rates derivative sector 10 times the size of the World economy. If you want to know why rates are low, look no further than the rates-bets that have been placed in that crazy, surreal sector.
    3. Their senior employees are arrogant towards the authorities, utterly selfish about entrepreneurial business, dystopian about society, and – in innumerable cases – (bending the rules).

    The Conservative Party would do well to face the facts about the current global banking model – and stop defending the indefensible.

  39. Damien
    Posted March 9, 2011 at 3:00 pm | Permalink

    John

    Can I recommend that you and your readers watch; ‘HARDtalk’s Sarah Montague talks to the internationally respected economist John Llewellyn and asks how governments create jobs in the current economic climate’ available on BBC iplayer. It is fascinating and gives a rare insight to the cause and extent of the banking crisis as John Llewellyn is the former Chief Economist for Lehman Brothers.

  40. Conrad Jones (Cheam)
    Posted March 9, 2011 at 8:58 pm | Permalink

    “Is something wrong with the banks?” – NO.

    Is there something wrong with the Government and the Bank of England? YES.

    I do not recall a public debate on how we should have tackled the Banking Crisis. On something which has contributed to austerity measures and will affect the next generation of tax payers, it is strange how there was no public consultation.

    “We Bail Out the Banks – no other options”.

    No one asked me or any other taxpayer on what should be done regarding this Financial Crisis. The Bail out will cost me, my family, friends, work colleagues and the rest of the tax paying public, Billions – if not Trillions of pounds (when including the interest payments which will rapidly accumulate).

    Your article is very good and I would like to add to it by saying that the Banks could not take tax payers money without the active participation of the Government and the Bank of England. They are private businesses and should be expected to seek profits – even from the pockets of taxpayers.

    Iceland chose not to Bail out their Banks and allowed them to fail. They too suffered, but are now recovering. We are destined to suffer for a lot longer.

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8370560/Northern-Rock-pays-13m-bonuses-despite-232m-loss.html

    “Northern Rock pays £13m bonuses despite £232m loss”

    Mr Redwood, I would not care whether an Investment Banker finds High Street Banking dull or not, and would rather spend his time making money in the Derivatives Market – but when he is working for a subsidised private company which is making a loss and at the same time awarding bonuses – then I do care, as those Bonuses and Salaries are partly being paid by me and my taxes when this money should be going to the NHS or Police Service.

    Are we all being taken for idiots by our Government – especially the previous Labour Government and Gordon “No Gold Left, No Boom and Bust” Brown ?

    I think that Gordon Brown should be sat in a classroom and told to write:
    “I must not encourage Moral Hazzard” – 1000 times, before he receives his Knighthood for services rendered.

  41. Lindsay McDougall
    Posted March 9, 2011 at 11:42 pm | Permalink

    Taxpayers could not care less about regulation and the size of bonuses as long as we get out money back. The big mistake was in bailing out Northern Rock, RBS and HBOS in the first place. (I have some sympathy with government action at the time of Northern Rock because they were caught unawares. But they should have asked themselves WHY Northern Rock could no longer raise funds on the inter-banking market.) I would have let them crash and burn, although your idea of controlled failure is more humane and appears to have been taken up by the Govenor of the Bank of England.

    Even now, if HM Government were to say – and mean – that no bank, no matter how big, would ever again be bailed out, then the necessary reforms, sell offs and restructuring could be driven from below by shareholders at AGMs and EGMs. As for selling the public’s shares in State controlled banks, we are pushing at an open door. RBS CEO Stephen Hester is impatient for the day.

    So what are we waiting for?

  • 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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