Today there are two stories emerging that paint a picture of increasing pressure on the UK banking system. Some commentators blame the culture and governance of the banking sector as the underlying problem that resulted in the severity of the financial crisis in the UK and also the slow recovery. More importantly how can the government and the Bank of England, not only get the banking sector onto a more stable basis and ensure that a similar problem does not occur.
Osborn threatens to break up banks.
George Osborn has indicated that if high street banks do not follow the guide lines and separate their high street business from their investment activity or what has been dubbed ‘casino’ banking activities the government will step in and break them up.
This will mean that their high-street banks will have to be ring-fence their day to day operations and to ensure this is the case a new regulatory body the Prudential Regulation Authority will have teeth in the form of powers to break up any bank not complying with these requirements.
A spokesman for the British Bankers Association(BBA) felt that these measures were ‘regrettable’ and pointed out that no other countries were contemplating such a move. He went on to say that measures of this sort will reduce the attractiveness of London as a centre for banking in the future.
Bank of England needs new growth strategy
Today we also hear that industry experts have warned Mark Carney, the new Governor of the Bank of England that possibly 8% ofloans from UK banks are so called ‘zombies’ – loans were the banks have made arrangements with lenders rather than foreclosing. However the longer the economy stays in it’s current state, or if it enters a ‘triple dip’ these borrowers are highly likely to default and act as a break on the growth the economy needs.
The Prudential, one of the UK’s largest insurance companies has also warned Carney that the policy of quantitative easing (QE) is also having a detrimental effect on the economy increasing the likelihood of ‘inflationary shocks’ and is an ‘anti-growth’ policy. The Prudentials CEO Tidjane Thiam urged Carney to move from short-term approaches such as QE and develop a longer term policy for recovery.
I share the Prudentials concerns about QE – it is a measure that should be used with care, something I am not sure this government has done. My understanding is that QE means the Bank of England prints money to buy back government debt in the short term and then reverses the process and some future date to balance the books, however Osborn has re-appropraited the debt by transferring from the Bank of England to the treasury to make their figures look better. I am quite happy to be told if I have got this wrong – but surely is this not just like the government printing money?
As to the high-street banks, I cannot help feeling that the underlying problem here is an ethical one – and there is too much focus on short term profit, interestingly the same complaint as levelled at the Bank of England – that QE was a short-term fix. If I am right then it is difficult to see how the approach of ring-fencing on some ‘gentleman’s’ agreement is going to work. I am also struggling as to why we need to add another layer of regulation rather than ensure that existing legislation controlling the actions of financial organisations and their directors are not more aggressively applied and if found wanting strengthened. There has been plenty of evidence recently of misconduct in the banks management if not down right criminal activity. While I hesitate to agree with the BBA I am sure that additional regulation will be unattractive, I am sure that a diligent and application of the existing law against fraud, misconduct and theft should not put off bankers setting up in London – indeed surely this would be a positive as it would protect them – unless of course they are all crooks?