Independent Commission on Banking: Final Report

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The Independent Commission on Banking released their final report this morning. Our analysis is below.

Imagine that the government establishes a Commission to report on measures to reduce traffic accidents and deaths on the road, giving them a staff of 15 civil servants, a budget of millions, the opportunity to consult the public and a year to develop some radical reforms. Twelve months later the Commission reports back, but rather than suggesting measures to reduce traffic accidents, the Commission simply proposes that the crash site is cleaned up slightly more effectively, the bodies are removed more discretely, and post-crisis counselling is provided for the victim’s families. No mention of traffic calming, traffic lights or fundamentally re-designing the roads to make them safer; just an assumption that fatal accidents are inevitable and the best we can do is focus on the post-crash clean up.

This has been the approach of the Banking Commission. Rather than looking at fundamentally changing the nature or structure of banking, they have focussed on what to do after the fatally-flawed banking system inevitably implodes.

So before we even get into the detail, we need to point out something fundamental:

>> Nothing has changed <<

The Banking Commission is not a response to the financial crisis and has done nothing to fundamentally change the likelihood of future crises. It has done nothing to reduce the harm that banks can inflict on the rest of the economy, or to look at the impact that the banking system has on poverty, debt and inequality.

Rather than getting caught in the detail of what the Commission has proposed, let’s look at what they ignored.

The Commission Ignores the Fact that Banks Create 97% of the Nation’s Money:

In the entire 363 page report, there is only one mention – in banking jargon – of the fact that banks can create money, where this process is referred to as ‘credit creation’ (p166). There is no mention of this fact in the rest of the report, despite that fact that the most significant role of banks in their current form is the creation of money.

In other places the Banking Commission refers to the massive creation of money by banks in the run up to the crisis in very indirect terms, saying things such as “Leverage ratios of assets to equity capital had ballooned to around forty times – twice historically normal levels…”, rather than simply stating that banks doubled the money supply in the space of 8 years.

Towards the end of the Final Report, the Commission states that “Banks with more robust capital, together with the creation of the ring-fence, would provide a secure and stable framework for the supply of credit to businesses and households in the UK economy.” (P19). This again overlooks the fundamental point – that we are dependent on the ‘supply of credit’ from the banks simply because this is the only source of money into the economy. If banks do not lend, then we as the public have no access to money, and the economy grinds to a halt.

The Commission Believes a Fairytale Story about Banking

The Commission still believes that modern banking is about a system ‘efficiently channelling savings to productive investments’ (p10) despite the fact that only a quarter of bank lending actually goes to productive investments, with the rest going into speculation and property bubbles. A more accurate description would be that modern banking allocates almost all lending into the economy in a way that suits their short-term profit-seeking objectives rather than the productive needs of the economy.  By definition, much of this investment is actually unproductive, or even counter-productive.

The Commission Does Not Understand How the Banking System Works

The Commission does not realise that the morphing nature of the banking system now means that the level of bank lending depends more on the confidence of the banks than any level of regulation. As the New Economics Foundation’s guide ‘How Money is Created in the UK’ (to be published at the end of this month) will make clear, if bank are confident then they can make loans by typing numbers into a borrower’s account, and worry about getting the ‘real’ money to back up that loan after the event. They do not sit around waiting for customers to bring money in through the front door before they start making loans to borrowers. Yet the Commission makes schoolboy errors on this subject, saying:

“Separation has costs however…The economy would suffer if separation prevented retail deposits from financing household mortgages and some business investment.” (p13)

Unfortunately the analysis is still based on a textbook model of banking that believes that banks simply take money from savers and lend this money to borrowers. That textbook model hasn’t been accurate for over 20 years.

