Like Hopi, I welcome the publication of Labour’s report into the case for a British Investment Bank publication written by former city lawyer Nick Tott. I’ve long been convinced of the case for some sort of state-backed lending institution to address obvious market failures such as the banking systems seeming inability to support SMEs and infrastructure investment.
The key point for me is that whilst we clearly have a cyclical problem with bank lending in the aftermath of the financial crisis we have a deeper structural problem beneath this. Even during the ‘good years’ around 85% of bank lending was going to either financial companies or property. A British Investment Bank (BIB) is one way to address this issue.
More generally I thought there was much to welcome in Ed Miliband’s speech today. For much of the past two weeks, since the Libor scandal broke followed very quickly by the interest rate swap mis-selling scandal, too much of the public debate has focussed on the form of an inquiry into banking. Whilst the TUC has backed the call for a judicial, rather than a parliamentary, inquiry I’d far rather see politicians debating the kinds of financial reform we need rather than the exact make-up of an inquiry.
As the TUC has argued previously the debate on how to make banks safer is vitally important and this is the question Vickers was asked to look into. But there is another issue, how can we get banks that are more supportive of the real economy?
In Ed Miliband’s speech today, Labour seem to now be looking into this issue.
Whilst a British Investment Bank is a crucial component of this, it is a necessary but not a sufficient step. As Tott makes clear examples of state backed banking institut5ions can be found in Canada, France, Germany, Italy, Japan, Russia and the USA, so Miliband was certainly correct to argue today that:
It’s time that British business stopped having to compete with one hand tied behind its back.
But interestingly enough, Miliband were further today than simply announcing a report into the BIB and once again pressing the case for a judicial inquiry. Two sections in particular stuck out to me.
Implementing the Vickers recommendations in full is our starting point.
I find it interesting that this is now just a ‘starting point’. Previously (and I may be misreading this) Labour’s position had just been to implement Vickers in full, this feels like a step towards a more radical policy. The FT agrees that this may signal a change in tone.
In this regard the important article in today’s FT from Martin Taylor, a former Barclays CEO and a member of the Vickers commission is especially interesting. He reveals the full details of Barclays’ losses in Russia in 1998 and the total failure of internal controls to restrain Barclays’ investment banking arm.
The case for a strict separation between retail banking and what Miliband (like Vince Cable) dubs ‘casino banking’ was felt throughout today’s speech.
Secondly Miliband directly addressed the problems of too little competition in the sector:
The banking institutions we have shape the behaviour of many of the people who work in them.
Over the course of the last twenty years, we have seen the ethic of our banks change because the institutions that make up our banking industry changed.
We can all remember when there were many banks to choose from in this country.
And different building societies in every major town.
We saw them on our high streets and we understood what they did.
They looked after our savings, offered us mortgages and supported local businesses.
Since the 1980s, two hundred building societies have been lost.
There are only five major banks in this country.
The need for more competition, and related issue of ‘too big to fail banks’ (a topic I wrote about last week), is directly related to both the need to make banks safer and the need to ensure they do more to support the ‘real’ economy. We can debate the merits of moving from a ‘big 5’ to a ‘big 7’ but Miliband’s open support for more mutuals and wider diversity of banking models is surely to be welcomed.
Taken together, I think this was an important speech from the labour leader, one that moves the debate on banking away from a largely ‘process driven’ story on the nature of an inquiry and into the more important areas of how we actually reform our banks.
I suspect this is an agenda we’ll be hearing a lot more about in the coming months and years.