Change the banks if you want economic recovery

When Ken Clarke was Chancellor he was lucky. He took over after all the difficult decisions had been put in place by Norman Lamont to get the then deficit under control. Reducing the deficit was a necessary but not sufficient condition for recovery. He took over when world trade and the world economy were going well, and the British banks were able to lend. As a result the economy grew well and the deficit shrank.

George Osborne has to do the same on a bigger scale. He needs to make his own luck. He has done the difficult thing, setting out a new path to cut the deficit. He now needs to make it more lilely the private sector will grow as fast as is needed to do the rest. World trade and the western economies cnanot be relied on to grow as quickly as we would like given the state of Euroland and the wobbles in the US. Meanwhile the UK banking system is not delivering the cash and credit to UK industry and comnmerce that it needs to be more confident and to put in more capacity.

The government needs to make changes to the banking industry to ensure more competitive credit is available to finance recovery. It will not wish to pre-empt the important Vickers review of retail and investment banking, by expressing a view on whether the two should be split. It could conclude now that the UK retail banking market is not competitive enough and start to do something about it. We need the banks to deliver more now, not in two years time.

I have two suggestions. The first is to hold a competition for new banking licences for suitable companies and consortia to aply for, to give a push to the rumours that there are people and businesses wanting to set up as banks. They can apply anytime anyway, but it would show the government is keen and will listen with their Regulators to the needs of the wannabes to get something going.

The second is to package up two, three or four UK retail banks from within the RBS and Lloyds/HBOS empires for sale. These conglomerate banks hold many brands and franchises, ranging from Nat West and Halifax to Lombard, Cheltenham and Gloucester and Birmingham Midshires. Some of these have been fully integrated, others still have some independent identity wthin the global banks. It would be possible to make up a package of branches, assets and liabilities in each case, sell them on to the market with a new quote, and raise new capital to give them growing room at the same time.

The UK needs say five new banks with starting capital of say £5 billion each, allowing them to establish a combined balance sheeet of say a conservative £200 billion. That would allow a useful injection of new cash into suitable UK business projects. We have a more competitive pound, lots of empty buildings and plenty of unemployed labour. We need the cash to get it back to work.


  1. Coker
    July 3, 2010

    We have had nothing but the conventional thoughts for too long give way to the bold and radical thinkers. What he is saying may have merits but one has to have guts to test it.
    It is true that British Banks are hamstrung now to lend because they spent decades stuffing their Boardrooms and Branches with people whose desciplines are as far romoved from Banking as the baked beans they sold from the fresh vegetables.
    We need a new vision on what Banks do and how it is done. The old Banks are marooned with credit scoring so there is no risk assessment on balance sheet gutsy lending to small business. No passion or affinity for the business. If we have new thinkers in Banking who will be out there touting for business advising on growth and suvival understanding what needs to be done we will see growth.
    We now have uniformed retail bankers bent on cross selling insurance and warranties not a modocom of understanding in reafding a balance sheet.
    Watch the select committee session with the last Banking chiefs you will see where they were from and where they took the Banks and understand the need now to return back to the local Banker and his ties with his locality.
    We want Bank managers who understand business and visit business to work with the companies.

    1. Alan Jutson
      July 3, 2010


      The Banks used to operate on a more local basis many years ago, with the Manager being able to make decisions without box ticking or referal to region.

      30 years ago I was building our new home (whilst doing a full time day job) whilst living in the old one (not planned, but in 1980 we also had a slump in house prices so could not sell) I was then made redundant.

      Went to see the local Bank manager with whom we had a bridging loan, to tell him the news that I no longer any income. He asked what I was going to do, I gave him my plan, he looked at the numbers and said, "Alan I am sure you will cope"

      Never more reasuring words could I have heard, yes it took a further 6 months of hard slog, but it all came good in the end. I dread the think what would happen now if someone was in the same position as I was then.

  2. A.Sedgwick
    July 3, 2010

    I was told that a very successful self made man, who became a business grandee and subsequently chairman of numerous large Plcs gave this piece of advice – don't become beholden to banks.
    My view is that banks have their part to play but the main problem with encouraging people to take the big step into creating their own business is the bureaucracy, paperwork and unnecessary financial risk.
    Osborne needs to set up a regime that encourages start ups. From his budget I see nothing to support this, in fact an increase in CGT is a backward step. There are people with money about prepared to invest in small enterprises but the return has to be there.

    1. oldtimer
      July 3, 2010

      I broadly agree with your views. Bank lending alone is not enough to promote the growth that Osborne wants and needs to generate extra taxes. He needs to encourage risk investment in those businesses the banks will not touch. Yet the CGT compromise, especially the 28% rate for higher rate taxpayers, is clearly a backward step. It is an obvious negative for the UK business angel community. Present policies seem designed to attract foreign takeovers of UK owned businesses.

