Given the scandals, bonus increases and plummeting lending to small and medium-sized British businesses, reform of the banking system is likely to be a hot topic in the run-up to the general election. It is not surprising then that Labour has launched its plan on banking reform, which proposes measures to improve competition within the banking sector, lending to smaller businesses, and the culture of banking itself.
On the local and regional issues of increasing bank lending to smaller businesses, the banking reform paper makes some sensible suggestions. Among them are a greater system of guarantees for new and smaller banks to help them establish themselves as lenders, and a more substantial British Investment Bank, funded via the £1 billion anticipated revenue from mobile phone license increases. On the bigger issues of changing the culture of British banking however, any good the report proposes will be watered down when faced with the limited oligopoly of the largest British banks.
One step beyond
The continuing crisis of the British banking system has been a problem no government could avoid. The 2007-08 bailouts were only the start, but the £55 billion fall in lending to SMEs since May 2010 and repeated scandals that have rocked the city have led to a whole series of measures and reforms under Tory leadership.
The most prominent of these have been the ring-fence, designed to protect taxpayers from higher risk trading activities. Other measures have included institutional changes to enhance supervision powers in and around the Bank of England, and various measures to promote lending, from Project Merlin to the Funding for Lending Scheme.
Simply, Labour’s banking reform paper is only one step beyond what the coalition government has already attempted. The report begins by suggesting that “we need a One Nation banking system that serves Britain, rather than having Britain serving our banks”. But this is nothing new. Cameron and Osborne have been using this type of soundbite for the last three years.
The big message, then, is that Labour’s report adds a few extra layers to the Tories’ existing array of reforms. It commends the Tories’ efforts, but suggests that “implementation … has too often fallen short”.
On competition in the banking sector, it proposes evaluating existing criteria and measures to help ensure the emergence of two new challenger banks. In accessing finance, it proposes developing the Tories’ Business Bank into a British Investment Bank. And in culture and pay it proposes deferring bonuses from the Tories’ suggested five years to a new standard of seven years. These are sensible suggestions, but they are incremental rather than innovative and original.
A limited oligopoly
Reading between the lines both the Conservative and Labour parties’ stance vis-à-vis the British banking system tells us that the love affair with the City has been sorely tested. But the reality is that Labour’s banking reform paper is largely performative. No self-respecting opposition party would avoid being seen to take a tough position on the City in the run-up to an election. But little will change if Labour gains power, for many of the same reasons that little has changed under the Tories.
This is because the power commanded by the largest banks stems from their almost unique positioning and structure. They straddle two worlds in a way that banks in few other developed economies can. The UK’s largest banks – from HSBC, to Barclays, to RBS – remain amongst the largest in the world. As such they reflect the longstanding though unwritten privileging of the City of London as a global financial centre.
This privileging has not changed since 2007. Yet these largest banks also form what the Cruickshank Report once called a “limited oligopoly”, which dominates lending to the British economy. And it is very unlikely that any measure proposed thus far – even the ring-fence – can provide sufficient distance between these two worlds of British banking to diminish the overweening power that these banks wield.
What will this mean for Labour? Lending to smaller British businesses matters relatively little to this limited oligopoly. As a result, it will probably not resist a larger British Investment Bank. This may be good news for smaller firms. What the oligopoly will challenge – albeit quietly and behind closed doors – are any measures that are seen to threaten the competitiveness of the City and its ability to attract and maintain the best talent. The longer-term remuneration policy, tougher sanctions, and stricter leverage ratio targets, proposed by Labour, all fall within this category.
The result will be that, in the all-important post-election negotiations, any tougher Labour party proposals will themselves be watered down. Improving the “culture” of banking is good pre-election language. But the fine line between improved culture and damaged competitiveness is one that the largest banks police aggressively.
So, the Labour plans will be diluted. This has clearly been the case with recent Tory measures. For example, at vital points in the Vickers ring-fence consultations, the insider status of the largest banks gave them particular powers to shape the finer details.
The incremental changes proposed by Labour are a start. But they will not redress our unhealthy preponderance with the City. Nor will they address our equally unhealthy dependence on credit and debt; a theme which Labour targets only in passing. And the road to rebalancing the British economy – which may or may not be aided by a British Investment Bank –- is itself long and treacherous.