I spent about 20 years of my career as a practicing chartered accountant, in he process advising many mainly small and medium sized businesses. Most felt they had two obstacles to achieving their goals (even if that belief ignored the fact that they themselves were usually the biggest problem in that process). The first was, largely unfairly, HM Revenue & Customs. The second, almost invariably justifiably, was their bank, and of the two the banks almost always came out top.
There was very good reason for that. Bank staff, who had joined them for the safest possible, lowest risk, highest pensioned career they could find in the hope of achieving the ultimate in security, sat and pretended they understood what it was like to run a small business. They hadn't a clue. Nor had they the slightest comprehension of the mind set that a person running a business needed to possess. And yet these bankers held the power to say yes or no. It's a recipe for disaster.
Give those bankers the wrong incentives and it will go wrong, as we have seen , all too often. There is a further claim about this today, with the FT noting:
Royal Bank of Scotland will on Monday face withering new claims over the way it treats business customers, including allegations that viable companies are being forced into default so the bank can seize their properties at knockdown rates.
More than once I saved companies facing such a fate - and when I say saved I mean just that. That RBS does it is no surprise; it's gone on for a long time. That's it's more commonplace now is also no surprise: attacking the more vulnerable customer as a means to quick profit is very tempting for any bank in need of easy money.
This is the scandal of banking, and not Paul Flowers.
The problem of the Flowers debacle is that there will be calls for banking to be left to bankers. And that really would be a disaster, because they have no comprehension of the real world. In the meantime we suffer for incompetence on all sides.
The question is, when will we realise that smaller, more accountable, local banks with a commitment to long term relationships are the answer? We seem a long way from that as yet.
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maybe when banks become small businesses things will improve -I still feel they should have been left to fail. Neo-Liberalism is about maximising financialisation, not social utility, so, for the last thirty years they have concentrated on housing bubbles and neglected SME’s. Banks no longer need ‘customers’.
1) Co-op is much smaller than the large mixed banks. So no, that is not the answer!
2) Yes, banks should be left to fail as this is what market forces require. You mess up, you fail. Unfortunately, no politician can let that happen. Again, this is why the banks we know are not free-market institutions, but Frankenstein monsters as a result of political mis-management.
3) Financial markets have a HUGE social utility. It makes choice in how you spend possible, it allows for pensions (well, maybe not the illusion of 30 years doing nothing). They allow you and I to have the computers on which we write right now. Are there abuses and side-effects? No doubt, but one has to be very careful about identifying the real cause to the problems.
4) Banks LOVE customers, although sometimes to abuse them. Customers allow profits without risk. Banks without customers are the ones possibly increasing systemic risk.
Financial markets, when they invest in real things (which is what stock markets were developed for in the first place)are useful! Investing in pointless assets like housing is anything but useful, indeed, as proved, extremely harmful. Bank lending is one of the biggest causes of inflation. They CAN be a huge social utility, but probably only if they are under state control.
It is possible to argue that computers, and many other innovations as well, are as a result of huge state Research and Development, NOT because of financial markets.
Banking will only ever be socially useful if they are under some form of state control and interest from loans gets put back into the system rather than in the pockets of bank investors.
As long as British finance and business are dominated by the hopelessly short termist, over-centralised approach of the City, there won’t be change. As you’ve said Richard, along with others, banks are meant to serve the rest of the economy, but in Britain it’s the other way round.
Given the latest revelations about RBS, you don’t have to be a member of the SWP to believe that bankers are nothing more than, if I may use a rather colourful expression, ‘a bunch of blood sucking parasites’.
And the failure of our politicians to do anything significant about this is appalling.
