Matthew Hancock and Nadhim Zahawi, two talented MPs elected in 2010 for the first time, have produced a thoughtful and challenging book about the banks. They are rightly critical of the greed and rashness which drove some in the banking system in the run up to the Credit Crunch. They are especially critical of the strategy pursued by RBS, which put the bank at great risk and ended with the taxpayer taking it over. They are also critical of the failure of the elaborate system of regulation put in place by Gordon Brown, which so lamentably went wrong in 2005-10.
Their major remedy makes a great deal of sense. They say we need to move from the highly complex and detailed rules based approach to regulation that so obviously failed in the last decade, to Big picture regulation. They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless, and needs to change if the bank is to retain regulatory permission.
As thoughtful authors, they challenge the economics assumption that people behave rationally. They comment on how waves of optimism in the City can lead too many people into excessive greed, with remuneration systems in large banks encouraging rashness with other people’s money. That is why the banks need a referee who will supervise the way they play the game, and prevent them from excess. Such a regulator needs to have a keen eye for the cycle, and an understanding of human nature. He or she needs to be above the game, and able to see when it is running out of control.
They also urge a better balance on Boards, with a stronger role for independent directors who could also in theory offer more restraint at times of excessive enthusiasm. Their proposals on more women on boards have captured more of the commentary than they warrant. Their fundamental point is one about how large banks should be regulated.
They also agree with the views on this site that we need more banking competition in the UK market. I hope they will support moves to sell off parts of the UK government’s banks holdings with a view to creating more successful and manageable UK High Street banks. As Matthew himself has said, the disciplines of capitalism including the possibility of failure need to be restored to the banking system. That means more smaller banks. This can be allied to regulation which protects depositors and provides living wills which ensure the orderly wind up of any bank which does still overstretch. Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.
It is good to see two MPs making a thoughtful and good contribution to the wider debate about the Credit Crunch and banking crisis. Their book is “Masters of Nothing” published by Backbite Publishing. It’s a good read. As they say:
“It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state. A truly free market should promote innovative new entrants and allow market leaders to be challenged. ” They condemn the “rewards for failure culture” which were “bestowed on men who drove their banks to ruin”. The FSA enforced its detailed rule book, but without breaking any rules “banks remained under-capitalised, toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’and outrageous risks were taken…” Exactly. Labour had not deregulated UK banking. It was regulated in great detail. It was also regulated in a way which missed the big picture, which failed to spot the elephant in the room – the underlying weakness of the banks and the extent of the overextended credit.