What should we do to the banks?

The banks are unpopular with the public for a variety of good reasons. They are the whipping boys of the politicians for less good reasons. The government has every wish to blame the whole economic crisis on greedy bankers, to suppress the role of incompetent government, regulators and central bankers. The public hates the banks, because it sees it has had to put huge sums of money into them, only to watch as their senior personnel continue to take large sums out by way of pay and bonus.

It is high time we had a proper debate about what went wrong and what should be done to have a better banking system in the future. I despair of getting such a debate in the Commons with my Labour and Lib Dem colleagues. They simply refuse to engage with the many points I make about the history of the crisis and the sensible way forward. They find it an inconvenient truth that the regulators were heavily involved and maybe they made mistakes.

What went wrong?

1. The Monetary Policy Committee followed boom and bust policies, bloating money and keeping rates too low for too long, then squeezing too hard and keeping rates too high.

2. The government followed boom and bust policies – expanding its own balance sheet too much, spending and borrowing too much in the boom, and then forcing the private sector to take all the hit when we lurched to bust.

3. Between August 2007 and the end of 2008 the authorities kept the markets starved of money when over borrowed banks needed access to funds. That is when the Central Bank should have made more cash available in the usual way – by way of short term loans against good security – to avoid the crash. There was no need for any major UK bank to go down.

4. The regulators led by the government blamed the banks for the crash from September 2007 onwards, and decided to make it worse by lecturing the banks in public on how weak they were instead of working behind the scenes to make them become stronger. Usually transparency is right, but in this area the regulator needs to work in private to avoid triggering a run on a bank. Having made the errors in the boom, the Regulators should have given the over borrowed banks time to adjust, allowing them to raise new capital, sell assets, split off businesses, run down their loan books, cut costs or however they chose to do it.

None of this is jobbing backwards – this is what this site said throughout the gathering crisis.

What should they do now?

The approach of the government should be different for RBS from the rest. RBS is state owned. It has received large sums of subsidy. It cannot go offshore or hit back against the UK authorities. It should be broken up, into a series of competing banks. These should be sold to maximise the returns for taxpayers.

Other banks should be placed under a prudent regime controlling their cash and capital. There is no need for a future banking crisis if we have competent regulators who understand the mistakes made in 2007-8. Today the regulator should relax the cash and capital controls, because they are too tight for the conditions.

Will taxpayers get their money back?

The government wants to ease taxpayer grief by claiming close to the election that we are poised to get our money back from Lloyds and RBS. They are adjusting the figures to try to create this happy outcome. They are knocking all the fees, charges and special revenues off the purchase price of the shares. Yet these receipts were connected to the whole package of financial support, not just the share purchases. This flatters the position.

It is unlikely taxpayers will make a profit the way the government is going about it. It would be possible to get all the money back we invested in the shares if the proposals above were adopted. One of the reasons is the pound has fallen so much, making the overseas banks owned by RBS worth more in devalued sterling.


  1. Nick
    March 29, 2010

    The approach of the government should be different for RBS from the rest. RBS is state owned. It has received large sums of subsidy. It cannot go offshore or hit back against the UK authorities. It should be broken up, into a seris of competing banks. These should be sold to maximise the returns for taxpayers.

    Maximise the returns.

    A politically acceptable way of saying minimises the losses.

    It's a basket case. Since it has been bailed out with borrowed money, we will never even get to break even.

    All down to crap regulation

  2. Norman
    March 29, 2010

    If only we had more politicians espousing views along these lines.

    Instead we are treated to bonkers ideas of 'transaction taxes' so that when the next banking crash happens there will be a kitty to pay for the bailouts! I'm almost afraid to google the Conservative Party position on said tax as I'm afraid as to what answer I'd get back!

    I'm still a little confused in my mind over what has happened to the £700bn of assets that RBS has divested itself of over the last year. If this firesale continues at what point will the bank no longer be big enough to break up into a series of competing banks and will the assets that are left allow for such an outcome? I imagine no one knows the answer to that question except perhaps a few boffins at the people who are managing the bank for the government and the board of RBS.

  3. Pauper
    March 29, 2010

    If one bank goes under it's the bankers' fault. If two go under, it's the regulator's fault. If they all go under (as they pretty much did), it's the fault of the regulations, and of he who drew them up.

    The Tories, who have made many tactical and strategic blunders in the past 13 years, never made a bigger one than when they let Mr Brown pin all the blame on the bankers, and none on himself.

    Too late now.

  4. Richard
    March 29, 2010

    An excellent summary. I think more realism is needed though by everybody on the question of how likely we are to get our money back. This seems to me to be inconceivable. The banks hold impaired assets of c. £350bn on their balance sheets (£280bn on RBS's). These are worth more than zero but a lot less than their book value. The banks can only trade solvently because of the government's support. Remove that support and the equity will have to find its true value – surely zero. It could be that years of currency depreciation and inflation will mean that in 10 years or so the nominal sums are repaid – though even that is unlikely. But the concept that taxpayers will get any kind of economic return on all the money invested (in loans, guarantees & equity) is surely wrong. Brown has wasted £10bns. Or am I missing something?

