What Banking Reform?

(c) maurice

A rare event occurred this morning. The ‘national broadsheets’ all agreed.  In their leading articles both The Telegraph and The Times headlined ‘A Missed Opportunity’,  The Independent bemoaned ‘This was not the historic reform that was needed’ and even The Guardian led with ‘Banking Reform: Small Change’. This consensus that simply not enough was proposed in yesterday’s White Paper on banking reform proves that even after the biggest wakeup call in post-war history,  Governments are still scared of the City.

The very use of the word ‘reform’ should invoke something much more substantial than what was proposed yesterday. To use an analogy, it is clear that some of the banks should have been sent off – forced to leave the field for dangerous play. The rest deserved at least a yellow card; a hawkish eye kept on them from now on with a sending off imminent if they mess up again.

What actually happened? The banks were given five hundred billion reasons why they shouldn’t worry about being sent off and, yesterday, a stern talking to: “please don’t do that again – we’re going to a keep an eye on you a bit more now, please try to hold back a little next time. Please. If you don’t, we might have to caution you.”

The bill is not useless, it is a step forward, but the step is far too tentative. The market logic has always been ready to point out that fear is its own regulator, businesses including banks remain efficient and competitive because if they do not they will cease to exist.  As Mervyn King points out, if banks are operating under a ‘too big to fail’ mentality, the fear regulator is impotent.  We can regulate further but without serious repercussions the regulations are futile. The government needs to talk in the same language as the market’s juggernauts, break up the banks that are ‘too big’ and make them feel the reality of the idea of ceasing to exist.

Having said that, financial institutions are not your local corner shop or even Woolworths – it really matters on a huge scale if they sink or swim. In addition to the fear factor, they need to have it installed within them the responsibility of being a long term, safe institution there to serve their consumers interests; they are not meant to be the short term, quick-big-buck money makers existing to line their own pockets that they have become.

It cannot be a shock to anyone that Bonuses Are Back (or ‘BAB’ to the smarmy recipient bankers). Or indeed, as announced this morning with what seems almost deliberate timing, the return of 125% mortgages. Why would the banks have learnt their lesson? The Government have done nothing to install fear or teach them their responsibilities. This is not just a fault of the Labour government alone; I refuse to believe the Conservatives would have been any harsher on the City if it had been themselves in power.

Banks need to be taught a proper lesson. They need the ability to fail and the belief that they can and will fail. If bonuses need to be so big to encourage success, then punishments also need to be big enough to discourage failure. The arguments the banks have used to convince the government that they cannot be clamped down on too harshly are the same arguments they used 10 years ago, they were wrong. The system collapsed. Don’t be fooled again. Clamp down on these greedy bankers and beat them into realisation that they have a responsibility – to us.