I have already written today on the subject of banking.
I’m far from alone in being concerned about the issue. I think people are bemused by the issue the world over — and ask themselves how it is we allow it to continue.
In my previous article I linked to one alternative idea — The Royal Bank of Sustainability — which seeks to address the systemic faults in banking by reshaping the hulk of a bank we already own — the Royal Bank of Scotland.
I noted another proposal for the same bank on the web site of ATTAC Jersey — run by good friends of mine. This one is called Mo’s Law. This says:
As we own 84% of the Royal Bank of Scotland this is what we do. We pay depositors 2% interest and loan out money at say 10% on secure loans, credit cards on collateral at 12% on a sliding scale. We would not pay bonuses but a fair wage.
This one move would force the banks to do they same which would benefit the whole economy. They would no longer expect depositors to be satisfied with ¬?% nor lenders prepared to pay 15%.
One added advantage — this would free all these very clever but overpaid bankers so that they could do something useful for society that was not dishonourable.
You can argue it is simplistic — but most good ideas are because they seek to capture within them the kernel of a bigger truth which we can only partly understand — which is certainly true of banking (let me assure you — for bankers too, as has become only too plainly apparent and will be again when the next crash comes along, as surely it will at the rate we’re going).
Inside this argument are, I think, three ideas:
- That of disgust at usurious exploitation;
- The concept of fairness in pricing;
- A deep understanding that bankers do not add ultimately add value. They may on occasion enable it in exchange for a fee, but usually they just redistribute at some cost.
These are worthwhile objectives.
Bankers have forgotten them. If Mo’s Law reminded bankers of the inherent truth of these insights then I’m all for it.
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I’m afraid it is simplistic.
The Government paid £45bn to bail out RBS. Right now that holding is very slightly in the black, and with a bit of care (and political will) the taxpayer could come out with a profit. Any proposal that RBS should act in a particular way needs to come with an assessment of what it will do to RBS’s share price, and how much that will cost the taxpayer. Any proposal that doesn’t is entirely unserious.
The other problem is that it’s far from clear a commercial bank can act as suggested and remain in business. Not even the Co-Op comes close to those rates.
The article is also simplistic in its confusion between retail and investment banking. Retail banking – vanilla deposit-taking and lending – most definitely can add value. There is certainly an argument as to how competitive a market we have, but retail banking has not in recent times been hugely profitable for the banks. The big profits – and recently the big losses – were in highly leveraged lending, exotic financial products, aggressive sub-prime lending, investment management arrangements rife with principal/agent problems. These are the business lines that sunk RBS, HBOS, Lehman, Bear Stearn et al. Not coincidentally they are also where the highest bonuses were received.
@Marc Daniels
I note it is simplistic
A maxim such as “tell the truth” is simplistic. It’s also powerful. That is why I unpacked what was said.
But I also think your comment is simplistic. How do we know retail banking was profitable? Cross subsidy was possible.
If there is the risk you describe we need Glass Steagall, now
Why do we need to assess the impact of future decisions on the basis of a historic share price – that is just historic cost accounting? Surely we assess on the basis of future impact? And then why in relation to share price? When this bank is 84% owned why is that important? The minority could be bought after all at modest cost. Isn’t the right basis for decision making economic impact of decisions for the economy as a whole given that e do actually own this bank?
I don’t really understand your point. My premise is that the taxpayer should recover the amount it sunk into RBS as soon as possible. That historic price seems highly relevant to that. If you’re saying that instead the Government should be using its £45bn investment to reinvent retail banking then doesn’t seem particularly efficient or realistic. You could establish a retail bank to borrow and lend at the figures you describe for a fraction of that amount – whether it would be viable is another question.
Glass Steagall is a distraction. The bust wasn’t caused by banks carrying on both retail and investment banking. Northern Rock was a pure retail play. Lehman and Bear were pure investment banks. Barclays and HSBC – with their significant investment and retail banking arms – came through in relatively good shape. HBOS had to be bailed out because of the amounts it lost in traditional relationship retail banking, albeit of the utterly irresponsible kind. The assumption behind Glass Steagall was that casino banking, if combined with retail banking, could put the larger economy at risk. But the interconnectedness of modern financial institutions means that even a pure investment bank can put the economy at risk. A paradigm change in the regulatory environment is required, but Glass Steagal isn’t it. Splitting the banks would look decisive, but achieve little actual change (which is why it is such an attractive option to politicians on both sides of the pond).
Occam’s Razor? In the state we are in and the perils for those in the poorer sector of the community, which is going to be most of us, we need the simplest, most reliable and most transparent banking facilities we can get. And at a fair price. I believe such a bank and preferably banks could compete. At the moment we do not have them and so do not have the choice. Those who continue to support the system that has just crashed seem to think that choice is only for them and not the rest of us.
@Marc Daniels
Why can’t we hold it as an investment? After all any return compared to the cost of acquisition is bound to be good
And sure Glass Steagall by itself is not a solution – it was one of a range of regulation – the term is now shorthand for that range, not an act in isolation
Demetrius has it right – the control of the means of exchange cannot now be linked to anything else
That is the risk Glass Steagall averts
If it was that easy, the Co-Op would dominate banking. If you could profitably bank at those rates, then Tesco would have done it and made a fortune. If the Government wanted to sponsor such a bank, it could do so relatively cheaply. But if it forces RBS do something uncommercial, the bank’s share price will plummet and the taxpayer will bear the cost.
“Glass Steagall is a distraction. The bust wasn’t caused by banks carrying on both retail and investment banking.”
I think you misunderstand the purpose of Glass-Steagall. It is not because there is anything inherently riskier in mixing these businesses than carrying them on separately. John Varley made the point that Barclays had survived the banking crisis, although he omitted to mention that RBS, Citi and BofA all required support.
The point is that the government (or taxpayers depending on how you look at it) may be happy to guarantee retail deposits and commercial deposits to some extent in order to maintain a n orderly banking system, but they do not necessarily wish to underwrite the trading activities of investment banks, and hence they wish them to be entirely seoarate businesses, preferably under entirely separate ownership,
That doesn’t do away with the need for better supervision, and I use the word supervision rather than regulation because there are some things that can’t be expressed in regulations but can be expressed by a bank supervisor. RBS, HBOS, B&B and Northern Rock all failed/suffered because they relied to heavily one the ability to securitise their assets. A better supervisor than the FSA might have limited their abilirty to run that sort of risk, but I am not sure that any sensible regulations could be drafted to do the same.
@Alex
My point was that the US Government had to bail out pure investment banks because of contagion risk. Modern banking had developed so that retail banks and their deposits were (indirectly) structurally dependant upon Lehman remaining creditworthy. This post-dates Glass-Steagall, and is a problem you don’t solve by separating retail and investment banking.
Not sure why you think securitisation played such a significant part in the fall of the British four banks that folded. Northern Rock failed, because it relied upon cheap funding from the commercial paper (short term debt) markets; when this dried up it had nowhere to go (not a problem inherent in securitisation, which usually run for 7 year terms). RBS and HBOS’s falls had little to do with securitisation (save indirectly; both lost considerable money investing in US sub-prime securitisations). I believe B&B’s failure was (at least at first) caused by losses on its mortgage loans, but didn’t really follow that one and am happy to be corrected.
To look at MO’s law simplistically, one Bank offering better investment and loan terms would attract huge interest and business, to the extent that the big 4 would have to improve their offerings to stay in game, and thus operate in a reasonable way.