  3. Mark Wadsworth
    July 3, 2010

    I don't understand this obsession with forcing banks to lend, it can't 'work' without making something worse somewhere else.

    On the business side, if you want businesses to expand, how about just giving them a tax cut? Starting with a VAT cut, as it is The Worst Tax Of All.

    I accept that keeping house prices as high as possible seems to be the only thing that matters to UK governments, but you seem to be sorting that out by cutting council tax and placing a complete ban on any new development. There's plenty more stuff you can be doing to keep the bubble inflated without involving banks.

  4. JimF
    July 3, 2010

    "That would allow a useful injection of new cash into suitable UK business projects"

    I'm not sure how much of the current lack of lending to business is down to the banks. The more cautious amongst us won't borrow because we feel on the wrong side of the deal.To put it bluntly, there is something decidedly wrong with the cards being stacked so wholly on the side of a taxpayer-underpinned bunch of shysters in Mega-Bank plc who then protect their funds with 5-6% interest rate margins, loan agreement costs and collateral requirements.

    Of course the borrowers who already stacked up loans prior to the crisis at good rates, who now need to re negotiate are in a different category, and are not the people you are talking about here.

    For new projects, we need new banks with new, more ethical ways of lending. Like good money drives out bad, we need good lending to drive out bad.

  5. JimF
    July 3, 2010

    In a dream world, one would be thinking about localised banks where succesful mature business people with cash in the bank would be on the board, making informed decisions about where to lend theirs' and smaller depositors' money, whether to younger businesses wanting to move forward, or for retail lending. Sure the Government could tilt the field towards business lending via loan guarantees, and could provide depositors' guarantees providing these banks met certain criteria in their savings and lending policies. But after that the local banks would need to compete with these multinational banks, and might well do so, on the basis of ethics, local support and some Gov backing.

    PS comment had to be split under new site rules….. I also have to enter name and e mail every time, also cannot see comment after posting to make sure it went ok. I'll stop now or this will be too long again!

  6. Antisthenes
    July 3, 2010

    "World trade and the western economies cannot be relied on to grow as quickly as we would like given the state of Euroland and the wobbles in the US."

    Whilst you have the above problem how can you expect banks to increase lending? Your pointing out the problem but your solution is flawed uncertainty and risk are too high so the banks have to lend with extreme prudence until they feel confident that any loans they make will be repaid. As for encouraging more competition in the banking industry that is always to be applauded, however that in the current economic climate is not likely to increase lending.

    It has to be accepted that until trade and confidence is restored lending is going be less than you would like and is not going to be the fuel to drive UK growth. Restoring UK private sector competitiveness by reducing the financial and regulatory burden will have to be the way forward. Recovery will be slow but at the end the private sector will be fitter and leaner and not burdened with debt as it will have to finance growth mostly through retained profit and innovation (the father of necessity).

  7. gyges
    July 3, 2010

    Not only change the banks but more disintermediation. Kenya has a payment system that operates through their mobile 'phone networks – where's Blighty's?

    Incredible to think that Kenya has a more advanced payment system that we do.

    Not only change the banks but privatise the currency.

    Fiat currency and passports are crimes against humanity – if Lemkin was an economist he'd see this statement as a truism.

  8. sm1
    July 3, 2010

    How will you prevent 'the current banks and future banks' paying out the superprofits in the form of large bonuses.

    1) I suggest supertaxes unless they are paid as longterm risk equity or debt equity of the company which is specifically non protected by HMG.This will pay a taxable (by law in the uk) income only based on the official BOE rate.
    2) Once we have proper competition and normal profits with many players we may consider removing 1.
    3) Capital gains 'earned' in the banking sector should be taxed at marginal rate, unless they are specifically meant and allowed by parliament.

    Banks are being subsidised by the state and until it ends super profits should not be distributable to controlling management or other stakeholder in dividends or pay/bonuses.

    I think more competition is only part of it, more price fixing probes need to be instigated.

    When are we going to see a fall in the cost of politics in line with non-protected departments?
    I specifically mean large senior headcount cuts in the Lords,the Commons,the quangos,the EU,etc. They must come before January.

  9. Neil Craig
    July 3, 2010

    Even withouty the EU & USA I suspect the world economy will continue to grow. I'm not sure if the world economy ever saw an actual recession. The real driver to growth is technological progress & so long as Moore's Law & similar phenomenon eork the previous world average growth of 5% is very attainable. The reason for much lower EU/US growth is simply state, usually eco, parasitism. If we wndedcthe expensive restrictions on new electricity generation, on housebuilding & most of the literally murderous "heath & safety" rules we would be able to achieve at least world average growth.

