Let's have more banks – then they might have to compete for our business

 

        The UK economy is not going to grow strongly unless and until the banks are mended. Many of our troubles today stem from the failure of regulation and bad banking in 2004-7 which got some of  the banks into an extreme financial position. This was compounded by the decision to nationalise or subsidise them without forcing changes upon them.

           The weakened banks are now under a regulatory cosh to improve their balance sheets. They are told they must have more cash and capital to back up a given quantity of lending.  They are doing so not by raising more capital but by lending less. This constrains recovery.

          I am not advocating a debt soaked dash for growth to repeat the mistakes of 2004-7. I do not want to see a further surge in house prices and crazy mortgages. I would like to see enough credit around to finance larger infrastructure projects from broadband to tollroads, from new power stations to better water supply and flood protection. I would like to see sufficient credit available on reasonable terms for small and medium sized enterprises needing to expand, to buy capital equipment or to meet sensible working capital needs. I would like to see a decent supply of mortgage finance to pay for homes for a new generation of first time buyers. This is not going to miraculously happen by doing nothing. Nor is it likely to come about with another bout of Quantitative easing.

              I suggest the government creates three new UK High Street general purpose banks out of the assets it holds through RBS. Each bank should be given assets and liabilities from RBS, an initial number of branches and staff. These new banks should then be floated on the Stock Exchange. At the time of the float they should raise say £5 billion each in new capital. Their remit should be to provide excellent competitive banking facilities to businesses and individuals in the UK. They could be called RBS, Nat West and Coutts, if you wanted to keep current brands and some  of the  existing identities. You could call them  Tom, Dick and Harry, or any other new name for a new brand. I would want them to be pioneers of better customer service , persuading people that banks can be good allies and service providers to reasonable customers.

             The remaining RBS Group  could start out again by setting up a replacement UK clearing bank network if it wished. It might need to be called a new name if the RBS brand and name had been sold as part of the break up. The government could still hold on to its shares in the overseas and investment banks that are the rest of the RBS Group if it wished, in the hope that one day the management will get the shares into profit. Or it could press on with the piecemeal disposal or wind up of all the remaining  overseas and investment banking assets. The important thing is that three new clearing banks with balance sheets that allow them to expand their UK lending would have emerged from the broken shell of RBS.

               These banks could lend on more than the £15 billion of new capital they had raised. They could lend a sum of money that would have a visible and benefical impact on the UK economy. This would be better than QEII. It would provide a market tested stimulus, financing projects that the three new  smaller bankruptable banks thought were worth backing.

             The public might also feel better about banks if the main one which went so badly wrong were made to pay the price by facing full break up. Minority shareholders might fare as well or better by break up compared to  holding on to the current congomerate. If there were any legal and political fuss about the position of minority shareholders  a buy back option for them could be part of the scheme.

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68 Comments

  1. Dr Alf Oldman
    Posted September 11, 2011 at 6:36 am | Permalink

    Excellent! I totally support this proposal – let’s hope the government adopts it!

  2. norman
    Posted September 11, 2011 at 6:40 am | Permalink

    I have to say this is a great idea.

    However, we’ve been hearing since the bailout from both Chancellors that eventually the taxpayer would see a return on our money and turn a profit (much like our EU / IMF bailouts).

    Of course, no sane person thought this would be the case but I’m sure Osborne would prefer to tip a wink to the MPC (whose sole remit is to control inflation) to start up the presses (for the purpose of growth..er…or is that to control inflation) rather than admit that RBS is a basket case and take a multi-billion pound hit on all the toxic assets the taxpayer would be left holding.

  3. lifelogic
    Posted September 11, 2011 at 6:44 am | Permalink

    You say “I would like to see sufficient credit available on reasonable terms for small and medium sized enterprises needing to expand, to buy capital equipment or to meet sensible working capital needs.”

    This is certainly needed and has been needed for nearly 3 years their is little sign on improvement in the position little lending and higher lending criteria, fees and margins all round. Only 3+ year to the next election after all had Cameron already given up on it. Just in the businesses that I know the details of, about 30 jobs with subcontractors and in house, have all been put pointlessly put on hold just for lack of sensible bank finance and bank wanting finance back.

    • lifelogic
      Posted September 11, 2011 at 7:10 am | Permalink

      Of course the solvent banks might also be more willing to lend anyway were Cameron to have a positive pro business vision. If energy were cheaper, if employment and planning laws were not so absurdly restrictive, if regulation were less and actually sensible, if we had a smaller state sector (or were moving towards one at least), if we had no pointless wars, no PIGIS black hole bailouts, if we did not have mad sex equality insurance rules or all the rest of the EU nonsense and the counter productive 52%.

      Still he did (very nearly) get rid of HIP packs, he is doing something on sqatting perhaps and a little on the no win legal racket and he did get rid of the M4 bus lane. So perhaps we should be grateful for these tiny crumbs. He does often “say” he is business friendly – perhaps someone could just explain to him what business friendly actually is.

      • lifelogic
        Posted September 11, 2011 at 9:36 am | Permalink

        I see Ed Miliband has given his backing to suggestions that bankers should face being struck off if they are deemed unfit to do the job like solicitors and doctors.

        These are perhaps not the best examples of closed shop, self interest and professional disciplinary systems. Doctors only ever seem to be struck off for sleeping with their patients – very rarely for killing or maiming them. The legal profession seems endlessly to encourage increasing complexity, multi level & disagreeing courts, endless delays and absurd costs. Also very great ambiguity and an arbitrary nature into judgements and the actual law. The result is that we have ever more lawyers dragging industry and productivity down. It is one profession who always seem to benefit the more complex and worse the legal system becomes.

    • Bazman
      Posted September 11, 2011 at 10:03 am | Permalink

      It’s interesting that as soon as some issue effects you or your business then you squeal repeatedly like a stuck pig “Something just has to be done”. “Or. This is not necessary” When something is done. Landlords often install electric heating in flats because it is cheaper to install with little maintenance. The tenant pays the higher overall costs in the bills. The argument that they could pay less rent is false there is more renter than flats. Their ‘choice’ involves property out of their reach. Remind me again why you do not like energy efficient lighting?
      Same old story.

