Banking reform – time to stop privatising the profits and socialising the losses
FOR the past four months I have been serving on the Parliamentary Commission on Banking Standards. It was set up in July in response to the Libor and other scandals and at first tasked with looking at culture and behaviour. However in recent weeks it has concentrated more on the issue of structure – whether investment banking and retail banking should be split. Sir John Vickers reported on this question last year arguing that there should be a ring fence placed around retail banking, but against a full split. The Commission has been asked to do the job of pre-legislative scrutiny of the Bill to implement the Vickers Report.
Amid this focus on the structure of banking, there is a danger that another question gets overlooked – who should bear the losses in the event of another banking crisis? One of the things that most angered the public about the recent crisis was that when times were good, the profits were private (and huge) but that when the crisis came, the losses (also huge) were borne not by those who had lent money to the banks but by taxpayers.
All across Europe, austerity measures have been imposed on electorates to pay for the cost of bailing out banks. And the banks were bailed out because the social and economic cost of allowing them to collapse was deemed too great. Yet, apart from some exceptions in Greece, for the most part the bondholders who lent to the banks have not had to take haircuts on their investments. They have been paid while the taxpayer swallows job losses, pension cuts and cuts to services. No wonder people are angry.
A lesser known part of the post crisis reform plan is for bail in debt – the idea that in future, if banks fail, it is the bondholders who should pay, not the public. This is what would happen in the event of a normal insolvency, but banks are not normal businesses. Because of the economic necessity of the payments service and the social necessity of protecting savers, they usually have to be kept going in some form. In 2008 this was by means of a huge taxpayer injection of capital. The idea is that in future, the debts to the bondholders should be turned into shares so that in the event of a crisis, the investment houses come to own the bank to which they lent money.
Will this work? Some who have given evidence to the Banking Commission doubt it. They say that investors would “run for the door” in the event of a crisis rather than owning shares in a damaged bank. Others say you have to ban other banks from owning such debt or in a crisis all the damaged banks would own one another and we’d be no better off. But other witnesses such as RBS boss Stephen Hester have said that in future all bank debt should be “bail-inable” to remove the implicit taxpayer subsidy from banks and to ensure that those who lend money to banks pay more attention to how they are run.
Bail in has been mandated by the international Financial Stability Board. The leader of that body has just been announced as the new Bank of England Governor. Bail in is supposed to be taken forward in Europe through the Resolution and Recovery Directive. And Paul Tucker, the Deputy Governor of the Bank of England, told the Parliamentary Banking Commission last week that if agreement could not be secured on this in Europe, he believed the UK should go ahead anyway.
Amid the sometimes quasi-theological discussion of ring fencing and separation it can be easy to lose sight of what reform is really aimed at. Reform is, at least in large part, to ensure that bank failures are less likely and that if they do happen, it is not the taxpayer who is left on the hook for businesses deemed “too big to fail”. There is more of course like lending to the real economy but a fairer distribution of losses is an essential change if we are to deal with the morally and economically wrong position of profits being privatised and losses being socialised.
banking, economy, Labour, politics