Smaller banks, the Chancellor and the Governor

Last week there was an apparent disagreement betweent he Governor and the Chancellor over the dangers of mega banks. The Governor rightly warned that some banks are too big to fail, implying something should be done to stop this. The Chancellor seemed to be more accepting of very large banks, and was more in favour of demanding more capital and more liquidity – a happy request for him at a time when he needs banks to buy more government debt!

I am with the Governor to this extent. I do think some UK banks are too big for comfort, and there is too little competition on the High Street to lift service standards and foster innovation. The answer to this lies not with a new Glass Steagall or some other regulations, but with competition law, and with the government as owner of two of the large banks.

In future the Competition Authorities should be allowed to block mega mergers of banks, and encouraged to do so by a clear banking competition policy. I was against both the LLoyds/HBOs merer and the RBS/ABN Amro merger. These mergers damaged the markets and the shareholders. They should have been stopped by the authorities.

The UK government can fashion a more competitive banking sector by splitting up RBS and LLoyds before returning them to full private sector ownership. This will the topic of a future blog.


  1. Mike Stallard
    June 22, 2009

    It really does not seem ages ago since everyone was talking about the “toxic debt” of the banks. Where has that gone? Was it a fraud? Has it been paid off? It just seems to be under the radar at the moment.
    Barclays seems, without government help, to have almost recovered now.
    Meanwhile vast amounts of the banking system seem to have been absorbed by the government. Again, it does not seem to be so long ago that you were warning us about trillions of pounds, which no government has got, being used to prop up the banks and thus risking an Icelandic collapse. Is that threat now over?
    Meanwhile, we are being bamboozled with all sorts of stuff about parliament and Mr Brown’s incompetence as the blissfully unaware government (owner of a large part of the system) slips further and further into debt.
    Is the cataclysm now passed?
    Or was it just another pile of government spin?

    1. jean baker
      June 22, 2009

      Escalating borrowings for PFI’s continues, according to reputable blog sites.

      It seems the manner in which the Fees Office operates serves to deflect from the more serious issue of borrowings against taxpayers.

  2. Jon
    June 22, 2009

    “The Chancellor seemed to be more accepting of very large banks, and was more in favour of demanding more capital and more liquidity ”

    Could that be seen as an admission that the Government shouldn’t have sold it’s Gold and Foreign Exchange reserves.

  3. Kit
    June 22, 2009

    The only way to achieve a competitive banking sector is clear the way for new entrants into the market. The only way to do that is to deregulate. Currently the only viable way into the British market is to buy an existing bank – hardly the best way to create competition.

    1. jean baker
      June 22, 2009

      The government was elected to run the country, not it’s banks; it’s undemocratic and uncompetitive. Taxpayers were oblivious to the level of debt racked up by the ruling regime.

    2. Lola
      June 22, 2009

      Hear Hear. Which is exactly why NR, RBS and HBOS should have been let go. The pieces would have been picked by new entrants, the existing banks being so damaged and without sufficient funds. What price Tesco Bank or Virgin Bank.

  4. alan jutson
    June 22, 2009

    Agree with you that the Governor has the more correct thoughts.

    Also agree with you that the Banks could do with a bit more competition with more taking part. But with the Government helping Santander with Bradford and Bingley, and Alliance and Leicester joining the Santander and Abbey Group this has not helped.

    Unlike you, I am becomming a fan of splitting the Banks once again from the more risky trading elements that they undertake, which could, and has in the past, helped to bring the whole house down.

    Regulation now seems in chaos again, with the USA and Europe putting forward different types of schemes, with us to follow with another in a few weeks time.

    G20 success, I think not.

  5. Richard
    June 22, 2009

    It is clearly not sustainable for the taxpayer to underwrite the global activities of banks. For example Barclays is on a major expansion path in global investment banking right now. Good luck to them – and shareholders will benefit if it works. But if it collapses in a heap, the UK taxpayer will pick up the bill. Isn’t the simple thing the following: if a bank hits problems, the government underwrites all depositors (but only depositors, not other debt-holders) in exchange for collateral (eg mortgages) of 105-110% of the total value of the deposits. Perhaps they could even purchase these assets in exchange for the bank assigning the deposits in a private transaction. The bank is then told to raise sufficient capital within a reasonable period of time (eg a year), either by raising it in the markets if they can or by negotiating a restructuring (and possibly a run-off) with bond holders and other creditors as any other company would have to do in such circumstances. i.e. in no circumstances should the taxpayer either (i) underwrite the total balance sheet of a bank or (ii) nationalise a bank, wasting taxpayers’ money & (as your rightly pont out) distorting competition.