      • lifelogic
        Posted September 12, 2011 at 4:20 am | Permalink

        Over the top gas safety regulations and new condensing boilers (forced onto people by absurd regulation) and which are much less reliable, complex and more expensive than older ones now make electric the preferable option for small flats. The overall costs, capital, safety and maintenance make it the best option for small flats, particularly where the tenants are only in evenings and weekends. Talk to the government if you prefer gas and get the daft regulations changed if you can with Huhne in charge.

        The OTT government regulations push people towards electricity – which is not what they intended – but what they have done as anyone sensible could have told them it would.

        I do not like so called “energy efficient lighting” because in general it is horrible mono chromatic light, flickers, does not fit the fittings well, is ugly, has a delay, is rarely bright enough, makes no sense in rooms like the loo when the usage is so little anyway, lacks directivity, and need special disposal (which is rarely done). Also the waste heat from bulbs heats the flat anyway so in general no net saving in energy anyway as it saves on heating costs by a similar amount (except a little in summer).

        The human eye is not evolved for monochromatic light particularly older human eyes.

        Halogen for residential is the best option available in bright and bayonet fitting and the nicest (sunny type of) light. There are good low energy options for offices/commercial but these do not usually make sense in small residential.

        I do not as you say “squeal repeatedly like a stuck pig – Something just has to be done” I just point out that the regulations make things worse for tenants and landlords and owner occupiers. Let them all make there own choices, free from government orders/EU , and in the light of their own particular local circumstances. The “subsidiarity” we were promised by Major but never delivered yet again.

        No point in paying for £1500 for an unreliable complex boiler with a 5 year life + maint + safety+standing charges and gas meter installation cost just to save the tenant perhaps £200PA on energy costs for a small flat. It would all be passed on in rent anyway.

        • lifelogic
          Posted September 12, 2011 at 5:56 am | Permalink

          Some one should ensure in some way that RBS handle their existing debts in a way that does not demand repayment from good debtors too. Forcing them to put investments on hold.

        • Bazman
          Posted September 12, 2011 at 7:25 pm | Permalink

          As you say gas costs more to install and maintain. It makes you wonder why anyone would make and install an ‘absurd’ gas boiler in their house. £1500 and a five year life? Which one will that be so we can avoid it? One developer in my area installed electric boilers in new build houses. Sky high bill and leaks in all of them. They should not be allowed to get away with this cost cutting for themselves. Most people avoid electric heating at all costs and rightly so.

          • lifelogic
            Posted September 14, 2011 at 5:37 am | Permalink

            It is often better on overall cost for small flats. If you want lower rents that is the best option. For anything much bigger then gas is more cost effective.

          • Bazman
            Posted September 15, 2011 at 9:07 pm | Permalink

            Could use air heat pumps (air con) offering about 3kw out for 1kw in, but some of these flats are so small even this would be limited. The outside unit being the size of a medium suitcase.

  4. Andy Large
    Posted September 11, 2011 at 7:31 am | Permalink

    Great idea in theory. What worries me is that USA seems to have a ton of small banks. But still rather pathetic service in general from high street branches. I am having a hard time figuring this out. Do you have any ideas why this is John?
    Andy

    • RDM
      Posted September 12, 2011 at 11:51 am | Permalink

      We need quality as well as quantity!

      In this Information age, do banks really have the expertise to understand a SME’s Unique Selling Point? They need a new business model! One based on a relationship formed with each company, individually, so they can know how, where, and when a company’s revenue is generated, how viable they are.

  5. Mike Stallard
    Posted September 11, 2011 at 7:33 am | Permalink

    Can I tell you what I need?

    First of all, I want my money to be really safe. I do not want to take risks with it. On the other hand, I do not want to make a lot of money. Many times in my life, I could have been sidetracked into worship of Mammon. I do not want that.
    Secondly, I want Mr Mainwaring back. I want to be known and I want someone there who actually knows the local people. That way, he will indeed take risks because he will be like a sort of Dragons’ Den. On the other hand, he will not be stupid like Sir Fred apparently was. Or stingy, putting silly charges on writing me letters etc etc.
    And thirdly, I would like my investment (laughable as it is) to be able to make a small profit.

    I think your idea might help here. Thank you so much for seeing it our way – the way of real people who actually exist.

  6. Iain Gill
    Posted September 11, 2011 at 8:29 am | Permalink

    exactly the right concept, although I would tend towards 6 or 12 new banks not 3

    well done

    where do we get to vote for this then in our so called democracy?

  7. davidb
    Posted September 11, 2011 at 8:34 am | Permalink

    If that is the solution then perhaps a new more powerful antitrust framework needs to be put in place. If all that happens is a bunch of new banks are born only to be bought up by larger competitors or foreign entities then we wont have done much more than hobble the Scottish banking sector. That will add to the discontent here in the Provinces. The new banks must not be “allowed” to be bought by any other bank. And there you may need the European Commission to buy into the thing. The giant risky banks are an international phenomenon, but you are not allowed to stop cross border mergers willy nilly.

    Its not just banks that need to be brought down in size. There are too few supermarkets. how much competition is there in insurance or pension provision? BAE makes an awful lot of the country’s weapons.

    It is very difficult to see what is in the best interests of all parties. If only these stupid banks had been allowed to go bust in the first place the market would have sorted the problem. And is it not arguable that it is the immense damage to banks on the continent which will arise in a Greek default which has the Eurozone leaders appoplectic? I wish we were not starting from here.

  8. Rebecca Hanson
    Posted September 11, 2011 at 8:42 am | Permalink

    John,

    What do you think of the proposal that we should introduce regulation to ensure that no individual businesses in the UK are ‘too big to fail’? i.e. attempt to cap the maximum exposure to national finances should there be failure.