The Alignment of Risk and Reward:

The Commission does make a good point with regards to pushing the risk back to the dodgy banks that benefit from risk-taking:

“In addition, the cost of capital and funding for banks might increase. But insofar as this resulted from separation curtailing the implicit subsidy caused by the prospect of taxpayer support in the event of trouble, that would not be a cost to the economy. Rather, it would be a consequence of risk returning to where it should be – with bank investors, not taxpayers – and so would reflect the aim of removing government support and risk to the public finances.” [Our emphasis, p13].

However, if the Commission really wanted to limit the risk to the public finances, then they should have spent more time looking at full-reserve banking, which allows a complete alignment of risk and reward (in other words, if you want the reward, then you take the risk as well). Instead, they allowed a junior civil servant who struggled to understand the basics of money creation to dismiss the proposal on the basis of his own ignorance.

The Commission Ignores More Problems than it Addresses:

The Commission’s report is noteworthy more for what it ignores than what it actually recommends. It completely ignores the most fundamental problems with the modern banking system, such as the fact that:

  • When all money is created by banks as debt, this forces the bulk of the population into debt, permanently
  • The interest that has to be paid to the banks on the entire money supply results in money and income being redistributed from the poor to the rich, from the real productive economy to the financial sector, and from the rest of the UK back to the City of London
  • That banks must always be rescued by the taxpayer simply because the £85k government guarantee on bank accounts ensures that it will be more expensive to allow a bank to fail than to rescue it
  • That the structure of the banking system results in banks being subsidised by the taxpayer between £30bn and £100bn a year (depending on what you include in the analysis)

Plans Going Forward

The Commission’s report is a distraction from the real changes that need to be made to the modern banking system. It’s not enough to simply worrying about making banks safer – we need banks that are socially useful, rather than socially harmful. As long as we retain a system of allowing banks to create money and forcing the public to go into debt just to have money in the economy, then problems like poverty, debt and inequality will continue, as will economic chaos. Banks will continue to take power away from our democratic system (we’ll have a full report on this shortly) and will continue to destabilise the economy and fund the destruction of the environment.

In short, the Independent Commission on Banking has not addressed a fraction of the fundamental problems with the modern banking system.

We don’t intend to spend much more time discussing the Commission. We went to considerable effort to help them to understand the fundamental problems and the benefits of implementing real reforms. In return, one of their junior civil servants wrote a technically inaccurate and very misleading account of our proposals, and passed this on to the Commissioners rather than actually allowing them to read our original report. If the same kind of sloppiness has occurred throughout the last 12 months of the Commission’s work, then it is hardly surprising that they have taken what is technically known as a ‘monumental cop-out’.

Nothing the Commission has suggested will fundamental change the economically harmful and parasitic nature of the big banks, and there are much deeper issues that still need to be addressed. We’ll be continuing with our work getting people to understand that our debt-based monetary system is at the root of poverty, debt, inequality and economic chaos, and that only fundamental reform will make any significant difference to the people who are paying the costs of the banking crisis.

In the meantime, we strongly recommend removing your funding from the big (and most socially harmful) banks. We made not have the critical mass to pressure for fundamental reform of the system yet, but as individuals we can all ensure we’re not funding the short-term speculation, unethical investments and socially-damaging activities of the biggest banks.

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  • Nic the NZer

    It is most important to realise that the financial crisis and subsequent recession was not primarily a ‘banking’ problem. The financial crisis was always caused and is still being manifested as a debt problem. Until the debt levels are reduced in many areas the recession will not abate.

    Still if the previous set of QE ‘solutions’ are anything to go by then more optimists will pile into the share markets, and we will see another market led recovery, completely disconnected from the real economy. This will be equally doomed to crash when reality manifests itself to the markets once again.

    In fact recently Sheila Bair, a member of the Obama administration, who was in charge of banking insurance, discussed how the American bank bailouts were in many ways un-necessary. No deposit holders needed to lose deposits under the existing rules and insurance scheme, but the administration decided to go the route of the bailouts so that bond and share holders would be protected as well.

    Shows pretty effectively how much meaning regulation has when a crisis occurs. I imagine the discussions took a similar course in the UK at the same time.