  6. Brian Tomkinson
    June 22, 2009

    I thought that the merger of Lloyds and HBOS would have been stopped by the competition authority but the government intervened to allow it – indeed to ensure it went through. If governments can do that, what value is there in a competition authority?

    1. jean baker
      June 22, 2009

      I recall Brown on TV news with Lloyds spokesperson at the outset and government involvement ensured with merger eventually took place.

      Given Lloyds historical record of ‘prudence'(it’s soundness reportedly placed it in pole position for the HBOS takeover) many find it questionable as to why so much ‘toxic debt’ at HBOS was not reported (in the media) until sometime after the takeover was completed.

      Would Lloyds have involved itself in the takeover had the level of ‘toxic debt’ been transparent ? Many believe not ……..

  7. Waramess
    June 22, 2009

    It will in time become clear that banks in trouble must be allowed to fail and that the problem right now is too much regulation and not too little.

    If we try to restrict the size of our banks without looking at the competetive consequences we will lose any advantage we presently have in the world market and the corollory is that if we try to move to negate negative consequences we will almost certainly get it wrong.

    Systemic risk is something dreamed up by left of centre central banks to protect their own: it just does not exist but it is very convenient for polticians, particularly on the left to repeat it.

    Banking is already the most regulated business in the UK and look where that has got us.

    Far better to deregulate and allow the market to sort out the weak banks. So far as retail depositors are concerned let them take out insurance against their banks default and limit the amount of risk each insurer can take.

    Allowing the Central Bank and politicians to meddle in matters where they have nothing to lose other than our money is a recipe for disaster

    1. jean baker
      June 22, 2009

      It (reportedly) took Blair 6 months to abolish Clause 4 (financial regulation) in 1997 and the state of the economy with historic levels of debt speaks for itself.

      1. Waramess
        June 23, 2009

        I am not suggesting a little bit more or a little bit less regulation neither am I suggesting different regulation, I am suggesting the amount of regulation imposed by government should be neither more nor less than that imposed on any other commercial entity in this country.

        People argue that lack of regulation caused the banking crisis but that was far from being the case

        Notwithstanding the accusation by some that the free hand afforded the banks was their undoing, the banks were never given a free hand.

        The regulation was the wrong type of regulation, as with most regulation of this type, and the supervision was the wrong type of supervision and, the problems experienced would never have happened had normal market forces been allowed to prevail.

        1. jean baker
          June 23, 2009

          Regulation ensuring economic stability economic growth was the cause and government’s responsibility. Toxic levels of debt confirm banks were given a free hand, blind eye and deaf ear in the process.

          Bush’s regime reportedly worked in line with Blair’s abolition of fiscal regulation and the results are well documented.

          ‘Toxic debt’ stems from speculation and greed, not prudent, secured lending. Labour’s incurred a three generational level of debt against taxpayers against ‘normal market forces’.

  8. Josh
    June 22, 2009

    It’s simple, let’s have a free banking system like the one Sweden enjoyed in the 19th century. I accept that over the counter derivatives and securitisation was not in fashion back then, Sweden enjoyed decades on growth without a banking collapse and it was on the gold standard too. If governments have proven anythinf during this crisis, it is that they are completely untrustworthy with fiat money. It’s time to restrain them. I have an essay somewhere in Swedish free banking, if you want a copy just email me. It is too long to cut and paste.

  9. Javelin
    June 22, 2009

    I think the situation is more complex than you state – and the issue being the context.

    The context is that regulations are set by the Government and the Government is also responsible for bailouts. The Government could make banks, regardless of their size, very conservative ensuring that none of them will fail – along the traditional “bust” routes.

    However, if the banks are forced to be too conservative with risk they will reduce their profit, meaning they may fail because they either become unprofitable or they get taken over by more profitable banks who are not subject to the same rules.

