The Archbishop of Canterbury called this week for one of the UK’s nationalised banks to be broken up into regional lenders. The prime candidate would be Royal Bank of Scotland, of which the state owns 81%.
From every quarter of the great and the good come calls for “fundamental change” in the UK banking system — urgently needed, the critics say, to kickstart economic growth.
Yet most bankers would probably just rather all the clamour went away and that they could get on with their jobs.
Given UK politics, what is most likely to happen is that the clamour will not go away, but not much will change. The time when political momentum existed for radical change, in the height of the crisis from 2008 to 2011, has passed.
The government’s Banking Reform Bill, going through Parliament, will force banks to ringfence retail operations in highly capitalised citadels — but fundamentally, the face of the industry will remain unaltered.
That is both a good and a bad thing. A hasty revolution in the midst of a financial crisis arguably risked plunging the economy into even worse stress. On the other hand, the UK banking sector is not perfect, and the door should be kept open to further change.
Money-grabbers or saints?
Critics of UK banks are full of hue and cry about how the banks are not lending enough. But until 2008, the banks were blamed for lending too liberally.
Those two gripes are not entirely inconsistent. One school of thought is that banks must be freed from the grip of “self-regarding interest”, as the archbishop, Justin Welby, put it. Rather than seeking their own profit, they should serve society. That would mean, the argument goes, more conservative lending during booms, and hence a steadier supply of credit in downturns.
Serving society might sound pious, even communistic — but there is a scale. Germany’s banking system offers an obvious contrast with the UK’s. It managed to produce three global commercial banks — Deutsche, Dresdner and Commerzbank — though the latter two flew too close to the sun and had to clip their ambitions.
Yet Germany also benefits from not just one but two nationwide networks of local and regional banks — the savings banks or Sparkassen, and the co-operative banks. Each network has larger banks — the Landesbanks and DZ Bank — that provide more complex products, advice, and connect them with global capital and trade finance markets.
In the German model, the purpose of most banks is not to generate a 15% return on equity for their shareholders, but to channel savers’ money safely to German industry. Capital markets high-flyers love to scoff at this parochial system, but boy are they pleased German industry and, with a few blots, German banking, have kept humming through the crisis.
Closer to home
The local aspect of German banking is an interesting strength that the archbishop picked up on. There is good reason to believe that a bank focused on just one region or even town will be more attentive to the needs of corporate customers in that area. Recreating this in Britain is a creative idea, though as has been pointed out, the UK still has over 40 regional building societies — regional banking could be strengthened without necessarily breaking up a global player like RBS.
The UK’s nationalisation of several leading banks during the crisis gave it the chance to create a parallel channel in the banking sector, that would have been more socially or policy-driven. Even within the constraints of EU competition law, this was surely possible, since it exists in other countries.
Yet both the Labour and Conservative-Liberal Democrat governments have failed to do so, terrified of appearing socialist by genuinely using the banks they owned. No doubt politicians also feared the blame that would follow if their lending failed to produce good results.
The obstacle to Welby’s suggestion is not just one of legislation. It is political and cultural.
A new fleet of regional banks — call them baby RBSs — would have to be owned by somebody. If they were privately owned, the nature of the UK’s capital markets is that they would soon be snapped up by each other or by bigger players. Look at the continual churn in local water and energy utilities, or the way regional TV companies amalgamated.
Germany’s regional banks are owned either co-operatively like UK building societies, or by municipalities. Yet the UK has one of Europe’s weakest systems of local government, partly because central government has crushed it since the 1980s, but also because of the much longer-standing centralisation of the British state.
Only in Scotland, Wales and Northern Ireland is a genuinely powerful layer of regional government re-emerging. It is doubtful whether England’s regions have the traditions or capability to run regional banks — even the county and city boundaries themselves have been repeatedly changed.
Regional banks would be a great adjunct to a more far-reaching move to devolve power to the regions — but such a move is nowhere on the political horizon. The Conservatives’ localism agenda is purely for show.
Realistically, the UK is not going to change to become much more like Germany, in its regional organisation, banking system or industrial policy. Margaret Thatcher’s shrinking of the state casts a long shadow.
Easier wins
The good news is, we know that the UK banking system is capable of producing vast amounts of loans when the spirit takes it. It is equally clear that, outside the mortgage market, lending is mainly constrained by lack of demand for loans, not lack of supply.
The moment for far-reaching change has gone, in this crisis. What the UK must do is focus on three areas where its institutional arrangements do allow for progress.
Culture and ethics in banking is one — as the archbishop and others argue, a higher sense of belonging to a profession with rigorous standards would help to fight the corner-cutting, cheating and mis-selling that have plagued UK financial services for years.
Competition is another — moves to ease capital standards for new banks should be cautiously welcomed; the new entrants themselves are extremely welcome.
Finally, there is regulation — to restrain the reckless lending that leads to crises. Once the industrial loan machine that is the UK’s publicly listed banking sector gets going, the new alphabet soup of regulators and supervisors had better have had their double espresso, because things are going to get lively.