  • RJ


    “Until the debt levels are reduced in many areas the recession will not abate”

    If debt is reduced. Then credit will reduce by an exactly equal amount

    This will make the recession worse. MUCH WORSE if debt (and credit) is reduced by too much

    • Ben Dyson (Positive Money)

      @RJ – assuming we don’t reform the system. If we do reform the system in the way we’re suggesting, it would be possible to reduce debt without reducing the money supply.

      • Graham Hodgson

        The current banking system is predicated on the idea that money is something external from banks, something that people “deposit” in banks, something that banks hold in trust for “depositors”, and that deposits are therefore liabilities of banks.

        How does this square with the reality that deposits are the creation of banks, that nothing is deposited with banks but the promise of a borrower to make future payments?

        If banks can create money at no cost to themselves, why can’t governments?

        Why is it the answer to the problem that governments should get deeper into debt?

        Take away from banks the power to create money and give it back to the state as Positive Money is advocating.

        Isn’t that the logical next step?

        Nostalgia for the glory days when individuals could create their own money, by taking gold or silver to the Mint and having it turned into coin which could then be deposited in banks, is no justification for shackling us as eternal debtors to banks for the rest of time.

        • Nicholas White

          If I lent you my football, would you claim I had created another football? You would be holding one in your hands, and I still believe I own a football (which you’re looking after for me)?

          I mean, if banks “create” money why don’t they “create” loads of trillion-pound notes and give them to all their employees?

          And governments do literally create money – quantitative easing is the digital equivalent of a printing press. The BoE creates billions out of thin air, and buys government debt from the markets with it.

          100% fractional-reserve banking means you give your bank some money and it buries it in a hole in the ground somewhere – not a profitable activity! The recommendations suggest a 10% reserve – so for every £10 you deposit in your bank, one pound gets buried and the other £9 gets lend to some else as a mortgage. The bank receives a mortgage payment every month, and gives some of it to you, calling it “interest on your account”. The rest of it goes on salaries, rent, &c. and any left over goes to the shareholders. If the people who bought a house with your £9 default on their payments to the bank – then the bank’s just got £1 left and you’ve got a problem next time you go to an ATM…

          • Graham Hodgson

            The BoE creates money in exactly the same way as Barclays or NatWest create money. It writes an entry into an account in exchange for somebody’s promise to make future payments. In the BoE’s case it’s promises by the government, in the case of Barclays and NatWest it’s promises by borrowers.

            There is copious evidence elsewhere on this site that this is now the accepeted view of all the major central banks. The textbook simplifications of relent deposits and money multipliers simply no longer apply.

          • Ben Dyson (Positive Money)

            The book that will be published by the New Economics Foundation at the end of this month will have much more information on this, and will also be available as a free download.


          • RJ


            Thank you.

            Fractional banking bank lending restrictions no longer apply. And have not for a very long time.

            And you BoE comment is spot on. The somebody of cause is the Govt. When the BoE finance spending

            It’s why US interest rates are still low despite high US Govt deficits

  • Herman Mittelholzer

    Well, Ben, as we have discussed on several occasions, the contents of this report has come as as surprise to nobody. The ICB as we learned from a very early stage is the banking/government’s ‘whitewash’ committee, designed to do nothing more than try to convince the British public that all will be OK in the Garden of the UK Economy, just as long as we keep believing that the fairytale will have a happy-ever-after ending!

    Luckily, thanks to organisations like Positive Money more and more people have had their eyes opened to the real world. Let’s just hope that we can effect some real changes to the systems before the next inevitable crash. That way we may be able to salvage something from this ‘car crash’ of a fix.

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  • Nic the NZer

    No RJ, You have it exactly backwards. What the economy needs for recovery is more economic activity (that’s by definition). What more economic activity depends on is more spending/investment. What more spending/investment needs is less debt (e.g capacity to invest or spend, often taking on more debt). At the present banks have more than enough reserves, but can’t find suitable investors to take on more debt (so the reserves are unused).

