As readers of this site will know, I think the worst errors that led to the Credit Crunch were made by the banking regulators, the Central Bank and the government. It was lurching from too easy to too tight money and credit which brought the banks into stress. It was the decision to pump public money into bank shares which was the last straw for a public losing patience with the government and the banks. That was a needless folly, as there were other means of avoiding depositor loss or system collapse whilst ensuring shareholders and junior bondholders took the hit they deserved.
The Governor’s criticisms of the banks today claim that the banks do not offer good service to customers, and are all too ready to take advantage of gullible customers with high charges and poor products. I have heard numerous specific criticisms of banks in general, which revolve around the following main points.
1. Regional and national centralised banking for business,with computer and model based analysis of loan prospects, makes it difficult for small and medium sized enterprises in each town to attract finance and the personal support of the Bank Manager.
2. Margins between lending and deposit rates are high. The costs of credit card borrowing in particular are substantial.
3. Large global banks pay their Investment bankers large sums, and seem more interested in that side of the business than the basic commercial banking on the High Street.
4. Banks do not know and understand their customers sufficiently, failing to offer the range of competitively priced savings and loans products that people would like.
Part of the current large gap between savings and lending rates is the result of the Regulator’s demand that banks make more money to put aside larger reserves. Part of it is owing to the very low official interest rates set. The banks would say that professional credit evaluation is crucial so they do not lose too much money in future. They deny that reasonable lending prospects go without an offer of a loan.
It is clearly true that Investment banking arms attract the best and most highly paid people, and are usually very profitable. That offends some people who do not like high remuneration, but does not in a well run conglomerate bank make it more difficult for people to get a loan or good service from the local branch business. They are two different types of business, run by different people.
The quality of service and the prices will be improved for customers if there is enough competition in the market. It is arguable that the past government and Competition authorities allowed too much concentration in UK retail banking, a process encouraged by the last government when it allowed margers in the boom days, and when it encouraged the merger of Lloyds/HBOS in the bad days.
The last wave of cost and price reducing competition was the advent early in the last decade of the new web based banks. Since then there has been little to match the impact of Chinese competition on industrial products, or the aggressive price cutting of the food retailers and clothing shops on the High Street. If new banking capacity could be created or brought on stream we might find new services offered at better prices. New banks might want to allow more decision making at branch level with an improved relationship with the branch manager. They might want to use more analysis of people’s accounts to offer a wider range of cost effective services relevant to each customer’s financial position. They might offer a better deal to depositors and not force them to keep moving accounts to keep up with the best rates.