  5. no one
    March 29, 2010

    like BT and network rail the big newly nationalised banks are too big

    they should be smaller to foster competition and innovation

    LTSB would be better for the public and probably themselves if it were a number of smaller banks, lets call them say Lloyds Halifax Bank of Scotland TSB and Cheltenham and Glos?

    the economics and dynamics of merging and the imagined benefits of scale and market share are largely an illusion

  6. Brian Tomkinson
    March 29, 2010

    Do you think the Bank of England will be a more effective bank regulator than the FSA?

  7. lola
    March 29, 2010

    You need to reinforce the Regulatory Failure component of those 4 points. Perhaps add a No 5 to the effect that incompetent regulation configured as 'nationalisation by regulation', was in large part responsible for the banking failures leading up to the actual failure. Regulation as configured by Brown is not the answer, it's the problem. It was never 'light touch'. It was, though, always 'wrong touch'.

  8. Hugh
    March 29, 2010

    There is a fun Spectator blog yesterday including poster captions.
    I rather like this narrative on the last decade, it encapsulates my beliefs and reinforces what the NOTW was saying yesterday.

    I gruesome Gordon abolished the Board of Banking Supervision so that the spivs in the City could rip us off and we could bankrupt the English together.
    VOTE for ME

  9. Stronghold Barricade
    March 29, 2010

    I think you also forget John:

    When somoen walks in to rescue a company, basically in administration, there is an understanding that all employee contracts are null and void, and anyone remaining with the company needs to sign a new one for the new terms and conditions from the incoming proprietors

    With the bank bale out Brown & Darling simply gave the money without any conditions attached

    It is therefore unremarkable that the banks "continued as before" because the companies didn't have to change any policies

    I presume this was because Brown and Darling believed that the banks could quickley start to refill the revenue streams into the treasury if they were left unhindered. I believe that they failed to grasp basic economics and have simply left us with zombie banks that are drawing down the rest of the economy because there are few lending opportunites for business in this country.

  10. Rob
    March 29, 2010

    The current position of a taxpayer guarantee on the banking system allows them to create an excess profit underwritten by us. Obviously we need to secure *a* banking system for general commercial transactions but do we need to secure *all* banking? I think not. It used to be split as high street banking and investment banking with little if any overlap. To my mind the way forward would be not to try and crush all banking into a highly regulated and taxed framework but to say to them – 3 years, split your banking business into two, guaranteed (G) vs non-guaranteed (NG). G, highly regulated, for widows, orphans and the general public. NG, do what you like but if it all goes wrong…no support. Obviously NG can't access G funds. Let the private sector do what it does best and make money but we mustn't insulate it from failure because survival of the fittest is the very essence of Capitalism.

  11. Alan Wheatley
    March 29, 2010

    I sympathise with your despair as to your parliamentary colleagues.

    Any prospect of collaborating with Channel 4 on a programme that gives voice to the points you make? After all they do have a public service obligation, and it would do them good to be seen to be informing and educating, especially if it also highlights an omission in the BBC coverage. And anything controversial (as the mainstream would see it) is good for the ratings, and hence for advertising revenue.

  12. Olaf
    March 29, 2010

    Another reason we hate the banks?

    We're told interest rates are historically low yet to get any credit from a bank either as a loan or a mortgage will normally mean paying relatively high interest rates, unless you have a monumental deposit.

    At the same time the banks pass on the full force of the low interest rate to our savings.

    So we, the public, get it in the neck at both sides as usual.
    We pay a high price for poor service in the country in almost every circumstance.

    It does seem that to be British is to feel ripped off from cradle to grave.

  13. Cliff
    March 29, 2010


    I suspect the banks and bankers are not quite as unpopular as many would like us to think. I personally believe that the hatred towards bankers, as well as the "public outrage" at the expenses scandal, is more a media led thing. Now don't get me wrong, there is now and always has been, some dislike towards the banking industry, particularly by those further down the socio-economic scale, as this group is the group that tends to be ripped off by the banks in order to provide free banking for their more wealthy customers.

    The media, especially the twenty-four hour news channels, have to fill their programmes with something and I have noticed that, all too often, they appear to be making or driving the news, rather than just reporting it. The "duck island" is always mentioned whenever the expenses scandal is talked about and yet, that claim was never made. I think that one incident, if anything, illustrates that perhaps the system did work at some levels and some of the time!!

    A question that I would like answered is, why are the "nationalised" banks still funding and sponsoring events and organisations?….Why does Northern rock still sponsor a North Eastern football club? Why does Lloyds still sponsor London 2012? Surely, as is the case with government spending in general, it makes sense to cut unnecessary out goings and I would suggest these two items are unnecessary expenditure for banks that are in a financial mess and needed bailing out.

    One last comment, slightly off topic, I am disappointed at the news that the National Lottery that John Major set up is going to be foreign owned to me, this fact makes the notion of a UK National Lottery, a bit of an oxymoron.

