Sunday, 8 July 2012

Competition in banking? Now that's a radical idea...


In that irritating way of today’s politics, the newspapers are report on a speech that Ed Miliband will make tomorrow. And Ed nearly gets it right for once:

The Labour leader will call for the big five banks - Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest - to become seven, with privately-run "challenger banks" to buy up to 1,000 existing branches. It is hoped that this will increase competition and choice for consumers as well as reduce bank charges.

I say ‘nearly’ because firstly banking isn’t driven by branches any more. For sure I have a ‘branch sort code’ but that’s pretty virtual these days and it’s a fair while since I actually visited that branch. And the future of banking lies in this virtual world not in grandly portico’ed high street branches.

Secondly, I should get to choose where I bank – if Ed’s banking reforms force me to change because they’ve forced my bank to sell its Bradford branch to a newly formed “challenger” bank, I shall be just a tad annoyed.

The problem with banking is that we have made it more and more difficult to operate as a retail bank let alone start up a new one. It didn’t use to be that way – governments passed laws that made it so:

As a result of these legislative changes, provincial limited-liability joint-stock companies started picking off private banks. After lengthy negotiations, three of the largest Quaker-run banking firms--Barclays (which had become Barclays, Tritton, Ransom, Bouverie & Company after a merger in 1888), Jonathan Backhouse & Company, and Gurneys, Birkbeck, Barclay & Buxton, along with 17 smaller Quaker-run banks, agreed to merge and form a bank large enough to resist takeover attempts. Barclays took its modern form in 1896 when the 20 private banks merged to form Barclay and Company, Ltd., a joint-stock association with deposits totalling an impressive £26 million. This marked the beginning of Barclays' tradition of service to farmers and fishermen.

And we have – for all sorts of reasons, good and bad – continued to pass laws regulating the activities of banks that acted to make it harder to start up a new bank. That made banks a special case in capitalism – because market entry was so hard, because banks could offer free banking to retail depositors, because banks had what we believed to be an essential partnership with government – for all these reasons banks had no good reason to focus on being the service businesses that they were once (and that their advertising still claims them to be).

While the big banks were careful cautious and focused on the day-to-day job of lending, holding deposits and such, this lack of competition didn’t really matter much. The public got truly awful service – banks elevated saying ‘no’ to a semi-religious status – but the banks weren’t threatening the foundation of the economy.

But then someone discovered the money tree and introduced bankers and governments to its wonders. By the wonders of this thing, banks and governments – in cahoots – could shower the economy with billions in “investment” while providing a bottomless purse of welfare, care and bacon paving. The essential partnership between banks and government was forged anew – in exchange for bankers making untold billions, politicians could bribe the voters with grand projects and freebies. The politicians would keep interest rates down (abetted as we now know by the bankers) allowing asset values to sour giving the illusion of great wealth and on the back of this higher taxes would allow for higher borrowing – more profit for the banks, more votes for the politicians.

We need more competition in the pretty straightforward job of taking my money, keeping it safe, paying it people I want it paying to and providing (at a charge) loans should I need them. It’s not a complicated business, there’s no reason why it can only be done by massive multi-national corporations. Yet that is the case.

If Ed Miliband had proposed such a real change – opening up banking licensing to the general market and allowing us to make choices about where we keep our money – that would have been interesting. Instead we get proposals to “break up” the banks and give us a choice of seven where there are now five. I guess that will suit the banks. And government still has that essential partnership with those banks. That hasn’t changed!



Anonymous said...

I still have a cheque-book with some unused cheques drawn on Martin's Bank - swallowed up by Barclays back in 1969.

Might use one to pay my Council Tax bill once day....

Frances Coppola said...

"Keeping my money safe" and "providing loans should I need them" are fundamentally incompatible. If banks provide loans, they can't keep your money safe.