Comment - The economy
Fixing our banks by David Flint.
LIBOR, PPI, CDOs, derivatives, Swops, credit crunch, haircuts. The
financial jargon is opaque and intimidating. But out of this has come
obscene and damaging inequality and a crisis that has destroyed
our prosperity and left many of our young people without jobs and,
often, without hope.
How has this happened? And how can we stop it happening again?
The story is complex but here's the short version.
In 1986 the Thatcher government deregulated the City in
made it easier for London to compete with New York but created
conditions for repeated takeovers of City firms. In particular it
allowed the combination of Retail banks (where you probably have
a current account) and Investment banks which did complex
transactions for companies - and traded foreign exchange and other
This combination allowed the traders to use the vast balances held
by retail banks to back their trading ('casino banking') and, as in
poker, fatter wallets made for bigger gains. And losses. Which
destabilised the system leading to the crisis.
So the solution must be to separate ordinary banking from casino
banking. Everyone from Caroline Lucas to David Cameron agrees -
though Cameron wants to delay it for six years. Separation is
necessary, in fact the activities should be in separate companies and
the change made immediately. But it's not enough.
Casino banking would be pernicious even if the gamblers weren't
using our deposits as their bankrolls. Consider. A thousand City
traders spend a year gambling against each other. Their gains and
losses balance out so no value is generated overall. Yet at years end
they pocket a billion pounds in bonuses. Where has the bonus pot
come from? It can only be from you and me. That's how inequality
was driven up. And why our brightest graduates choose the City
over engineering. To deal with it we need to tax this high stakes
gambling with a
or Robin Hood tax.
Yet that also is not enough. The crisis was triggered when poor
Americans defaulted on home loans that they should never have
been offered. That's retail not casino banking. And the 'mis-selling'
of payment protection insurance to people who could never claim
on it (fraud in plain English) is just the largest example of
criminality in UK retail banking.
The root of this problem is the fact that, because of its huge profits,
casino banking came to dominate the whole of banking. Managers
in retail banking sought to match casino profits and could only do
so through fraud. This is not recent and can only be cured by radical
action. All banking needs fundamental changes in governance and
culture and, with problems so deep-seated, the banks cannot be
trusted to reform themselves.
So, donning my management consultant's hat, I recommend:
- New laws to criminalise 'mis-selling' and market manipulation.
- The top 1% of retail bankers to be pensioned off within 12 months.
- New senior managers to be brought in from sectors with a better
track record in serving customers.
- Each retail bank to appoint a new board that includes several staff
and consumer representatives.
- Each retail bank to launch a multi-year organizational change
programme focused on honesty, customer service and whistleblowing.
First published in the EGP members newsletter, October 2012