IF THE penny hadn’t already dropped, it is now clear for all to see that Britain’s banking policy is in disarray. The past few years have not been entirely wasted, with banks improving their health and bringing in new management – but the government’s vision is broken, and many of the reforms have been preposterously counter-productive.
Take competition policy. Gordon Brown’s disastrous decision to cajole Lloyds TSB, a healthy bank, into buying HBOS, a sick one, continues to cause problems. Co-op’s failure to buy the branches that Lloyds had been ordered to sell by the EU is a major setback; let us hope that a flotation can be pulled off, and that the stand-alone firm can be viable. It is obvious that the branches should have been sold to NBNK, a consortium of highly experienced City grandees. Co-op’s withdrawal follows Santander’s equally embarrassing withdrawal of its own bid for 316 of RBS’s branches. The government’s competition plans are a shambles.
There are several reasons for this. The government is wrongly seeking institutional diversity, not just competition. I have nothing against co-ops and mutuals but they should not be favoured over PLCs. The Archbishop of Canterbury’s bizarre endorsement of regional banking – if he wants to be treated like an expert in financial policy, he should read up on the tragic history of geographically undiversified regional banks, and how they are often the first to succumb – is part of this narrative.
A related problem is the government’s dislike of investment banking: yesterday’s Barclays numbers reveal that, once again, what used to be known as BarCap is driving profits. We need global universal banks, partly financed by their investment banks, to enter the UK retail market – and we also need smaller, state of the art retail-only challengers, as NBNK would have been, as Metro Bank already is and as hopefully supermarkets will be.
The IT costs of creating a bank are already huge, so burdening new entrants with extreme amounts of red tape and capital requirements means that most wannabe challenger banks soon find the enterprise unviable and give up. Like in every other market, extreme regulation means extreme barriers to entry. Only giants can survive. While the authorities now want to reduce some burdens on smaller banks, that won’t be enough to tackle the key issue: it is too costly to enter retail banking, the potential rewards too uncertain and the political risk too great. Those who love regulation at any cost need to understand that making the system ultra-safe means turning it into a cosy cartel of sleepy behemoths. The only way to encourage competition in the current climate would be to make bank accounts fully portable and almost instantly switchable, as mobile phone numbers are today, to encourage customers to shop around.
The other big issue is that the government now understands that its and the regulators’ decision to get the banking system to massively hike capital and liquidity reserves has backfired – but it feels it cannot admit this, partly because of international agreements. Yet its policy has reduced the availability of credit, and increased its price, and is the reason why the Bank of England is now expanding its funding for lending programme, and the government is subsidising mortgages under help to buy. We are getting a series of dangerous interventions in the market in a bid to rectify a previous set of interventions, which is crazy. It’s time for a proper rethink of Britain’s banking policy.
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