    I understand that this would be very complex and involve a details understanding of the banks (and other businesses), which perhaps we do not have. But I was just wondering if you might put your mind to these issues and let us know what you think.

  9. Tedgo
    Posted September 11, 2011 at 8:48 am | Permalink

    A great idea, but how are you going to restrain potentially potty Chief Executives and main boards reverting to old ways. You would need some tight detailed legislation to prevent them doing so.

    • lifelogic
      Posted September 12, 2011 at 5:59 pm | Permalink

      Perhaps some real shareholder power and in elections some voter power for a change.

      Corporate and UK democracy – where not all the power lies with the board or the cabinet.

  10. Geoff not Hoons
    Posted September 11, 2011 at 9:37 am | Permalink

    Mr.Redwood, Can you imagine the lengths the current RBS Board would go to protect their lot. The payoff’s and pensions would dwarf even Fred the Shred but it is a brilliant idea nevertheless.

  11. Bazman
    Posted September 11, 2011 at 9:37 am | Permalink

    Business friendly would mean a crackdown on the banks. forcing them to work for us and not the other way round. Unlikely to happen given the level of vested interests.

  12. Gary
    Posted September 11, 2011 at 9:44 am | Permalink

    You don’t get it. WHEN THE YIELD CURVE FLATTENS, AS IT ALWAYS DOES AFTER A CRACK UP CREDIT BOOM, THE FRB BANKING SYSTEM GOES OUT OF BUSINESS ! Now explain how adding more banks will solve that? Madness.

  13. JimF
    Posted September 11, 2011 at 9:46 am | Permalink

    This is one side of the coin, and sounds like a radical and good solution. The other side is the creation of an environment where people actually want to borrow.

    • lifelogic
      Posted September 12, 2011 at 4:28 am | Permalink

      I agree confidence is needed and lacking in Cameron. But plenty of sound businesses want to borrow now and cannot, even with good security available. Many are being forced to repay debts that they need for other projects. Even businesses making £50K a month yet having it all taken back in debt reduction by the banks often government owned RBS/Natwest to reduce lending and thus not available to the business to re-invest.

      Property development funding is very hard to get in particular.

  14. forthurst
    Posted September 11, 2011 at 9:47 am | Permalink

    Has the banking industry been damaged beyond repair when so many of its practitioners are under the impression that they should be paid a large fortune for their extraordinary ability in being able to hole any balance sheet below the waterline? Are there enough sane people unconsumed by uncontrollable greed left to bring it off?

    Nat West sounds like an horrific conglomerate to me; I’m fairly certain my first bank account was with the National Bank with which I was perfectly satisfied until it was predated on by the Westminster, at which point I jumped ship.
    I suggest to restore the National bank name leaving politicians to work their magic on the appropriately named Westminster rump,

  15. Matt
    Posted September 11, 2011 at 9:59 am | Permalink

    I think that it’s a brilliant strategy will lead to smaller banks hungry to do the right business– need competition for small, medium sized firms – I hope that the government run with it.

  16. Fox in sox
    Posted September 11, 2011 at 10:07 am | Permalink

    Dear John,

    Isn’t a large part of the shortage of investment for businesses simply due to the large government borrowing requirements here and abroad? If my savings are in Gilts then they are not in the shares of “widgets r us”. Government debt is the chain holding us back, not the engine of growth.

  17. waramess
    Posted September 11, 2011 at 10:14 am | Permalink

    Would the investing public be more interested in investing in a new bank with RBS assets than in the existing RBS?

    The banking system is now so materially controlled by the state that any sane investor will treat that sector with a good deal of caution.

    You play with the art of the possible whilst the real problem remaains unadressed because it is considered too great a leap forward. After many yesrs of nationalised utilities Margeret Thatcher might have felt the same. Make no waves and just reorganise a little.

    She did not because she knew that was no answer. The way forward will be for the Bank of England to loosen its grip on banking licences and that will mean they must be willing to let banks fail. The government must stop regulating and let the banks get on with the business of banking in the full realisation that if they get it wrong they will not be rescued by the government.

    If this really is too much for these namby pamby Keynesian politicians of ours then they should be left to totally destroy the infrastructure without further caution. There really is no halfway house; already the CDS’s of the two large banks in which the government have a material stake are at an eye watering level, with very good reason and fiddling at the fringes is no answer.

    Money printing, bank regulation, interest rates; so long as they retain credibility for matters about which they understand little then they cannot be saved from themselves and we will have to bear the consequences of their actions.

  18. Gary
    Posted September 11, 2011 at 10:30 am | Permalink

    What’s more, when a bank is highly leveraged to reserves, as in frb :

    1. a relatively small call on their reserves by hard pressed savers quickly depletes the reserves entirely

    2. Falling asset prices further decimate a highly levered book.

    In a 100% reserve system, new money does not get created for each loan, and so the lender has to attract more savings in order to make more loans. Thus the link between savings and loans is restored and acts as a brake on potential credit bubbles. Growth is slower but more measured and the quality of the loans are better.

    Adding more banks without going to 100% reserve banking is a waste of time.

  19. Antisthenes
    Posted September 11, 2011 at 10:32 am | Permalink

    Why are banks not lending? There is no one reason but many, however one thing is certain they are acting as most of us do “closing the stable door after the horse has bolted”. This continual bleating about bad banks, poor regulation and lack of competition and what the banks should do about it is at best misleading and at worst buck passing and not addressing the underlining problem. The problem is one of bad government and predominance of left wing policies and that is what should be addressed. Government should set the framework so that wealth is created, competition flourishes and social standards and values continually improve not decline. To do that less regulation not more and a public sector that does only those things that other than central control is not practicable, which is very little. Government has to do better than Knut and reverse the tide of socialism and if the EU cannot be reformed and embrace capitalism and free markets as we should then that monster should be ditched. A new economic reality has to be faced the West cannot afford the luxuries of the welfare and nanny state in it’s present form. Tinkering with QE, bailouts and new regulations trying to maintain the status quo is a forlorn hope and only making a bad situation worse. Without the rise and industrialization of the East and the competition it has brought no doubt the West could have plodded merrily along becoming ever richer and decadent. The new reality must be recognized and we have to learn to live with the new economic order and adapt or decline into oblivion like the Greeks and Romans and a myriad other empires and civilizations before us.