    Risk is a double edged sword.

    The same is true for size. But rather than risk, it is economies of scale that is the double edge sword. Large banks will make more profit with lower cost per unit. But … economies of scale will mean more dependencies between functions within the bank making them more dependent on the failure of core business units and therefore making them ultimately more unstable. Smaller banks may go bust far more frequently than larger banks.

    Unless Government regulate sensitively then banks will suffer and through employment and tax receipts they will suffer.

    Making banks failable rather than fail-proof sounds alright in theory but in a global context it means British banking will fail whilst other banks grow stronger.

  10. Dan Tubb
    June 22, 2009

    This economic crises has produced a very strange conviction for a free-market Tory like me. I’m now in favour of nationalising all those banks that took money. Spilting them into a greater number of smaller banks and selling them off.

    Then make it clear that in the future banks are on their own, that they can and will fail.

  11. adam
    June 22, 2009

    I dont agree with anti-trust style interferences.
    Banks should be regulated into a position that they do not require taxpayer bailout, irrelevant of size. I am skeptical that they ever do or did.

  12. Kevin Lohse
    June 22, 2009

    If our banks are diminished in size, will they be able to viable in the global economy, or will they be gobbled up by the leviathans?
    Jean Baker. While the application of Labour policy was in part responsible for the credit crunch, I don’t see how the application of an antedeluvian piece of Marxist theory could have improved things. Do tell.

    1. Kevin Lohse
      June 22, 2009

      to be viable.

  13. figurewizard
    June 22, 2009

    The separation of retail (inherently a cautious business) and investment banking (inherently risky) achieved by the Glass Steagall act did lead to sixty six years of banking stabiliy, despite there being a six year world war in between. The history of the act shows that regulation of the former was far more effective as their business was focused and clearly understood by both the management of the banks and the regulators themselves.

    Since the repeal of the act however banks got to be a lot bigger; not by developing their retail business but by charging headlong into the (risky) investment fields previously denied to them, which we now all know neither they nor the regulators fully understood. The result is that we, the taxpayers have been loaded with collosal levels of debt which will take a generation to pay off.

    In view of this banks must be forced to change, and that change must lead to there being more and smaller banks, who know their business. This is why a new version of Glass Steagall should be considered. Those of us who are having to pay for their previous follies do not want to see them engineer a return to the status quo.

    Reply: The bank that went down, doing most damage, was Lehmans. Lehmans was just an investment bank. It was the failure to control risks and capital in all sorts of banks including ones that would have passed the Glass Steagall test that caused the crisis.

  14. Pat
    June 23, 2009

    If a business is too big too fail- its too big for the country. If we bail out a business it loses competitive edge, and needs ever larger bailouts until someone brave pulls the plug. Should we have a brave leader again I would rather they didn’t have to waste effort covering old ground- there’ plenty of challenges without repeating old ones.
    Why not restructure corporation tax on a sliding scale dependent on share of UK market, so that large companies pay a high rate of tax and startups pay nothing. We should then get more startups and more overseas companies moving in, and large companies would focus on efficiency rather than market share. There should also be an absolute minimum of allowances- so that companies don’t spend their time gaming the system. This should also reduce both the cost to HMG of collecting the tax, and the cost to companies devising tax avoidance systems- having some of the best brains in the country arguing about tax liability is extremely wasteful.
    If asked to pick the greatest business of 2020 I would say that todays great business is the most likely single candidate- but their are many many startups, and it is more likely that one of these will be top dog on 11 years time (though we have no idea which one)

  15. Javelin
    June 26, 2009

    Correct me if I’m wrong, ut as I remember it, it was the small banks that got into trouble and it was the Big English Banks that bailed them out.

    The two Scottish Banks were badly run, grew too fast and took high risks. In the old days big banks took turns bailing out small banks. Having lots of small banks would mean having lots of failures and no big banks to bail them out.

    Of course the key point here is that it doesn’t matter whether a bank is big or small, what matter what risks they are taking. They way to check on this is to make the banks books transparent. The regulator should have a right to banks books and should have the right to (quietly) get them to unwind positions if they think they are too risky.

    It was RBs – mega bank in trouble, and LLoyds after it merged with HBOS

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