Inevitability when something happens; there is a tendency to blame the system itself rather than the behaviour within a system. Grasping for the need to be shown to do something, politicians – backed by hectoring calls from the media - ignore the obvious in favour of introducing more strict regulations or laws. The obvious being, what was the behaviour of the people involved?
From gun laws to dangerous dogs, the effect has been that the lawful have been punished for the actions of the unlawful and the actions, or inaction, of politicians, police and judiciary.
And so it is with banking.
Three years ago, we saw the financial crash that we have yet to recover from. As banks went to the wall and the markets crashed, governments stepped in to bailout other banks.
As a result, the UK government set up the Independent Banking Commission which releases its final report on the future of UK banks in under a week’s time.
In all likelihood, the report will recommend the ring-fencing of the retail operations of a bank from the investment side.
Predictably, in these bank-bashing days, the public and politicians have applauded the suggestion and in fact go even further and want a full-blown abolition of universal banking.
However, it is important to note that, in the UK at least, the major failures in the banking system came from retail operations or takeovers. Northern Rock and Bradford & Bingley were high-street operations, whilst RBS entered into a disastrous purchase of ABN Amro. In addition Lloyds was a paragon of virtue in banking terms until being forced to take on Halifax.
Those truly universal banks, Barclays and HSBC for example, were relatively unscathed despite having extremely aggressive investment divisions. Barclays even going for the profitable parts of Lehman’s following its demise.
The crash started with sub-prime mortgages – a political strategy from Bill Clinton. It was not casino banking, this was a politically-motivated form of irresponsible lending. When the sub-prime mortgages were repackaged, it was also not just the “Anglo-Saxons” that were caught up on the idea of ever-increasing returns. German, French and Swiss banks were happy to pick up sub-prime debt packages with the promise of monies to come.
The issue was behavioural. Poor risk management and poor decision-making at a time when politicians were making claims for an end to boom and bust and the consumer feeding frenzy was about to hit its peak. Everyone was at it. The politicians, you the public, us in the media, the banks, they were the good times. Only a few were predicting the bubble burst and their voices weren’t loud enough to be heard above the ringing of cash tills and ATMs.
Making a decision, so you appear to be decisive, is not a sensible option unless you look at the events and behaviour within the system.
In 2008, Northern Rock should have been allowed to fail and RBS should have gone to the wall, same with Halifax. This was the moral hazard that Bank of England governor Sir Mervyn King had talked about – take the risk, take the fall. A structured wind-up with depositors and mortgage holders protected should have happened.
This would have given the signal to the markets and the banks themselves that they were not protected, only their customers were. This would have led to a natural change in investment and risk habits rather than the politically-enforced one that is being suggested at the moment.
Although banks, and politicians, doom-mongered about banks being “too big to fail”, my view is tough. The economic world needed an adjustment no matter what. Speaking as one who was hit by the crash, I know how tough it could have been but I would argue that this adjustment could have prevented us from being where we are at the moment, teetering on the edge, lacking a confidence in the global economy.
It is not that some of the ICB’s ideas aren’t sound. Capital adequacy rules are already being put into place through Basel II and the European bank-stress tests, while living wills - to allow an orderly wind-up of a failing bank whilst protecting savers - are good if done correctly. But splitting operations and not allowing banks to cross-finance operations would not restrict risk and indeed could actually hinder not help the British economy.
Investment banking in its own right is not inherently wrong, in fact it provides financing for companies and income for pension funds. The issue is about people and risk. Rather than destroying a structure that rightly or wrongly, plays a big part of our economy, the question has to be about shareholder or investor accountability for management actions, protection for retail savers, and sensible regulation that promotes the recovery, not kill it dead.
With both the US and European leaders rejecting the banning of universal banking, it hardly seems believable that some in Westminster seem determined to go ahead with this and present a Britain which appears completely hostile to investment and finance.
It seems it is not just banking behaviour that carries a risk to the UK.
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