  20. Javelin
    Posted September 11, 2011 at 10:37 am | Permalink

    First I’m pleased to hear Geirge Osborne say that he will separate investment banking from retail banking. I’ve worked at the heart of the crisis at the HSBC looking after Credit Drrivatives. HSBC are an excellent bank. They were prudent and responsible within the bank. However they relied on self discipline, and it’s clear that other banks simply cannot be relied upon. When you look at the bad loans at RBS you realise retail deposits need to be separate.

    Having said that the mortgage business model (relying on liquidity in the money markets) at Northern Rock was not a direct problem of investment banks enmeshment. However the credit markets drying up were.

    I think that as well as separation of investment banks that mortgage lending also needs to much more regulated to create stable house prices. Plus immigration needs to be drastically reduced to create a more stable job Market for the lower skilled.

    • zorro
      Posted September 11, 2011 at 10:44 pm | Permalink

      All agreed with those approaches from here.

      zorro

  21. GJ Wyatt
    Posted September 11, 2011 at 10:59 am | Permalink

    In Sir John Vickers’ introduction to the Independent Commission on Banking’s interim report of 11th April he said “… UK retail banking needs to be more competitive … now there are opportunities to make competition work better for customers”. The interim report itself did not mention the break-up of any banks, but rather focussed on reducing entry barriers into banking and reducing the cost to customers of switching between banks. However, having more banks vying for customers should be part of it, I would think. Even if the break-up idea is eschewed in tomorrow’s report, it should be given an airing in Parliament.

    Over the last half century there has been a continual process of mergers and acquisitions in banking, which created the destructive gang of behemoths we have today. It may be claimed that this process was driven by reducing costs through economies of scale, but all the reward was reaped by the bankers and the risks heaped on the banking system (i.e. the public). Both the Bank of England and the FSA as bank regulators appear to have been blind to this. So the Vickers report should also propose ways to get better regulation.

  22. Ralph Corderoy
    Posted September 11, 2011 at 11:15 am | Permalink

    I would like to see a decent supply of mortgage finance to pay for homes for a new generation of first time buyers.

    Given houses remain overpriced by long-term norms, is it wise to encourage the first-time buyers of today when they’ll become the negative-equity owners of tomorrow?

    • zorro
      Posted September 11, 2011 at 10:47 pm | Permalink

      Yes, I do not agree with a subsidy here. House prices must fall and stabilise in order that people may feel confident enough to make a sound purchase. No more inflating the property bubble. Don’t worry John, people will still vote for you rather than Labour.

      zorro

    • Mark
      Posted September 12, 2011 at 11:47 am | Permalink

      House prices should be encouraged to fall first: the sooner, the fewer first time buyers and upgraders get caught up in the mess. When prices have corrected, finance for buyers should remain at prudent levels: they will at least find that houses are rather more affordable, and they will have money to invest in a pension.

  23. uanime5
    Posted September 11, 2011 at 11:30 am | Permalink

    According to the Independent Osborne is moving towards Plan A+ and is trying to boost the economy through transport upgrades, housebuilding, the expansion of green energy, and super-fast broadband. All of which apparently won’t require any new money.

    http://www.independent.co.uk/news/uk/politics/osborne-signals-uturn-on-economy-with-growth-plan-2352868.html

    As long as all the jobs don’t go to immigrants growth may increase.

    • norman
      Posted September 12, 2011 at 7:18 am | Permalink

      Is there no end to the lunacy?

      Big government has failed and trapped us in a low growth economy, USA has tried to ‘stimulate’ it’s way out of recession and has only added more debt and debased the currency and our new plan – stimulate our way out of recession by increasing the size of government via stimulus (no doubt ‘paid’ for by freshly printed money)!

      Genius! Why didn’t Gordon Brown think of that? Oh, he did…..

      Why don’t we go back to a model with a proven track record, to wit taking less from the private sector so that that side of the economy grows?

  24. English Pensioner
    Posted September 11, 2011 at 11:57 am | Permalink

    I fully agree with you.
    But I doubt if it will ever happen, I’ve totally lost what little confidence I ever had in Cameron as Prime Minister, and as far as I am concerned his disgusting treatment of Nadine Dorries was the last straw.
    In practice, whatever Nick Clegg or Vince Cable want is more likely to happen.

  25. spencer
    Posted September 11, 2011 at 12:05 pm | Permalink

    John, where do you stand on the issue of separation of retail and investment banking? I feel we need the choice as consumers to place our deposits with retail only banks even if politicians are too timid to break the banks in two. How about removing guarantees on deposits for all banks that do both and only offer that protection to retail only banks and make this clear to customers. That way the big banks have a clear incentive to break themselves up.

  26. Acorn
    Posted September 11, 2011 at 12:21 pm | Permalink

    Lord Levine is starting a new bank, targeting bits of the Crock and Lloyds. Tesco wants to start a bank. Then there’s Metro from the US. All claiming to be deposit based.

    Has anyone told these guys that Brits rarely, if ever, change their bank accounts to another bank voluntarily? They change banks via takeovers involuntarily.

  27. Andrew Gately
    Posted September 11, 2011 at 12:24 pm | Permalink

    Whilst I do like the idea of splitting up the banks to provide customers with more choice, I think the fascination with raising capital as an answer to all banks problems is a red herring.

    When the retail run on Northern Rock occurred 12 billion was withdrawn by savers. This was money that had been loaned out by Northern Rock to borrowers over twenty five years and caused huge liquidity problems. RBS and Lloyds also suffered similar “silent runs” prior to part nationalisation for significantly larger amounts.