The banks are acting as predators when they should be acting as nurturers. This makes them a lot of money in the short term but will destroy the economy in the long term. I assume from their inertia that our politicians endorse this practice, presumably as they expect to get their slice of that predatory pie. This has been going on a long time, witness http://rowans-blog.blogspot.co.uk/2013/11/you-couldnt-make-this-crap-up.html and nothing’s been done about it, indeed, the calls for punishing the disabled and unemployed for their supposed part in our economic decline have grown more strident, presumably by way of distraction. Time to dust off the guillotine, I fear…
Totally agree that banks are a huge problem. Not particularly “investment banks”, but retail and commercial banks just as well! I really like your description of the bank staff blowing hot and cold over an SME, whilst never having worked in one. I had to open an account for a new small business I launched last year and I had that 30 year old junior judging me over whether I knew what I was talking about or not. It was sad…
Banks as we know them today are Frankenstein creations by successive regulators. Tweaking this, that and the other, whilst at the same time politically protected as they are huge employers.
There are 2 approaches to moving things forward. Changing regulation again, by tweaking more aspects, which will result in new problems or look for alternatives.
Alternatives may never be growing fast enough, but they are vital as they may force the established players (and the politicians) to take notice.
I am personally a big supporter of 2 new ventures:
– Zopa.co.uk
– fundingcircle.com
Although nowhere near perfect, as the right market balance between supply and demand is certainly not there yet (I think Zopa has more money supply than demand and Fundingcircle has more SME’s bidding for loans than there is capital supply), they show the cost savings one can do by dis-intermediating the regulated banks.
Basically, the cost of funding for and SME on FC is slightly over 1% more than what the ultimate lender gets. The “financial institution” in between only gets that spread and nothing else. For the “investor” or saver, the excess return vastly outstrips what the banks take for their balance sheet management and all the costs they run with their massive overheads.
As for Flowers, sorry but there is no excuse for him. There is a basic concept in finance that should be the gold standard for everyone and which should be the deciding factor between jail and freedom for anyone in the industry: fiduciary responsibility. His case is probably worse than any other one. He can not be excused for having accepted an oversight position he should have known not to be able to fulfil. Trying to minimise his lack of judgement by referring to other issues in finance is not an excuse for his criminal incompetence. Porn and drugs are actually not an issue here.
I agree with much of this
Re Flowers – as I wrote a couple of days ago – I am deeply angry that the Co-op failed so many so badly
Slight addition, three obstacles:
Receiving poor advice?
I had to open an account for a new small business I launched last year and I had that 30 year old junior judging me over whether I knew what I was talking about or not.
Your were indeed lucky to have such an 30 year old “experienced” individual scrutinise you…my firm seems attracted to 18-25 year old account managers (sic!)more interested in selling commission carrying financial “products”…oh me miserum!
Haha… Excellent Essexbeancounter. I’ll tell you a trick next time you open an account!
Just say you expect a turnover over 1m in year one. Not impossible, as you may very well have a client lined up and moreover turnover does not relate to profits, as we all know. In my case 1m was a possibility. It ended up being a small fraction.
But at 1m, you will talk to a slightly less junior junior! But as Richard says, it doesn’t mean they have ever been anywhere near a business!
Banks much prefer to churn second hand houses, bidding up the prices in the process, than to lend for consumption or business investment, which together fuel real growth.
Is this not a mistake made at the start of the issues. The UK should have set up a business bank that should have looked after the accounts of sme’s. Instead we tried to force RBS to change whilst still saddled with all the bad debts that caused the problems in the first place. In essence we have been telling RBS to do two different things that are opposite to each other. Its failed, but by doing so it has let the UK down, not just the customers hurt by their misgivings.
There has been some interesting reports in the press recently and I wonder whether they can be taken totally seriously.
Apparently, manufacturing industry in this country is enjoying it’s biggest boost in 18 years and it is the SME’s that are mostly helping to drive this.
The same SME’s that cannot get loans from the commercial banks for toffee not that long ago!
The above fact makes me wonder just how reliable these reports of the new-found health of manufacturing actually are!
I think you can add some (not all) in the Insolvency industry to the Banks. I am aware of Insolvency practitioners who lend money to businesses in trouble,then hey presto, who gets appointed as the Receiver to the business in Liquidation?
Yes,the same Insolvency practitioner- and it’s still Legal apparently. The Insolvency world is a Jungle, the banks are just joining in, so no surprise to me.