    The causality your argument implies is that creating lines of credit creates economic activity. It clearly doesn’t, economic activity creates more credit (and debt). You can observe this from the fact that there is a real economy which exists outside of the banking system.

    I can agree with your comments only in the context that continued paying back the current debts will be bad for the economy. If every debt was magically halved (in a way that also satisfied creditors, and ideally without inflation) then the recovery would be instant.

    In fact some of the key points of full-reserve banking are that total debt levels should have an upper limit, and that government spending can be increased (when economically indicated) without additional government debt needing to be taken on.

    Ben, you might want to review the material here
    The travesty of neoclassical macroeconomics.

    It includes some good published references to statistics and papers indicating that money creation is exogenous not endrogenous.

    • Graham Hodgson

      No, RJ has it right.

      As the poor indebted people of this country, those that are honest and assiduous about their debts, continue to pay off what they have borrowed, then the amount they have to spend with the beleaguered enterprises of the economy diminishes accordingly, but nobody elses’s ability to spend increases. People stop spending if they’re paying off their debts. And if they stop spending, there’s no revenue to encourage enterprises to invest for future growth.

      Banks claim they can’t find people to lend to because they look at enterprises’ accounts and find that revenues are static or falling, because customers are spending their money servicing their debts instead of consuming, so the enterprises are considered poor risks, so they have to pay more for the loans on offer, which enterprises find unsupportable and reject.

      Now Ben said this wouldn’t happen if the system ran in accordance with Positive Money proposals. Why not?

      Let’s assume today’s situation had occurred under the aegis of the Positive Money banking system. It couldn’t have, because today’s crisis arose from doubts about banks’ ability to acquire the flow of central bank assets (reserves) needed to support the transfer of their liabilities through the payments settlement process, which would not be a consideration under the Positive Money proposals. Nevertheless, households and businesses feel under pressure but, whether from the Puritan ethic that debts must be honoured, or because pragmatically they know that banks have the legal authority to destroy them, they are motivated to service their debts rather than feeding their families.

      As these borrowers pay off their debts the investment accounts of the people who subscribed to the borrowings that gave rise to these debts replenish. If banks decide to set onerous conditions on new borrowings, then these subscribers, finding their funds are earning nothing, can withdraw them to find other lending agencies with more flexible loan criteria, or spend the funds themselves.

      Money is not destroyed by loan repayments under the Positive Money proposals, unlike under the present system, so debts can be repaid without the disasterous impact on economies in a recession that RJ so rightly points to. But as things stand at present, to repay debts is to condemn the economy to money starvation.

      • RJ

        I think the article should say the Euro nations are not. The Uk is fine

        An alternative to popular faith

        Fundamental to debt hawk beliefs is the idea that monetarily sovereign nations are like you and me. Thus, debt hawks practice “anthropomorphic economics.”

        A monetarily sovereign nation is the monopoly supplier of its currency, which currency is not tied to any asset (like gold) or to a foreign currency. A monetarily sovereign nation has the unlimited ability, and the monopoly power, to create its currency.

        The U.S., Canada, Australia, China and India are monetarily sovereign. The EU nations are not. That is why so many of the comparisons between Greece and the U.S. are false.

        • Graham Hodgson

          How can a state be monetarily sovereign if it has to rely on borrowing from those willing to lend in order to finance its expenditure?

          Democracy is predicated upon the notion that the power to tax makes the impact of government spending visible to the electorate, who can then regulate government through the ballot box.

          Who regulates a government which has to go cap in hand to the bond markets?

        • Nic the NZer

          Good to see how relaxed the US government is about that credit down-grade (due to too much government debt).

          • Herman Mittelholzer

            The US could solve it’s debt crisis tomorrow by simply printing another 14.6 trillion dollars. It is after all a major reserve currency. What this might do to it’s international value is anybody’s business, so a credit downgrade is probably not the worst of positions, since it reduces the currency’s value and could help with exports.

