Let’s hope the Co-op’s decision to withdraw from buying the Lloyds Bank branches will make the authorities think again. The Co-op said that the increasing regulatory burdens on UK banking made it no longer in their interest to expand their banking business. The weak economy they said also impedes decent profitability. Indeed, they are reviewing their existing bank at the same time, and could decide to sell or cut that as well.
It is good it was the Co-op which took this view. People who hate banks on the left of the conventional political spectrum will find it more difficult to criticise the Co-op when it stands up for the need for sensibly regulated and profitable banking. Their statement was moderate and considered.
Most participants in the banking debate have come round to the view long proposed here that we need more banks to offer competitive services. If we are to achieve this the Regulators have to be realistic in their demands for cash, capital and staffing levels. The market has to sustain profitable banking, however loud the cries of bank critics everytime a bank dares to make a profit. It is profits that allow banks to increase their capital base and sustain more lending to people and companies that can make good use of it.
It is a difficult debate to conduct, against a background of such hsotility to banks and bankers whipped up by polticians keen to find a group more unpopular than themselves. The Archbishop of Canterbury called for the break up of RBS, a sensible cause. He did, however, also state that the banks had made two big mistakes – borrowing short and lending long, and lending to people who could not repay.
The truth is all banks have to borrow short and lend long to some extent. That’s how they make their money. Some current and on demand deposit account money can be lent to others for longer periods, as long as the bank keeps enough cash to handle demands for withdrawals.
They also have to lend to some people that will not in the end be able to repay. They back businesses, and not all will succeed. Good banks manage the risk of the different term structures on their balance sheets without misadventure, and keep the numbers of defaulting clients under control.
We need more banks. The Regulators are still not getting it right.