    The problem that needs to be addressed is “if banks borrow short to lend long then what do you do in times when there is a call for banks to repay short term money?”

    In my opinion the answer to this problem is very simple – banks have to borrow from central banks who then charge them a higher than market rate of interest to encourage them to repay this money at the earliest opportunity.

    For banks to use capital to protect itself against a bank run then they would need to hold a ratio of £1 of capital for every £4 lent – which is clearly a ludicrous ratio and shows that capital is not the answer to the problem stated above.

    Further what is the point of holding capital if in the event of a bank making a loss rather than accepting that capital is going to be reduced, instead the authorities raise the capital requirement for banks forcing them into part nationalisation.

    In these circumstances why would investors want to provide the 5 billion of new capital you suggest should be raised? If this capital is likely to be wiped out by the authorities in the event of a future break down in the banking systenm.

  28. Bernard Otway
    Posted September 11, 2011 at 12:27 pm | Permalink

    John although you and I have our ‘SPATS” this is a fantastic idea,HOWEVER I wish you had couched this excellent piece as say a parent would,in words that were in the opposite ie that you had heard this was a plan and advised against it,the reason being that your colleagues on your own side mostly go in the opposite direction to you if you say YES they say NO and the
    LIMPDIMS well !! uncle vince is green with envy at your sense, and their DEFAULT position
    where you are concerned is the polar opposite “IN SPADES”. REmember my comment on the QE article you wrote yesterday,their is a DISEASE metastesised throughout the WHOLE public service called SUB MARXIST THINKING which requires huge amounts of Chemotherapy to dislodge.

  29. Andrew Smith
    Posted September 11, 2011 at 12:42 pm | Permalink

    For larger infrastructure or commercial development projects the sterling bond market could be a useful source of funding if it were bigger and more effective. We do not all want to put all of our financial assets into equities so a bond market with interest rates linked to inflation or partly to the success of the venture could be a useful shelter for cash within a diversified protfolio.

    The banking system certainly needs greater competition and current technologies and routes to market other than through physical branches could make smaller banks viable in a way they may not have been 30 years ago when the current market was formed through a series of mergers.

    New players and additional competition and innovation is needed in many sectors. I would highlight supermarkets, vehicle servicing and repair, motor dealerships and the “tie” operated by manufacturers, some personal insurance lines, etc.

    I also feel the involvement of banks in other financial services has been damaging to the public, the markets and eventually to the banks. One can recall the pension misselling in which bank subsidiaries were among the worst offenders, PPI misselling, predatory marketing practices for household and SME insurances.

  30. Joseph McCaffrey
    Posted September 11, 2011 at 12:42 pm | Permalink

    The idea is one I agree with totally, however unless it comes alongside a few of the other vital requirements for sustainable growth and performance improving competition in the banking sector they will never be able to grow to a large enough size to make a real difference to saver/borrower choice.
    1. Bank bailouts: the implict guarantee that the “too big to fail” banks will be bailed out and the explicit that standard creditors will recieve their savings up to £75,000 back are the greatest impediment to competition and the main factor in the excessive risk bubbles that built up pre-crisis. Parliament should enact legislation outruling the possibility of a future bank bailout and strike down the savings up to £75,000 guarantee – this will allow the new smaller banks, and any future bank that is set up, to compete on a more level playing field as creditors will not favour the ‘too big to fail’s and ensure that risk management is a factor in the free market competition.
    2. Centre regulation on transparency: instead of telling banks what they can and can’t do, something that has never worked in the entire history of banking, enact firm legislation on transparency allowing potential creditors and borrowers to make a choice based on the facts and not just based on what the bank chooses to tell them – let the freemarket and not the bureaucrats do the regulation.
    3. Capital requirements: capital requirements harm competition as it is all but impossible to raise the required capital to start a new bank – reforming their impact on small providers would allow the new banks to compete more levelly and potentially allow new banks to be created by the private sector .

  31. outsider
    Posted September 11, 2011 at 1:21 pm | Permalink

    How long exactly do you think these mini-banks would last on the stock market? One year?, two years?, before they were taken over, though not by a British bank as this would not be allowed.

    In global banking circles they would be regarded as sub-optimal in size and a tasty add-on morsel, most likely for Middle East or Asian banks in the immediate future .

    As Mr Redwood and others who promote such schemes well know, they are just devices to sell the British clearing banks abroad without attracting the odium of doing so directly.

    Yes I know that “they” deserve what they get and that private shareholders, who have probably stumped up far more in rights issues pro rata than taxpayers are merely to be “dealt with”.

    But retail banking is one of the only remaining industries where British-owned businesses are world-scale. If you doubt that, just look at the FTSE 100 index. So let’s smash that one up too, like Conservative governments did with British brewers, British Gas and BT. Pro business? You must be joking.

    Reply: My propoal also includes not allowing takeovers to create large banks which damage competition in the Uk market

    • outsider
      Posted September 12, 2011 at 1:24 am | Permalink

      Yes I understand you reply but the competition argument would not stop banks from the Gulf States, China, India, Singapore etc buying them up individually.

      This would doubtless be hailed as good for competition, just as French, German and Spanish takeovers of UK electricity in electricity were hailed as great for British consumers until the market naturally settled into a new oligopoly, only now without British companies of international stature (other than the residual monopoly National Grid).

      Perhaps you remember the transfer of the TSB, then a profitable, sound, competitive institution, to the tender mercies of the stock market, where it was quickly used to generate lots of bids and deals, then soon consigned to the scrap heap. That ideologically driven operation to promote banking competition actually reduced it and it yielded not one penny to taxpayers because lawyers discovered we did not own TSB in the first place.

      Perhaps you remember how the last Conservative government split rail into dozens of pieces to create a new framework for competition only to find there was no competition, just a mess that took the market years to sort out and re-establish viable big companies, at great cost to travellers but enormous profits to the City.