    • Graham Hodgson

      “Ben, you might want to review the material here
      The travesty of neoclassical macroeconomics.

      It includes some good published references to statistics and papers indicating that money creation is exogenous not endrogenous.”

      As an interested party, could you be more specific?

      The link is to Steve Keen’s Debtwatch blog, who definitely does not advocate the idea that money is exogenous.

      • Nic the NZer

        I think Graham we are on the same page regards to debt repayment. Please read my reply to RJ carefully.

        In the debt deflation links the meaning of exogenous and endrogenous are relating to the central bank. Basically the concept of the money multiplier appears to be a bit euphamistic compared to how banks actually extend credit. In theory banks extend credit when they have reserves (meaning that the central bank has control of the money supply upper limit by setting the reserve ratio). In practise, or at least implied by actual statistics, the banks lend money then look for (and almost always find) reserves.

        Basically the central bank is not in good control of the money supply, because the system is a bit to loose. In fact to the extent that companies can utilise existing lines of bank credit, consumers can use their credit cards, etc… the money supply is clearly exogenous to the banking system itself.

  • Graham Hodgson

    Alistair Milne, in his 2009 book “The Fall of the House of Credit”, discerns two schools of thought concerning the cause of the financial crisis. One, he dubs the mainstream view, has it that this was a consequence of excessive and imprudent lending and borrowing. The other view, to which he subscribes, is that the crisis was caused by a sudden panic, a loss of confidence which was not necessarily justified by the reality.

    It seems to me that the Vickers Commission shares Milne’s view. There is nothing inherently wrong with the banking system, but because people are inclined to panic it’s best to put a few extra safeguards in place, just to be seen to be doing something. But it probably won’t happen again in our lifetime, so there’s no need to be precipitous about this.

    Oh, how wrong they are going to be proved.

    • Nic the NZer

      In one sense “a consequence of excessive and imprudent lending and borrowing” is spot on. The problem is quite clearly that there is a massive debt imbalance in the economy. If you look at neo-classical economics in fact ‘imprudent lending and borrowing’ is the equivalent of not predicting the future correctly. So I guess is a more ‘rational’ or prescient world then this much debt would not have been facilitated.

      This is why I can’t support the idea that MMT is a panacea, because it basically implies that the public sector is a better investor than the private sector (I don’t believe either is better).

      This is precisely the reason that the banking system is the problem. A massive debt imbalance is the only likely outcome of a debt based money system. This is true regardless of the lending mechanism being publically or privately owned.

      There won’t be a recovery until the balance is restored and the debt imbalance reduced. Which is what I was saying earlier. But as you rightly stated in a debt based system the falling investment caused by repaying debt can increase the burden of the remaining debt. This is another reason recovery is problematic in a debt based system.

  • Simon

    As expected, the ICB reforms do not go nearly far enough. The proposals to get more competition into banking, and requiring banks to hold more capital to protect against possible future losses are a small step in the right direction.
    Peer to peer transactions should be possible for current accounts in this electronic age without the need to use a bank intermediary, as cheques and cash become less relevant. I am sure you can do most current account type transactions with Paypal, only problem maybe lack of debit card to do small payments and withdraw cash, That would reduce the banks hold on our current accounts. Granted this is difficult to achieve when big business, big banks and politicians are joined together in unholy matrimony. As Ben says, get your money out of the big banks.
    I would like to know how exposed the wretched RBS is to European banks, Greek bonds, Irish property etc. We bailed it out indirectly for the losses Anglo Irish bank made on Irish property. The benefits of the City to the UK economy are grossly overstated, in fact they are a liability.
    As others have said on this blog and elsewhere, it is very difficult to get meaningful reform when governments and the main political parties here and in the US are bought by the banking industry. We have to keep working from the grassroots up.

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