A Brave New World For Bankers
October 24, 2008
Amidst the bewilderingly swift developments of recent weeks in the financial services sector, many in the City can be forgiven for failing to appreciate the extent of change in the landscape that lies before them. Some complacently regard the recent turmoil as a short-lived upheaval and that business will ‘return to normal’ before long. I fear this will prove wishful thi
The decision to launch a full-scale rescue of the domestic banking industry need not have required nationalisation. The enforced recapitalisation of a relatively healthy bank, Lloyds TSB, has – to date – met with only muted opposition from ordinary shareholders whose investment has been largely destroyed. Once the dust settles, pension funds, reliant upon dividends, are unlikely to be overjoyed by the government diktat that deprives them of this crucial source of income for up to five years.
One key area the government has failed properly to address is that of competition law. The extreme circumstances that prevailed in early October meant the Lloyds TSB buyout of HBOS was given the go ahead even though in less turbulent economic conditions it would have fallen foul of anti-trust legislation. In such extreme circumstances it appeared supportable. However by the time the government’s bailout package was unveiled – seeing £37 billion of taxpayers’ cash being pumped into RBS and the new Lloyds TSB/HBOS entity – it was no longer clear why it should be exempt from these considerations. Competition law is designed to protect the public – not as an extra layer of bureaucracy, but as a crucial guarantor of choice and diversity in the free market.
Which begs the next question – whither the level-playing field? The US government in its decision to hose down the financial services market with vast sums of taxpayer cash has used the expedient of insisting that financial institutions such as Goldman Sachs and JP Morgan take government money even though, at this stage at least, it was neither needed nor requested.
The initial budgeted forecast of £2.375 billion pounds would have added an extra £20 per head per annum, for a minimum of 20 years onto the council tax bills for those living in London. By June 2007 Culture Secretary Tessa Jowell told MPs that the budget had been revised and now stood at a huge £9.35 billion, a near fourfold increase. This figure is now set in stone and we are promised that there will not be a further rise – the Games will have to be achieved within this figure of £9.35 billion including the legacy projects.
In the UK, however, we face a potentially serious structural problem in the banking industry looking ahead. The government (courtesy of Lloyds TSB/HBOS, Northern Rock and Bradford & Bingley) now controls forty-five per cent of the UK mortgage market and it is difficult to see how innovation, flair and consumer choice can be enhanced by such an arrangement. Moreover, the two of the big four banks which have not taken public money, HSBC and Barclays, will almost certainly have good cause before long to complain that their products (without the foundation of a government guarantee) risk being less attractive to the consumer.
As a condition of giving banks public funds, the government have insisted that lending activity is kept on a par with that which existed when there was more clement economic weather. This is also dangerous territory – first, will this result in the creation of another credit bubble albeit with lower interest rates than we have experienced over the past decade? Second, with the government as a guarantor of last resort, might part-nationalised banks, in order to satisfy the government’s demand for volume business, skew the market by selling their mortgage products at unsustainably attractive rates?
There is public distaste and anger for the banking fraternity which I fear has a long way to run. Indeed when the recession begins to bite hard in the ‘real’ economy there will doubtless be a vociferous demand (led by the tabloid press) that corporate UK should have a similar right to be bailed out as the banking industry. Indeed the Conservative announcements on small businesses in the last few days implicitly pre-empt this. I fear that there is a lot of complacency in the financial services world over the level of public anger still to come to the fore. Simply put – things cannot be the same. The adoption in the UK of rules, rather than as hitherto, principles based regulation system will now be the norm. Worse still so much of the banking industry is now in public hands there has to be a real concern about the place of the City of London within the ranking of globally competitive financial centres.
Furthermore, unravelling these recapitalisation arrangements will not be a short term affair. I suspect that it will take many years – possibly as long as a decade. In truth the deal was done without full political scrutiny. The power of the executive in the UK and shorter term political considerations meant that effectively the government was presented with a blank cheque which it has brandished with relish. It is slowly dawning on the public that there has been a far more extensive nationalisation of banking assets than was envisaged when bipartisan support was offered.
An integral element of our ongoing scrutiny of the bailout must be a forensic analysis of the failings of the Bank of England and the Financial Services Authority. Our ambitious plans to encourage a process of Bank of England-led reconstruction in preference to financial services nationalisation requires respected and credible personnel at the highest ranks of the institution.
In short the bailout is far from being a ‘done deal’ and our role as an Opposition should be to side with the hapless taxpayer in holding the government to account. Looking forward we need to provide a compelling vision of global capitalism, free markets and a small, more effective state for the recovery stage of this economic cycle.