      Conservative governments are no better at arbitrarily restructuring industries than Labour, which regulated Railtrack and 40 per cent of our electricity capacity into actual or near bankruptcy. At least Labour is honest about hating British industry, except of course for those sweet little SMEs.

      Conservatives claim to back British industry but equally hate the big businesses we need as a formally small economy trying to survive and prosper in a big, bad world. Mrs Thatcher tried to liberate British industry, including the old nationalised industries. But since about 1986-87 Conservative MPs seem to be interested only in City firms, developers and SMEs in their own constituencies.

      Sad.

      Reply: Competition on the railways delivered lower subsidy, more trains and a rise in use. Then Labour created a large nationalised industry at the herat of the system and took it back to high subsidies.

  32. MickC
    Posted September 11, 2011 at 1:27 pm | Permalink

    Extremely sensible idea.

    Probably no chance whatsoever of this being implemented though.

  33. Bob
    Posted September 11, 2011 at 2:37 pm | Permalink

    Sounds good to me.
    Our current retail banking provision is a cartel.
    I wish that the building societies had remained as mutuals, and that the FSA had never been created. We should set up a framework with savings accounts at sensible rates of interest, and where the money can be made available to borrowers in the form of mortgages offered on prudent terms i.e. no self certification, no political correctness and no 125% loans (say a of guideline 80% max).

    Stand aside Vince Cable, hello John Redwood.
    Government interference should be kept to an absolute minimum to avoid another sub prime crisis.

  34. A different Simon
    Posted September 11, 2011 at 2:59 pm | Permalink

    Where is the expertise going to come from to run and staff the new banks ?

    The skills set required for a bank manager is completely different from that required for the salesmen and business managers which replaced them .

    It takes decades to produce a bank manager . I should know , my Dad was one .

    We can say very conservatively that it took more than 50 years to establish the culture of local branches , bank managers and high quality responsible lending which was swept aside 15 years ago .

    It will take 20 years to achieve the quality of lending and services to small businesses that we had only 15 years ago .

    By the time these new banks really kick in , the game may be up .

  35. David in Kent
    Posted September 11, 2011 at 3:15 pm | Permalink

    Ass an MP for the governing party, is there anything you can do to get this excellent idea implemented.
    Or is every important decision in the hands of the civil service?

  36. James Davidson
    Posted September 11, 2011 at 3:17 pm | Permalink

    Affordable housing and more bank lending are incompatible: by implication the majority of the housing stock is unaffordable and therefore overvalued and banks don’t want to lend against overvalued homes!

  37. Michael
    Posted September 11, 2011 at 3:39 pm | Permalink

    Excellent suggestions allow I suspect the lack of lending is not merely the banks being unwilling or unable to lend but also the desire of business to pay down debt and not incur more at this stage of a credit contraction period.

  38. Alan Redford
    Posted September 11, 2011 at 5:09 pm | Permalink

    Whay would banks lend to SME’s at ‘reasonable rates’ when they can make billions in bond scams in cahoots with the government and pocket the proceeds?

    • Alan Redford
      Posted September 11, 2011 at 5:09 pm | Permalink

      ‘Why’

  39. sm
    Posted September 11, 2011 at 5:25 pm | Permalink

    Some thoughts,

    1) How successful would raising capital for a bank really be.
    2) How many projects are viable in a demand downturn phase caused by debt-deflation or inflationary/tax squeeze. (mark to market squeeze)
    3)How will they maintain independence? with such a nice balance sheet.

    This may work but why not introduce new banks as above but move away from fractional reserve banking?

    Increase reserve requirements and or interest rates from emergency levels to encourage long overdue asset value adjustments.Enforce the market test on numerous assets by auctioning them.

    Spend(fiat-no debt) money into to mitigate the worst of the resulting contraction and manage directly inflation (money supply change).

    Still need serious structural reforms (split banking, depositor priority etc) restraint on distributions and or full reserve banking.

  40. Peter Maddock
    Posted September 11, 2011 at 5:53 pm | Permalink

    I am a great admirer of the John Redwood daily newsletters but I feel that, broadly speaking, the continual pillorying of the Banks is wearing thin. Yes doubtless the Banks are building up reserves against indeterminate legislation and being very wary about loans of any type but there must be a reluctance on their part to be suddenly caught with a necessity to approach shareholders with another Rights Issue and to once again water-down their holdings and the dividends. Not all Shareholders are Sovereign Funds and wealthy Middle Eastern potentates. Many shares are held in Pension Funds and by small time individual Pensioners who have, and rightly so, been careful with the personal funding of their old-age and invested in the historical security of the ” larger” Banks. Thankfully some of our Banks are well aware of the responsibility they have to their smaller investors and I sincerely hope will do their best to avoid a repeat any public fund raising to meet impossible targets and legislation no doubt emanating from the EU and the LibDem influence.

    • lifelogic
      Posted September 12, 2011 at 4:49 am | Permalink

      You say “Our Banks are well aware of the responsibility they have to their smaller investors”

      RBS PLC shares Jan 08 about £4 now about 21p this despite hugely over charging many good borrowing customers in a lenders market. Glad to the see the smaller investors, pensioners and the tax payers are all benefiting so handsomely.

    • norman
      Posted September 12, 2011 at 7:25 am | Permalink

      This idea would probably work in favour of the pension funds, etc. as government would have to be left with the toxic sludge left over, as no new bank could attract funding if they were lumbered with it.

      One of the tricky problems would be allocating existing shares in the new companies but as the govenrment holds 80% (?) or so of RBS if it was willing to take a massive hit there would be enough left to go round to satisfy the rest.

      That’s why this will never happen, there is no money left and it would leave this government with egg on its face and Labour crying about how the nasty Tories were giving away the family silver to rich bankers and leaving the poor downtrodden taxpayer with the broken crockery.

