Better Banking Blog
Reports from the World Economic Forum in Davos were full of stories of leading bankers, at various points; schmoozing G20 leaders, talking tough and pleading for forgiveness for the pain they have caused economies around the world. Okay, maybe this last one might be made up...
Channel 4's economics correspondent, Faisal Islam, reported on twitter that ‘those in the know' were saying that Project Merlin was ‘a sham'. http://twitter.com/faisalislam/status/30643061000241152#
Project Merlin is the codename for the secret talks that the banks have been holding with the government to negotiate an end to ‘bank bashing' - ie taxes, break-up of investment and retail banks and further regulation - in return for more lending to small businesses and investment in the Big Society Bank. I have blogged previously http://www.urbanforum.org.uk/better-banking-blog/transparency-hides-a-multitude-of-sins on my grave concern about the government doing deals behind closed doors, particularly if this meant giving the banks a free rein in return for fairly modest amounts.
Where this leaves us, I'm not too sure. The government still has to find a way to adequately capitalise the Big Society bank, and will also need to decide whether it has the appetite to reform banking. There have been rumours circulating that Osborne and Cameron have been blocking any attempts to restrict the activities of the banks. Even if this were true (and I obviously have no idea whether it is or not), there is growing public unease at the gulf between the huge profits banks are posting (and more particularly the bonuses they are paying out) and the cuts to public spending. It would undoubtedly be a very popular move to take action against the banks. The recent speech from the Chair of the Independent Banking Commission http://bankingcommission.independent.gov.uk/bankingcommission/wp-content/uploads/2011/01/John-Vickers-220111.pdf will no doubt be pored over by Treasury officials advising Ministers on plotting the way forward for banking.
Meanwhile on the other side of Gotham City...
In Parliament, the Consumer Credit (regulation and advice) Bill has been making steady progress. The 10 Minute Bill, proposed by Stella Creasy MP http://www.workingforwalthamstow.org/2010/10/press-release-mp-introduces-bi.html would limit the amount that lenders could charge for a loan. This would cap the extortionate amounts that payday lenders and doorstep lenders can charge poor people who are generally excluded from mainstream banking - something we have long been campaigning for http://www.urbanforum.org.uk/better-banking-blog/how-can-60-interest-for-a-credit-card-be-too-high-but-60000-is-okay
The Bill was presented and then granted a second reading, which will take place on Thursday 3rd February - and it's not too late to get in touch with your MP to ask them to support the Bill. Stella has information on how to do this, including a model letter on her website http://www.workingforwalthamstow.org/2011/01/capping_the_cost_of_credit_ple.html
Encouraging the Bill now has cross-Party support and is being proposed jointly with Conservative MP Justin Tomlinson. Let us hope that Government Whips do not try to derail it by reverting to tired political point scoring.
I was pleased to hear from my MP, Mike Freer (the former leader of Barnet's ‘easyjet council') within a matter of minutes in response to expression of support for the Bill. [NB I have to say I was very impressed with the speed of his reply...by far the quickest I have ever had from my constituency MP!] He said simply:
Dear Mr Blume
I shall be attending the debate. Justin Tomlinson is a good friend and so I am inclined to support the motion.
Mike Freer MP
Finchley and Golders Green
sent via blackberry
He has obviously left himself a little bit of wriggle room with that wording, but I shall be watching closely and I hope that Mike and his colleagues on the government benches will take action on the exploitation of poor people.
Last week Mark Kleinman (Sky News' City Editor) broke a story about secret talks between the high street banks and the government aimed at securing support for the Big Society in return for a moratorium on bank-bashing. Whilst this was picked up in the press, it didn't really feature as headline news. Has banking really slipped so far off our radar since the midst of the financial crisis in 2008-09 when ever day the lead news items seemed to cover some financial impropriety or incompetence? It seems so. And yet, with the Irish bailout fresh in our minds and the prospect of further bailouts across Europe fast becoming inevitable, we are still paying heavily for the banks' gambling with taxpayers as their backstop.
This news highlights very well the inherent problems we face in making the government's commitment to transparency and ‘open government' meaningful. Whilst it's great to see government data being made publicly available, it's not in itself a solution to anything.
Just compare the fanfare that accompanied the publication of 150,000-odd items of government spending a couple of weeks ago, with the news of secret meetings between bankers and the government where future policy decisions are being agreed. Whilst there might be valuable information in amongst the vast list of items of spending which are in the public interest, that amount of data is only likely to be trawled by data specialists and those who are paid to interrogate it. For most of us it's utterly meaningless and uncovering anything useful is the archetypal ‘finding a needle in a haystack'.