  10. Conrad Jones
    July 3, 2010

    Yes – credit is not being delivered to Industry and Commerce for the same reasons it wasn't being delivered before – Too Much Risk without a sufficient return on that risk. Although they are still quite happy to invest large trunk loads of cash in derivatives and ciphon off Tax Payers money for themselves as salaries and bonuses.

    With these "Five new Banks" where would the £25 Billion Pounds come from and would there be any changes to the Fractional Reserve percentage?

  11. forthurst
    July 3, 2010

    Somehow, banks need to become the servants of business. In the USA, the total proportion of corporate profits attributable to the finance sector has now reached 45%. Much of what Wall Street does, to the common man, would consitute fraud. It is essential that the sector which caused the depression and saddled the taxpayer with huge liabilities is cut down to size in this country; it doesn't make anything, afterall and we can't afford it.

    Obviously, John Redwood is correct in suggesting there is too little competition and it needs to be increased but it is also imperative that banks compete with each other in the right way; if they are going to go back to lending almost exclusively, by preference, on property, both private and corporate, and otherwise massively to olgarchical confidence tricksters, then our businesses, both large and small, will continue to be starved of working capital and, once gain, the productive sector will falter and the our future a a munufacturing base will continue to be eroded. Clearly the system of central control and financial rewards by size of loan within banks needs addressing. Local bankers need to be empowered to assist local businesses. We can't go on with yet more property bubbles engineered by the banks while industry withers on the vine. Banks must be disincentivized from giving preference to foreign asset-strippers, or splurge the odd billion on some spiv or fill the balance sheet with derivatives (30%, already for some); they must be incentivized to enable small businesses as well as large to thrive and grow and compete successfully with our international competitors

  12. Andrew Gately
    July 3, 2010

    Sorting out the banks and lending is more complicated than simply splitting up banks.

    The first step to be taken is to allow banks to shrink their Balance sheets in a orderly fashion. This is as much a political issue as anything else. At the moment the banks are having to borrow money though the govt. and the BOE. This money can only be repaid by loans to private individuals maturing. This money would normally be relent to more private individuals but now it is not and this has lead to an extreme credit crunch. The way out of this is for govt. and boe to agree to lend for a longer time but as this has been labeled tax payer money by the BBC and Vince Cable it is difficult politically to do so.

  13. Andrew Gately
    July 3, 2010

    At present the Conservatives appear paralysed as they are too scared to throw their weight behind this solution and are happy to continue with the rather silly taxpayers money argument as shown with their decision to continue with the last governments nonsical valuation conditions that were applied to Northern Rock shares and wiped out the private shareholders. Unless the Conservatives can come out and convince a largely financially illiterate general public that loans to banks by the bank of england are not taxpayers money and that there is a common good at stake here then the pain to the economy is going to be much worse than it should be.

  14. Conrad Jones
    July 3, 2010

    I agree with your ideas on creating five new – "Completely Separate" Banks. Laws should also be engineered to prevent them from forming together – behind closed doors in secret meeting places to monopolise their markets- and our lives.
    I think we should all be very skeptical about Central Banks and Central Bankers. In 1913, the "Federal Reserve System" was introduced in the United States on a political wave of ensuring that previous Banking Crises from the previous Centrury would be prevented. It didn't work – The Dollar veered away from the Gold Standard. One year later the World was at War and 1929 saw the most herendous depression the World had ever seen on a Global Level.

  15. Conrad Jones
    July 3, 2010

    The US FED is based largely on the "Bank of England" model.
    When the US started to detach it's currency from the Gold Standard after 1913, it allowed the Centrally controlled "Federal Reserve System" to create money (at interest) and lend it to the US Government and other Governments. It then had a means by which it could inflate the currency and lend this to the French and British Governments which allowed them to wage war in Europe.
    If France and England had lost WWI, they would not have been able to pay their US Loans Back. The "Federal Reseve System" would have lost out on Interest Payments. Enter the "Lusitania" stage right, 1st May 1915, New York Harbour – Liverpool. Never reached it's published destination.
    Banking Interests are nearly always run counter to the Interests of National and Economic Interests.

  16. Conrad Jones
    July 3, 2010

    The "Federal Reserve System" is not "Federal", nor does it have a realistic "Reserve" (Except borrowed gold bars) and it is not a "System" – it's controlled by a small group of New York Privately owned Banks.
    Mayer Amsched Rothchild once was reported to have said:
    "Permit me to issue and control the money of the nation and I care not who makes its laws." — , a prominent European banker.