  41. Mark
    Posted September 11, 2011 at 10:29 pm | Permalink

    Modern banking depends on certain tenets of economic theory for its self-justification. First is the theory of general equilibrium that depend on the existence of “complete markets” – that is every contingency is tradable (Arrow – of the Impossibility Theorem we discussed under AV – and Debreu were the first to formalise this properly) – which has spawned modern derivatives. However, the number of contingencies is infinite, and even identified contingencies go untraded, so this theoretical construct cannot be achieved.

    Second is the Miller-Modigliani theorem which purports to show that firms should be indifferent between financing themselves by debt or by equity, other things being equal. This idea has then been tilted by taxation that makes debt financing much more favoured. In turn, this leads to very high gearing, which mean that the remaining equity is easily wiped out when a firm hits a squall in business conditions – leaving its assets at the whim of the financing bank. When the business in question is itself a bank, issues of economic moral hazard compound: the ownership of assets will tend to accrete to the last bank standing. We should perhaps start by giving equity investment a less tax disadvantaged position, most especially for banking: mutuals such as building societies have been wiped out by the tax disadvantage.

    Dubey, Geanakoplos and Shubik showed (in 2000) that where markets are incomplete, the Miller-Modigliani theorem does not hold when there is a possibility that a firm or one of its investors might default. We have seen the financial alchemists busy converting equity to debt: the optimal debt levels have been far exceeded, as now is evident when default probabilities are seen to be significant, having been grossly under-estimated by banks, rating agencies and markets in the boom years. We need to reverse that process in everything from PFI to house purchase to the financing of businesses. It has already been happening apace in business: time to switch attention to government spending and mortgages.

    P.S. There is a nice irony in that Miller was one of the Nobel winners behind LTCM, the hedge fund that collapsed 200 times geared.

    • sm
      Posted September 12, 2011 at 11:42 am | Permalink

      How about a just limiting leverage overall by moving gradually to full reserve banking?

      • Mark
        Posted September 12, 2011 at 8:33 pm | Permalink

        You mean reserves backed by government debt, so that lending depends on how much the government has borrowed? I don’t think that is a good idea.

  42. Richard1
    Posted September 12, 2011 at 9:22 am | Permalink

    Excellent idea. Regarding the minority shareholders, if there was a proper mark-to-market excercise on RBS’s assets you’d probably find there was very little value in the equity, if any, and that in order to be properly capitalised creditors would have to take a hit of some kind. Laying this out clearly should enable a good level of support. In any event the Government holds enough of the equity to push this through on its own.

  43. Gary
    Posted September 12, 2011 at 9:32 am | Permalink

    The problem is fractional reserve banking. And until we sort that out we are resigned to boom and bust.

    The problem with this system can be summarized :

    1. Demand Deposits are NOT available on demand to all at any time. Even though depositors are told that they are. There is a dishonesty implied.
    2. Fractional Loans ie loans made with newly created money , that don’t lead to GDP growth are inflationary. This must always happen , and especially when riskier lending is encouraged.
    3. Riskier lending is encouraged because the fractional reserve system is underwritten by the FDIC(deposit insurance) and the central bank. Both are in turn underwritten by the taxpayer. This encourages moral hazard, in other words to make risky loans.
    4. Because of the taxpayer underwriting, the cost of funds to these banks is lower than available to any other financial intermediary, they are encouraged not to make good productive loans to entrepreneurs, but to merely arbitrage the yield curve. ( borrow short and lend long in an upward sloping curve)
    5. When the yield curve flattens ,which their actions actually help bring about , but also when the boom turns to bust, then these banks go insolvent in droves as they are heavily invested in a sloping curve. They also go insolvent because moral hazard encouraged bad lending and bad loans turn into bad debts.

    If you don’t have this underwriting by the taxpayer, then yield curve arbitrage becomes less profitable, and if you don’t have the central bank underwriting insurance against bank runs, then you automatically get 100% reserve banking, or very close to it. If banks still want to use FRB , then they would be inclined to tell you that your deposits are locked up for a period of time, until loans are repaid.

    Fractional reserve banking is NOT capitalism. Govt subsidy is as far from capitalism that you can get.

    In other words, get rid of govt mandated taxpayer support for the banks, and you go a long way to solve the problem. That does NOT mean that banks won’t go bust, they will, but they won’t take us all down with them and they will make careful loans to economically viable enterprises. That IS capitalism.

  44. Percy
    Posted September 12, 2011 at 12:10 pm | Permalink

    Far too sensible, it’ll never happen.

  45. Anthony Baverstock
    Posted September 12, 2011 at 1:24 pm | Permalink

    The problem Mr Redwood identifies is that raised elsewhere by Conservative’s.

    The problem they suggest with the current banking system is:

    “Britain’s bank lending to small and medium enterprises and in personal current account business is currently concentrated in just four big banks…the competitive incentive to provide a better and cheaper service is just not there.”

    While it is clear there is limited competition in the Banking market before considering breaking up the banking system we also need to consider:

    “Is the lack of competition in the UK small and medium business sector, and personal sector due to some monopolistic behaviour by the banks to exclude other competitors, or that the current nature of the market is so competitive that new entrants cannot see how they can make a profit.”

    Before starting to make radical changes to the market a Government needs to be vary sure of the position.

    Before attempting to an answer its worth considering some elements of the market.

    If we look first at lending to small and medium sized businesses. Our image is of Mr Bank Manager sitting in his branch and agreeing with Mr Business Man what he needs to borrow to grow his business. Mr Bank Manger would of cause have years of experience in assessing businesses and have known Mr Business Man for many years.

    The real life situation is of cause very different. Assessing the performance of a business which is often highly dependant on the performance of a single proprietor is very difficult. Few banks have the expertise in local branches to manage this type of risk and if they wanted to do so the cost of monitoring the risk would far out weight the potential return. For this reason banks lending to smaller businesses are more interested in the value of the security they can obtain against the loan than the likely success of the business. The security maybe assets of the business, whether fixed assets, such as property, or plant, or receivable using debt factoring.