And even if we do uncover something - for example that the Cabinet Office spent £26,000 on a consultant to help them have ‘difficult conversations' - we have absolutely no context to assess whether that was good value for money or not. Right now, I can see plenty of need for ‘difficult conversation skills' but I still don't know if it was good use of public money.
Contrast that with information about a meeting between government and the banks. The news reports suggest that the banks have agreed to put around £1bn into the Big Society bank to support community action and social enterprise. But the price for that investment is that the government ‘lay off them' in the future, promise not to introduce any more taxes on the banks and not to interfere with their size, business model or structure.
If that's true, the government are pre-empting the conclusions of the Independent Banking Commission which is currently investigating the banks' structure and business models. And, perhaps more significantly, they appear to be making decisions that are far more significant economically than spending £25,000 to a training consultant. We're talking billions of pounds here.
So what has the reaction been to this story breaking from the government committed to transparency? Kaye Wiggins' in Third Sector reports a spokesperson from the Cabinet Office as saying ‘we are in discussions with the banking sector on a number of topics, but it would be inappropriate to provide a running commentary of our conversations'.
Basically, we can have all the information we want on data that has no context to enable us to make meaningful assessment of its value. But if we want intelligence on who's influencing government and how they are taking decisions in our name, then that's ‘inappropriate' to be put into the public domain. I know which I would rather have in order to hold the state to account - which is meant to be the purpose of transparency!
And the second thing that disturbs me about these clandestine meetings is that the government, in return for a short term windfall for their Big Society bank are at risk of giving up a huge amount. Let's go through the numbers that have been reported (of course we'll need to await any official announcement, but nonetheless...).
The banks are going to contribute something like £1bn-£1.5bn to the Big Society bank over a two year period. This figure includes the dormant accounts that they hold - that is money which has become ‘orphaned' from its original owners but does not belong to the banks and has always been earmarked for this purpose. The dormant accounts are reportedly worth around £200m - which is down significantly from an estimate of £5bn in a 2007 Treasury Select Committee Report (given in evidence by the originator of the Unclaimed Assets Register).
The remainder (£800m-£1.3bn) will be split between the five big high street banks - Barclays, HSBC, Lloyds, RBS and Santander - something like £200m each.
Let's compare that with some other figures:
The proposed new bank levy will raise around £2bn.
The one off bankers' bonuses tax raised £2.5bn.
The total amount of bonuses paid to bankers this year is approximately £7bn.
The combined profits posted by Lloyds, HSBC, Barclays and RBS in the first half of 2010 was £13.6bn.
The amount of public money spent on bank bailout (not including our European obligations) was £850bn.
Compared with some of those figures, £200m per bank is peanuts. And rather than await the outcome of their own investigation into whether the banks are too big, too risky and need to be fundamentally restructured, the government seem intent on selling us short in return for a quick buck.
Come to think of it, short term profiteering with no regard for the long term costs sounds a lot like the sort of thing we've seen going on in the banking sector which got us into this mess in the first place....maybe they're proving their credentials for a future career in the City?
Urban Forum is supporting a new campaign to put an end to predatory lenders charging extortionate amounts for loans. Here's why...
This week saw the publication of two very interesting reports, both advocating that banks be more strictly regulated in order to avoid future financial crises and meet their social obligations. However, what makes these two reports so particularly interesting is that they are not from social justice-minded charities and social enterprises. They come from respected financial service insiders.
The International Monetary Fund (IMF) may not be known for its social justice credentials (no doubt it would claim otherwise...but anyway), but it is an important organisation in global financial regulation. So when the G20 Ministers asked the IMF to look at possible regulatory responses to the financial crisis, we didn't quite hold our breath waiting for them to advocate a host of radical interventions. However its report, 'A fair and substantial contribution by the financial sector', which a number of journalists have reported on in advance of its presentation to the G20 Summit this weekend, certainly exceeds my expectations. In it it calls for not one, but two, separate taxes on banks. In addition to a flat-rate insurance levy (or ‘financial stability contribution') it also calls for a tax on financial institutions' profits and pay. The report adds weight to the arguments for a globally-agreed bank tax, though does not support a financial transaction tax, the so-called ‘Robin Hood Tax'.
The report is likely to take some by surprise (not least of all me!), and will no doubt be met with opposition from some governments. Canada in particular is likely to oppose the moves, since they did not have to bail out their banks, who many hold up as the model of good practice. It will also be interesting to see what the British Bankers' Association (BBA) has to say, following its recent line about it being inappropriate to introduce a Robin Hood Tax before the IMF's report - will it now support these proposals? I suspect that is unlikely. The outcome of the G20 discussions will be interesting to see, but the support of the IMF for taxing banks (twice!) adds weight to the Better Banking campaign's proposals.