  17. StrongholdBarricades
    July 3, 2010

    If we judge banks on their own criteria then many would have had the carpet removed from under their feet rather than granted support.

    Surely it is much easier to get the BoE to target 0% inflation in the housing market for the next five years to make the banks change their long term policies and find much greater rewards in the Commercial sector. Thus the "growth" would be in the real economy and actually it might help home owners indirectly, and force a change in Buy-to-let, and properties for pension out looks.

    Until then, you'll probably find that banks will still only lend for the umbrella a company needs when the sun is shining

    1. Mark
      July 5, 2010

      0%? Far too high – minus 5% nominal, or minus 10% real at most.

  18. StrongholdBarricades
    July 3, 2010

    I also think that it might be a good thing to get more competition into the banking sector, but I don't think that it should be achieved at the level of reducing value to the tax payer.

    I think new entrants should be encouraged, because they will come without any historical baggage and actually compete directly and force changes in other banks policies

  19. oldrightie
    July 3, 2010

    Banking is as out of control as is the "god" of globalisation. Small really is best.

  20. waronfreedom
    July 3, 2010

    Both very sensible suggestions. Banks "too big to fail" was a significant factor in the banking crisis.

    In fact, the Govt has a need to watch any organisation which is too powerful – and should itself be accountable.

    But the bigger problem with the banks is the way they all chased profits in trading and all loaded up on sub-prime debt.

    The credit rating agencies failed, the FSA failed, and the banks themselves failed.

    Only one of these has been addressed, and in a very unconvincing way. Introducing a Glass-Steagal Act is a necessity. There is no excuse not to.
    I'm not sure what to do about the credit rating agencies.

  21. Iain Gill
    July 3, 2010

    get India to pay (full price?ed) for the IP they have (acquired-ed) from the UK in the past 5 years and you will then have a large sum to play with 🙂

    i note in practise companies like virgin that want a banking licence simply buy a small existing bank, thats exactly what virgin have done, its apparently a lot easier than getting a banking licence from scratch

  22. David B
    July 3, 2010

    Its not only banks. We are ill served by many of the giant conglomerates which have grown up in recent years. Perhaps we need a monopolies and mergers commission with real teeth, and drawn from many fields. I am minded to think that companies should not be allowed to grow by acquisition of others in similar market sectors at all. Would we not have been better served if we had lots of independent banks? Would we perhaps have retained an indigenous car industry if British Leyland had not grown too large?

    The EU is big enough to enforce such a rule.

    Let new owners buy businesses by all means, but 4 supermarket chains, and 4 banks for example are likely to stifle competition, not nurture it.

    Anyone who works in large concerns knows how inefficient they are. I am unconvinced that economies of scale are not more than offset by increases in incompetence in larger concerns ( private or publicly owned ).

  23. BigJohn
    July 4, 2010

    I still haven't heard anything about any convictions, of anybody over this banking system fraud !!!

    As well as the banks accountants, there are auditors, credit rating agencys, the fsa etc.

    All these people are paid a lot of money, basically to stop the situation we have from happening, but they all failed to do their jobs.

    The whole thing stinks, and it is obvious to me, that there must of been a lot of "creative accounting", to have caused this situation, to happen in the first place.

  24. christina sarginson
    July 4, 2010

    There is such a fine balance with the economics of any country and the whole situations seems one of risk and luck. I know we all have to tighten our belts but we do still need to be able to breath, I hope George Osbourne has got this right.

  25. Javelin
    July 4, 2010

    A simple thing that could be done is force all banks to offer simple savings accounts. I was shocked to find some banks don't offer stand alone accounts. Back to basics.

  26. Alan Wheatley
    July 4, 2010

    The word "cartel" has been used by a senior politician applied to the banks in the run up to the election.

    Is not one banks excessive bonuses another banks business opportunity? Unless there really is a cartel.

    More competition is wanted, so I like your stimulus idea.

  27. Javelin
    July 6, 2010

    John. Houses ARE the banks in UK PLC.

    We deposit our savings into our houses. Why have a savings account when you can have a mortgage.

    How unstable is that? Think about it. The vast majority if the UK sink their savings into assets that can rise and fall in value.

    If the UK wants a banking sector that saves and lends it needs to take savings away from houses and put it in a more liquid form.

  28. nonny mouse
    July 6, 2010

    I think you may be a little unfair to Ken Clarke. According to the BBC Ken Clarke's first budget "was greeted by critics as representing the biggest tax increase and the biggest cut in public spending since the war."

  29. Business For Sale Mallorca
    September 12, 2010

    Business For Sale Mallorca…

    If a Freehold becomes available it usually sells quickly…

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