At last a politician is coming up with some serious proposals to deal with the banks. Osborne has done virtually nothing, even watering down the already inadequate Vickers recommendations. Cable has a much clearer and more effective reform programme to apply, but is caged by the Coalition. Ed Miliband to his credit is today issuing a set of reform policies which touches on some of the main issues, but it carries neither the the reach nor the weight to deliver the “root and branch change” promised. It also omits the most important reform needed altogether.
Ed says he will tackle the bonus culture, but does not say how. Huge bonuses are paid to maximize the excessive gains of investment banking which come primarily from overseas speculation, derivatives gambling, mergers and acquisitions, and tax dodging. These are reasons, not for reducing bonuses, but for banning them. And what about the panoply of other non-salary remuneration – share options, long-term incentive schemes, massive share hand-outs, and bulging pension pots? Dealing with bonuses alone won’t do the job; all the other income inflators need to be reined in sharply as well.
Ed says he will break the dominance of the Big 5, forcing them to sell up to 400 branches. Breaking the dominance of the Big 5 is certainly vital when they currently control some 90% of all UK lending, a virtual cartel. But since they have over 10,000 branches, making them sell off up to 400 is mere peashooter practice. We need instead a a range of smaller specialist banks focusing on infrastructure development, relational banking as in the German Mittelstand, knowledge and science industries, green economy, SME lending, etc.
Ed promises to create a British investment bank to improve lending to small businesses. But leaving the rest of the existing structure virtually intact won’t change the culture, style and direction of UK banking which is what’s really needed. And that will only be achieved by bringing the most important banks into the public sector.
Ed also wants a financial crime unit. But we already have a Serious Fraud Office, which needs to be strengthened further. The real way to keep a close eye on City corruption would be a UK Securities and Exchange Commission.
Ed is keen as well to implement in full the Vickers report – code for ring-fencing the retail arm from the investment arm of banks. But Vickers proposes the soft option to do this via Chinese Walls, which the City will always rapidly get round by regulatory arbitrage.
However, the key missing element from Ed’s package is regaining public control of the money supply which was privatised as a consequence of Thatcher’s financial de-regulation of the 1980s. At present the Big 5 lend £7 trillions a year heavily geared towards high-risk speculation hedged by the safe profitability of property mortgages. Only if the money supply is regulated, as it is in successful economies, to ensure that the bulk of the nation’s resources are channelled towards manufacturing, commerce and exports will Britain achieve a long-term sustainable economic recovery.