Taming the banks: two views from the FT

Oh the shame of the FT’s paywall!  Yesterday  the paper presented a wonderful view of the debate on the UK banking reforms proposed by the Vickers Commission with two opinion pieces under the title Taming the banks, long overdue or utter folly?  For the reforms was regular columnist John Kay.  Mr Kay (though I’m sure he’s not really a mere Mr) is one of my favourite FT columnists.   His articles do come out on his website in due course, but not this one yet, I’m afraid.  It is a very lucid article, pointing out the massive size of UK banks balance sheets: at £6 trillion, four times the size of the country’s income.  Of these but a tiny fraction is lending to industry, and a rather larger fraction is domestic lending such as mortgages.  The bulk of it is to the finance industry pumping up the great game of leverage.  The idea of ringfencing, the critical part of the proposed reforms, is to stop the small fraction of balance sheets that matters to individuals and “real” businesses from being poisoned by financial engineering gone wrong; or to put it another way, to stop the British state from having to underwrite the latter to protect the former.  Mr Kay’s only criticism is that the reforms are being implemented too slowly.

The opposing article is from Sir Martin Jacomb.  Sir Martin is no more a banker than Mr Kay, that is to say he’s done non-executive directorships but not much more; he’s a lawyer and chiefly famous for saying that universities should be independent of government, and that Oxford University should cut its ties with the state.  The bankers are in fact rather quiet on the reforms, after some rather clumsy lobbying to get the implementation delayed, which appears to have been quite successful.  The weakness of their case seems reinforced by Sir Martin’s article, which nearly nonsense.  Is this really the best the FT could find?

Sir Martin reiterates a familiar litany:

  • The reforms advocate breaking up “universal banks”, but this model “can be perfectly safe”.
  • It will hurt the City’s international position. “There must be universal bankers in Frankfurt rubbing their hands.”
  • It will cause the loss of jobs and taxes.
  • the new banks will not able to offer helpful products to industry.
  • It does not address the immediate problems besetting European banking,  “which result not from mistakes by bankers so much as blunders by European Union governments in the management of the euro.”

This lot is readily disposed of:

  • Universal banks did not come out the recent crisis well.  It is true that some of the better managed ones did not need direct government rescue (Barclays and HSBC in the UK, BNP Paribas, JP Morgan), though still benefited from implicit and explicit guarantees.  But far too many did, especially in America (notably Citigroup and Bank of America), here (Natwest and HBOS) and Switzerland (both UBS and SBC).
  • This is yet another cry of “Wolf!” from the City.  I remember how us not joining the Euro was supposed to kill the City in favour of Frankfurt.  The City’s standing is based on network effects of people, skills and time zones.  Most of its activity is from foreign owned institutions already.  If the UK owned activity shrinks, it is because the public liabilities that go with it are too large.  It best that we adapt.
  • This sort of answers the jobs and taxes bit.  As Mr Kay points out, lending to job-creating non-financial businesses should not be affected, and might even benefit if they do not have to compete for attention with gearing up of financial products.  It is much healthier if our economy is less dependent on highly paid bankers’ jobs.
  • Sir Martin uses the example of a currency hedging, which might be useful for an exporter with a long term contract.  But surely his ordinary banker can introduce him to an investment banker at little extra cost?
  • This is true; it’s a separate issue.  But is quite astonishing for him to suggest that the Euro area problems are the fault of politicians rather than bankers.  It was the bankers that bankrolled the Italian, Portuguese and Greek governments at absurdly cheap prices.  It was its banking industry that laid the Irish government low.  It was bankers from across the zone that pumped up the Spanish property bubble.   This kind of “it wasn’t us” defence from bankers simply shows how little they have learned from the disaster.

Apart this whingeing, Sir Martin makes a more subtle point.  We should be promoting more competent management amongst banks, and excessive regulation does the opposite.  Well, we must ask what caused the rampant incompetence in the most of the world’s banks before the crisis.  Surely it was the thought that if things went bad governments would come to the rescue, and it would all then be somebody else’s problem?  This is exactly what the reform seeks to address.  By separating the investment banking side out, it means that failure from that side will be easier to tolerate, and should not require the UK tax payer to stump up.  The retail side would be bailed out in the event of a failure, true, but it will be more difficult for these banks to pump themselves up to create a massive hole.  

There is an irony behind all this.  The point about banking reform is to make banking more, not less risky, for bankers anyway.  We need to see more bank failures, not less.  The by-line to Sir Martin’s article is perhaps its most cogent bit:  “Beware the paradox that a system to limit risk invariably increases it”.  But risk to whom?