James Max - James Max is a broadcaster, columnist and business expert

Banking report – another nail in the coffin of UK plc

The Independent Commission on Banking has published its report. It’s aspirations for our banks to compete around the world, lend to families and businesses whilst being a safe place to save are right. Sadly the conclusions and findings are wrong.

If implemented in full, we’ll see less financial services operations based in the UK, fewer jobs and wealth created from such activities. Meanwhile you, the consumer, will have to pay more for your banking services and financial products. And, by the way, your savings won’t be any safer than they were before.

As evidenced by much of the media coverage of this report it’s clear that people think investment banks are merely roulette gambling dens on a massive scale. The work they do is, according to them; based on luck, guess work and greed. Furthermore the TUC at its conference believes the cuts and changes to pensions are resultant from banks and bankers who they say caused the financial crisis.


Pension reform is required because we are living longer. You simply cannot expect the same level of benefit without increasing premiums and the length of time people work. The maths doesn’t add up. It isn’t a tax to pay down the deficit. It’s recognition of the fact that we have millions of people who are retired, living and drawing pensions that were not paid for. So what did cause the financial crisis?

Let’s take a step back. In the 1980’s the US and we operated monetarist policies. Interest rates were high to reflect the cost of borrowing. Market deregulation reduced the cost of borrowing and debt and equity were used sensibly to grow our economies. During the nineties and particularly after the dot com bubble burst and 9/11 the cost of money reduced. A wall of cheap debt was available. In effect we grew our economy both in the public and private sectors on a wall of debt. It was never going to be sustainable. When the crunch hit, governments kept spending when their income from tax fell off a cliff.

The financial crisis resulted in the implosion of various financial institutions. Yes, they did make mistakes. Some massive errors of judgement. However if you look at the financial institutions that got into trouble it wasn’t, on the whole, investment banks. It was retail banks that bought market share. In the case of RBS because they bought ABN Amro at too higher price and had stacked their balance sheet with far too many loans and deals that were bad. Bad from the day they were signed. Lloyds was encouraged by the government to buy the basket case that was HBOS. Another bank that had overstepped the mark. Lending too much, lending money they raised from the financial markets rather than funded by depositors or profits. In effect an institution that had bought market share. And now we have this report that will hit HSBC and Barclays. They both rode the storm and both could easily relocate if needs be. HSBC to Hong Kong and Barclays to the USA. Is that what you want?

In simple terms the reason some financial institutions failed is because at a certain point in time they were being forced to return capital that was tied up elsewhere. Longer term they had the resources in the short term they didn’t. If one is going to operate a financial system on that basis, we are always going to have a problem if confidence evaporates.

Think of it this way. I have a mortgage. I am perfectly able to pay the interest on that mortgage. If the money I have borrowed was demanded back, in full, today, I would not be able to pay it back. If I sold my house, of course I could. And there is the point. Financial markets rely on long-term confidence. Yet if short-term liquidity is required and markets seize up, then problems occur.

Time and again I speak to people who run small businesses. The lifeblood of this country and its economy. They cannot borrow the money they need. Too many obstacles are in their way not only from lending institutions but also from government. They can’t operate effectively. Nothing in the Vickers report makes it any easier for them to borrow, invest or expand. In fact, this report will make the cost of capital go up. Not down.

Mortgages are similarly difficult to obtain. New lending rules ignore values and ability to repay. Banks have reigned in their activities to such an extent so they can rebuild their battered balance sheets that it costs more to borrow than it should, the conditions are draconian and the charges extensive. This report doesn’t make borrowing money any easier. Meanwhile government applies Stamp Duty to property transactions attacking capital and making investment expensive and reducing liquidity. It’s daft.

It’s worth noting that when it’s difficult to borrow money then we exacerbate the problem. There are a range of very expensive credit cards and loans organisations that provide a quick but very expensive fix. They say demand is out there. It may be but it simply makes the problem worse. Excessive interest rates, fees and charges should be tackled as they hit the poorest in society. Yet there is no word from the government or Vickers on any of that kind of activity.

Over the years banks have made mistakes. The particular problems in 2008 were an over exposure to certain asset classes. Notably commercial and residential property. As someone who worked in these industries it is perfectly understandable that debt can and should be used to fund development and investment. Yet in order to buy market share a number of banks ignored good lending practise and became quasi investors in a sector they didn’t understand. That is the core to this problem. Bad loans. Bad loans in the US to fuel a housing market bubble. To a lesser extent that happened here too. The bigger problem in the UK was loans to commercial property outfits. Deals were not cross-collateralised and as a result the banks that lent took specific asset risk as opposed to sensible lending risk. Did the regulators pick that up? Or the rating agencies? Or indeed senior management at these organisations? No.

The banks then packaged up these loans and sold them on. No one sought to look at the underlying assets and assess the risk. Hence the problem multiplied.

Our politicians have found a tree to bark at

What we must do is get away from the notion that investment banking is gambling. It isn’t. We must also understand the relationship between debt and equity both on a personal and a corporate level. We saw too many people borrow money at a personal level that they could never repay and we saw too many commercial deals where lenders took excessive risk by investing and not lending.

Investment banks undertake fiendishly complex transactions. By their very nature it’s a risky business. It needs a big balance sheet to undertake these transactions. Whilst I support the need to protect savers and depositors our nation’s financial illiteracy means we don’t understand risk. As a result of the populist approach to banker bashing we are introducing rules and regulations that won’t protect the industry or prevent a meltdown happening again. We are simply making it more expensive to do business and once again killing off a significant part of our economy.

By endorsing this report, George Osborne is in danger of pandering to public opinion rather than pursuing policies that will promote growth and economic success. Ed Balls is right when he calls for greater lending to small business. He’s wrong on pay and bonus transparency. That is a distraction. And Vince Cable is so misguided by his personal crusade that he is blinded by his own rhetoric. Yet by supporting this report all the main parties are blessing lower levels of lending and higher costs of finance. And of course turning away financial institutions that are capable of generating revenue, growth, jobs and tax revenue this country needs.

In my opinion those operating in markets need greater training an understanding of the underlying companies and assets they are dealing with. Rating Agencies have a long way to go to get a better handle on risk. Government should be implementing rules and regulations that both protect consumers not only of banks and businesses failing in the future but also for them to operate their business and personal lives with access to relatively cheap debt.

Our politicians have found a tree to bark at. Not only is it the wrong tree. It’s in a different forest.

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