  14. Cliff
    March 29, 2010

    Sorry John,

    "The “duck island” is always mentioned whenever the expenses scandal is talked about and yet, that claim was never made."

    Should have read;

    The “duck island” is always mentioned whenever the expenses scandal is talked about and yet, that claim was never paid.

    Reply: Both are right – Peter Vigger made a foolish inquiry to see if such a purchase would be covered, was told No, so he neither claimed nor receievd the cash.

  15. JohnRS
    March 29, 2010

    "They are knocking all the fees, charges and special revenues off the purchase price of the shares. Yet these receipts were connected to the whole package of financial support, not just the share purchases. "

    NuLieBore fiddling the figures?

    Shurely shome mishtake?

  16. Jim
    March 29, 2010

    I think we also need to separate the retail banking from the trading arms. If banks wish to gamble they shouldn't be allowed to do it with peoples deposits.
    The other thing I'd like to see discussed is what happens to the profits from money wished into creation under the fractional reserve system. It hardly seems fair banks should be allowed to keep profits from credit that they have created electronically.

    "Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

    The quote is attributed to Josiah Stamp, former governor of the BoE.

  17. JimF
    March 29, 2010

    In my simple view of the world, private businesses are there to make a profit for their shareholders or go bust and leave the market, and nationalised industries and organisations are there as subsidised public services without a profit motive, although they should do things as efficiently as possible to deliver the service.

    So just where are banks in this picture???

    What galls the public most is that when it is convenient, banks are treated as private businesses and make bumper profits for shareholders and remuneration for employees, but whoops, as soon as they look like they're going under in steps Mr. Taxpayer. You just can't have this both ways!!!

    When you should be encouraging responsibility amongst the banks i.e. either take the wrap and go bust or declare yourself a part of the State in perpetuity, you seem to be blaming primarily the regulators and the Government. That is tantamount to blaming the police and government for not stopping some juveniles getting "wasted" in the local pub, and spreading their week's wage over a Berkshire pavement, then scrounging the money to feed himself (herself) over the weekend! It's not illegal but it's sure not pretty! And the folk running these banks aren't (supposed to be) juveniles!

  18. Lindsay McDougall
    March 29, 2010

    For RBS, you are entirely right: break it up and sell off the parts. Aim to have sold all of the UK government's shares back to the market within 18 months. To maximise taxpayer returns, preparation and timing are everything. That is where RBS's CEO can show his mettle.

    Lloyds/HBOS is much more difficult. The state's shareholding is only 43% (only!), so we can not entirely dictate to its management. However, the same thing still applies. It is too big and should be broken up (note, though, that the Lloyds CEO has made the integration of Lloyds and HBOS a top priority). So how to incentivise the Lloyds board to co-operate? How about a total ban on all bonuses until tax payers have recovered the money (plus interest) that they paid for Lloyds shares? The Lloyds board would then probably decide to go for complete independence by raising money on the markets to finance any taxpayer losses on their shares.

    However, the words "Never again" are necessary.

  19. Kevin Peat
    March 29, 2010

    Thanks for bringing much clarity to the issue, Mr R.

  20. Mark
    March 30, 2010

    One thing we should not be doing is turning the Post Office into a government sponsored version of Northern Rock, offering over-large mortgages to first time buyers to induce them to overpay for housing and support Brown's housing Ponzi scheme.

    There is too much debt. Too much government debt, so that the BoE now has to fund £200bn out of the £913bn of gilts in issue and £55bn of normal Treasury Bills. Too much private debt, so the BoE now funds at least £319bn of the £1,237bn of outstanding mortgages (there was actually a tiny net paydown in Feb). Too much corporate debt, so that businesses want to repay it rather than draw down further sums.

    Banks cannot be considered healthy until these BoE props are eradicated. Such props are artificial injections to demand for debt and supply of funds which disguise the true lower values that the debt should carry. Those lower values will result in more losses for banks.

    Some key points from a recent speech by Charles Bean, DG of the BoE, to Cambridge students on 16 March:

    * Further balance sheet repair is needed by the banking sector which is likely to continue to restrain the credit supply. Charles Bean notes that “The spreads on lending to businesses and households,…, will be higher in the future than they were in the period preceding the crisis”.
    * The housing boom has resulted in some households, especially younger ones, carrying forward high levels of debt. However, “…the burden of servicing these debts is manageable [for now only] because of the low level of mortgage interest rates…” and “…unemployment has so far risen by much less than many observers, including the MPC, feared”.
    * The fiscal deficit is unsustainable in the medium term and creates a difficult balancing act. Cutting spending and/or raising taxes is likely to result in lower domestic demand, though a failure to do so may lead long-term interest rates to rise, also hitting demand.
    * Uncertainty about recovery in the rest of the world and particularly in the UK’s main export markets such as the euro area.

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  22. Adrian Peirson
    March 31, 2010

    I would have let the banks fail and told everyone who owed them money, your debts to these banks are now cleared.
    These people would have been better off and would have gone out spending so stimulating the economy.
    As for the depositors with money in the banks I would have honoured their savings by nationalising the Bank and doing what Govt should do, coin our own money.

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