Latest post on Left Futures

The biggest banks are still not curbed

In the 1960s banking assets accounted for some 50% of GDP. By the late 2000s they had risen to about 200% of GDP. In the case of Britain with its grossly over-extended international banking sector, they had risen to 500% of GDP. The reasons for this were partly to enable large companies to start doing business in ever more countries, but largely because of the de-regulation of banks and markets by Thatcher and Blair/Brown together with egregious financial innovation.

The latter were not only mortgage-backed securities drawing on sub-prime markets (the posh financial phrase for basing these securities on households with no hope or intention of repaying these loans), but also designed mainly to allow banks to circumvent regulation and take on more risk with (ultimately) taxpayers’ money to increase profits.

Basel II also purported to calculate precisely the capital reserve required to be held against the probability of loan defaults, but thus unwittingly categorised vast quantities of assets (e.g. exotic derivatives) as ‘risk-free’ which (predictably) turned out to be the opposite. But what is most significant of all is the way the banks deliberately inflated the size of their own balance sheets to increase their own power and profits on a mega scale.

McKinseys estimates that this accounts for about a third of the increase in the global debt-to-GDP ratio in the years before the 2007-9 crash. Bonds issued by banks during this period were 5 times larger than by companies. It is staggering that after 1995 only a quarter of the increase in debt to GDP came from households and companies, given that that is the real purpose of finance.

All this suggests that the finance industry has been grossly over-enlarging, is still far too large, and needs to be cut back. That process has already begun, but still has a very long way to go. Last year the investment banking industry generated total revenues of £233bn, a third less than the £341bn at the peak in 2009.

There are several factors driving this further. The include poor economic growth across much of the world especially the Eurozone, a raft of new regulations including higher capital ratios and likely ring-fencing of retail from investment banking, and the squeeze on margins from new technologies such as algorithmic trading systems.

There is also, ominously for the European investment banking industry, new rules emanating from the US which would force big foreign banks operating in the US to set up local holding companies for all their US subsidiaries. This seems to be aimed at Barclays and Deutsche Bank both of which have recently de-registered their main US holding companies in order to circumvent new capital requirements.

Nevertheless the 6 largest investment banks in the world – JPMorgan, Goldman Sachs, Morgan Stanley, Barclays, Citi and Deutsche Bank – still control nearly half of total global banking revenues, and are still increasing their dominance. Time for the G8 next month to deflate these over-extended behemoths and cut them down to their proper role to service companies and households, not themselves.

Comments are closed.

© 2017 Left Futures | Powered by WordPress | theme originated from PrimePress by Ravi Varma