The other important report to come out this week is the final report of the Social Investment Task Force (SITF), ten years after their original examination of ways that social investment could be grown to support the poorest communities in the UK. Under the stewardship of venture capitalist, Sir Ronald Cohen, the Task Force made a number of recommendations, many of which have been implemented since 2000. However, in its final report, ‘Social Investment Ten Years On' it acknowledges that progress on voluntary-arrangements between banks and government have not delivered the necessary step change. For the first time, the Task Force has called for a Community Reinvestment Act to be introduced in the UK. To have the backing of Sir Ronald and the Task Force in the Better Banking coalition's calls for a CRA is a fantastic fillip and I hope that people within the financial services sector and political parties take note.
The calls for regulation to ensure the banks meet their social obligations are growing. People from the banking sector have now ‘broken ranks' in advocating more radical reform. A breakthrough moment perhaps? Let us hope so.
The foreword to the Tories Big Society manifesto describes the banking sector as ‘overblown' and says we need a new economic model, so as I started reading the following 120 pages I was hopeful of finding evidence of real bank reform. Would I be disappointed?
There are certainly signs of progress against the Better Banking Coalition's proposals, on disclosure, tackling excessive charges for credit, encouraging financial inclusion and placing a social levy on banks. Their proposed Consumer Protection Agency will be given powers to curb excessive charges on store cards but their proposals only extend to store cards and I can't for the life of me understand why (philosophically or practically) they would stop short of extending this to all forms of extortionate lending? The apparent exclusion of doorstep lenders and payday lenders, who primarily serve poor households, seems at odds with the manifesto commitment to tackle inequality. Perhaps someone more knowledgeable than me can explain how this makes sense?
Their second plan is to establish a free national financial advice service although, as with most manifesto pledges, precisely what this means or how it would work is not clear. Financial literacy and financial capability is obviously important in order to address financial exclusion, but even having a degree in economics won't help you if the choice you have to make is between a doorstep lender charging 1,000% and an illegal loanshark to access credit. A welcome move in the fight against financial exclusion is that Post Office Card Account holders would benefit from discounts when paying by direct debit and people with unsecured debts of less than £25,000 would be protected from having to sell their homes if they got into difficulties.
Disclosure comes in the form of an obligation on credit card companies to provide clear and consistent information to consumers. This idea of ‘simplified transparency' (taken from Thaler and Sunstein's ‘Nudge' and a favourite among current policy-advisors) protects consumer interest, but it focuses solely on individuals at the expense of any corporate transparency. As such it would not help to identify where there is discrimination and market failure in financial service provision.
Progress on Better Banking's call for a tax on banks comes in the form of a new ‘social responsibility levy' which will be placed on the financial services sector. The Tories deserve credit for their proposals for two reasons. Firstly, for extending the scope of the levy beyond just the banks, unlike Labour whose own levy would cover only retail banks, never mind the wider financial services sector. And secondly, for saying they will implement the tax unilaterally if international agreement cannot be reached. There's no detail on what this would mean in the manifesto, but according to a BBC report this would tax banks ‘wholesale liabilities' (that is the amount of money they borrow from other financial institutions). The £1bn this is expected to raise would go on a tax break for lower-income married couples, funding the financial advice service and paying off the budget deficit.
A Conservative government would use its stakes in RBS, Lloyds Group and Northern Rock to increase competition in the banking sector. And when it comes to selling these shares, we will all be given the opportunity to buy a stake in these banks with a ‘people's bank bonus'. I don't know what happens to those who cannot afford to buy shares, but who contributed to the purchase of those banks through their taxes (and many poor people are in work and do pay taxes)? And even less certain is, if the sale is going to be good value for the taxpayer, are they actually going to be people who are keen to buy shares in these banks? It's surely something of a Catch-22 . . . if people want to buy them, then they must be a good deal for investors, in which case the implication is that they may have been sold too cheaply. Price them too high and no one will want to buy them. Economic theory would say that they would need to be priced at the equilibrium, but in practice that must be almost impossible? Perhaps that's one for the national financial advice service to ponder!
Overall then, there's some things to be pleased about and some steps in the right direction. However, the rhetoric on the need for bank reform and tackling inequality and discrimination and their Big Society plans isn't quite so prominent when it comes to their proposals for financial service reform.