Article at Liberal Conspiracy from Positive Money on the ICB report

Below is an article on the Liberal Conspiracy website from Positive Money. Expect an in-depth analysis on this blog later on today…

The battle between the government, the financial sector, and the public interest over banking reform reached a pivotal moment today with the release by the Independent Commission on Banking’s interim report. With foul play allegedly nearly causing the Commissioners to resign in February, threats of headquarters being moved (whip round for the taxi, anyone?), and posturing from both parties on who is least incompetent when it comes to banking regulation, the clear winners in this round seem to be the banks. This morning shares in Barclays were up 3.28%, for RBS 2.49%, and for Lloyds slightly less, at 0.72%.

We expect this is due to the less-than-radical reform being suggested by the Commission, which has advocated splitting up the investment and deposit-taking activities of banks, but not in the form of a full-scale breakup. The proposals essentially suggest that retail (high-street, deposit-taking) banking activities should be ‘ring-fenced’ from the riskier investment banking activities.

Much of the media is reporting that the two arms of a universal bank would be isolated, but closer analysis suggests this is not necessarily the case. The two arms of a bank would still be able to bail each other out in difficult times, but neither would be able to bring the other half down in a crisis. This opens the doorway to the enormously difficult task of designing new rules to govern exactly how much and how often these “isolated” institutions could transfer money to each other, and prevent the best rule-benders in the world from abusing the regulatory system. Just a few days before the financial crisis brought down Lehman Brothers and Bear Stearns the ratings agencies were convinced the firms were watertight, and our regulators were happy with banks regulating themselves!

Tasked with presenting reforms to increase competitiveness and stability, the Commission has presented several options to promote financial stability and to increase the capacity of banks to absorb losses.

Increasing the capacity of the banks to absorb losses does not equate to taking the taxpayer off the hook, and a pseudo-break-up of separate banking activities will not in practice prevent them from failing all at once, will not remove the need for deposits to be insured by the government, and will not remove the “too big to fail” problem.

I feel that the Commission has been tasked with the wrong investigation. After spending my share of £850 billion on bailing out the banks, the last thing I care about is “increasing competition” in the banking sector. I’m more interested in why, for instance, despite the advent of computer aided design and advances in construction technology, banking regulation enabled banks to lend so excessively that the average price of a house in Britain has risen from 3.6 times the yearly wage in 1960 to over 9.8 times (at the end of last year).

Of particular interest is the following passage:

“…even before the crisis banks enjoyed various kinds of state support, including the effective right to create money, and access to lender-of-last-resort facilities at the central bank. Comprehensive state support was given to banks in the crisis, for fear of what would otherwise happen, and continues to benefit banks directly and indirectly on a large scale, especially those seen as being systemically important.” (p98, http://s3-eu-west-1.amazonaws.com/htcdn/Interim-Report-110411.pdf)

Would it not be better for the Commission to ask whether these privileges should benefit bankers, or the taxpayers who provide them? Given the track record of the banks, are they really the right people to trust with the ‘effective right to create money’, as the Commission puts it?

In return for these privileges we are now £850 billion worse off, our houses cost nearly 3 times as much as they used to, and unemployment has risen by 1 million since the crash.

Doesn’t sound like a great return on investment to me, although lobbyists for the banks have tried to argue otherwise!

I for one am hoping that voters will demand that the right question is asked of the government – “does providing banks with the effective right to create money serve me better than taking it away from them?”