    However, I would suggest the single biggest means of security for banks lending to smaller businesses is the personal residence of the proprietors. This directly results in smaller business being quite highly leveraged. Which is itself a function of the tax system because a loan to the business but secured on the proprietors residence will mean the interest is tax allowable where as if the proprietor borrowed directly and invested the funds as equity the interest would not.

    Most small and medium business financing is really just asset financing.

    If we also at current accounts we need to remember that for some strange reason the UK market has developed so that for account holders’ banking is free so long as their account remains in credit. While operating accounts has good economies of scale it still costs money. Most of us want cash machines, standing orders and direct debits, cheques, statements on a regular basis, all of which costs the banks money but all the banks earns is the interest on any balance we have in our account. This might have been worth something to the banks when rates where 15% but now it is minimal.

    There is no indication small business, or personal banking, is particularly profitable.

    Lets turn to the of parcelling up branches and assets and selling them to competitors. I would suggest this is unlikely to be successful. If we look at the resent disposal of branches by Lloyds there was little interest from any of the types of buyers Mr Redwood suggests would be interested.

    The reason I am sure is that branch networks involve lots of people which by definition is expensive.

    Also it is not correct to say the banking market has shrunk in numbers in the last 20 years; there have been a number of new entrants, such as, Egg, Tesco’s, Sainsbury’s, M&S, Virgin. However these have all concentrated on internet banking. Even those who already have extensive physical presence around the UK, Tesco, Sainsbury, M&S have not chosen to open branches inside their stores but to stay with the internet.

    Egg is a very good example of the difficulty of creating a profitable business model in the sector. Launched by Prudential to great acclaim it rapidly grew in terms of accounts (mainly credit cards) and customers but never profitability. It has now moved through a number of owners but has never been able to generate significant profitability.

    It is also noticeable that the new entrants to the markets have only attempted to enter the personal banking sector, not the business sector. Since most will provide mortgages I can only assume they do not extend there products to the small and medium business sector because of the complexity of the market compared to returns.

    There is one exception in the last 15 years and while not a new entrant to the market it did challenge the big four in one market. That of cause is Northern Rock!!

    It’s a nice idea that there are lots of new entrants to the market waiting to take over branches from the big banks, but the evidence suggests that this is not the case. Indeed, I would suggest many of the banks would welcome the opportunity to cut their branch network.

    Some other problems which so not seem to have been addressed.

    1. Cost of capital, Banks need lots of capital and the costs of raising it are directly proportional to size.
    2. Access to the various payment systems BACS. CHAPS, which are essential to operate effective bank.
    3. Cash machines, perhaps the most important for most of us to access our account. How will the new banks offer a comprehensive service?
    4. Compliance costs have been increase dramatically by Government and the EU, many of these costs are fixed, so will bear disproportionally on smaller banks.

    Greater completion may seem a better model, but the banking market, as with many markets, in the last 30 years has been only that of merger and falling numbers. It maybe the reason is that this makes the market more efficient and cheaper for consumers.

    It would be ironic if we forced more competition and in doing so increase the costs for consumers.

  46. Conrad Jones (Cheam)
    Posted September 12, 2011 at 6:35 pm | Permalink

    Separating Deposit Accounts from Investment Accounts is a step in the right direction.

    But do we really have to wait until 2019 ?

    Separating Deposit Accounts from Investment Accounts will not prevent Bank Runs and therefore says to the Public (who understand Fractional Reserve Banking) that they will still be liable if the Bank goes bust. This will still not be a 100% Reserve Deposit Account System.

    There is very little reference to Fractional Reserve Banking in the Report – WHY?

    There is criticism of Banks for not Lending more – so Banks will see this as a sign to create more money through even more lending.

    When is the Government going to wake up and realise that we can create our own money and not allow Private Banks to control the money supply?

    If Banks actually had to have enough of other peoples money before lending money, the Debt Problem would evaporate. Public works and services would not rely on mortgaging our futures to Private Businesses. Income Tax is only necessary to pay the interest payments on debt incurred through ignorant politicians who think that the only type of money is that created out of thin air every time a Bank lends money to someone.

    The ICB Report is a whitewash of the real problem. Designed to make people believe that sometihng is happening when all it is is a means by which the Status Quo can be maintained.

    The so called “Independent” Commission on Banking does not address the real problem with the Financial System and does not even consider the option of the Government being sole creator of our own money.

    In eight years time we will still be involved in Wars, Debt and Poverty. An opportunity has been missed – yet again. Ignorance rules the day. Some Politicians may be unhappy about this but the Banking Community will be celebrating again tonight.

  47. Conrad Jones (Cheam)
    Posted September 12, 2011 at 6:51 pm | Permalink

    “Let’s have more banks – then they might have to compete for our business”

    In a free market capitalist system that would work, but we aren’t living in one of those – unfortunately.

    Banks hate Competition. We are not going to have any new Banks antime soon as the big Banks are just too powerful and complicit politicians accept the way things are and – possibly with justification; are terrified that if they even suggest that the Government can create it’s own money supply (we only create about 3% of the total in the form of coins and notes) there career opportunities will reduce drastically.

    Either that or they do not understand that 97% of our money is controlled (created) by Banks.

    A scenario of how it works could be applied to a car hire firm.

    Imagine a Car Hire Firm who has 100 Cars to Hire Out (Lend to people) for a Fee.
    At present they have to obtain ALL 100 Cars. In a Fractional Reserve Car Hire Scenario – they would only have to obtain 3 Cars (or there abouts), making a capital saving on the other 97 Cars, but could still charge Hire Charges on the other 97 imaginary Cars. I bet Car Hire Firms wish they could operate like Banks.

    That’s how Banks make enormous profits. When it goes wrong, because it is fundamentally fraudulant; the tax payer pays through Income Tax and increased National Debt which our Children will then be expected to pay the cost.

  • 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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