THE sense that banks have become too powerful is strong in the public mind. The crisis has shown their great might, dealing in trillions of dollars a day, controlling the flow of credit to the real economy, and paying themselves vast salaries for the pleasure of doing it.
This would be okay if they served the public good by financing growth and trade, and keeping down the cost of money through competition and efficiency. But if the crisis tells us anything about the role of banks, it is that this is not really what they are about. They seem to operate mainly to enrich themselves. They do far more trade with each other than with the outside world, and their power encourages arrogance and recklessness.
This may not be a faithful picture of the way banks actually behave. But it dominates the current political debate about the future of the industry. What is to be done about it?
Lord Turner, the chairman of the UK’s Financial Services Authority (FSA), which regulates a large chunk of the international banking business in the City of London, entered the debate last week with an astonishing attack on banks and a radical set of proposals to cut them down to size.
The banking industry, he said in a magazine interview, had “swollen” beyond the point where it was useful to society, and needed to be reduced in scale.
He made no bones about the message he wanted to get across. “That requires a very major reconstruct of the global financial regulatory system, and I don’t mean a minor adjustment.”
Britain’s chief financial regulator went on to propose various ways by which shrinkage could be achieved, including a global tax on financial transactions, tougher controls on profits, and a downgrading of financial centres such as the City. His remarks triggered whoops of joy from the popular press, but also fury and venom from the banking industry.
One banker was quoted as saying that he was “appalled, disgusted and ashamed” by Lord Turner’s remarks.
It is certainly very unusual for a regulator to talk down his industry in such blunt terms, and Turner, who is relatively new to the job, is a very political animal.
His remarks will provide powerful ammunition to the lobbies clamouring for punishment of the banking industry.
But what is particularly astonishing about them — and suggests a certain naivety — is that none of his proposals have the smallest chance of being implemented. His idea for a transaction tax is far from new. It was first proposed nearly 40 years ago by US economist James Tobin and, despite being espoused by interests across the political spectrum, has never made any headway.
To be effective, it would have to be implemented on a global scale, and that is impossible, even in today’s world.
Furthermore, the idea that the banking industry can somehow be reduced to a more appropriate size is very strange. What is the appropriate size, and how will it be kept there?
And why single out the banks? What about big oil, motor vehicle, pharmaceuticals, mining, all of which have lobbies longing to cut them back?
But the oddest point is about financial centres. Turner regrets that financial centres compete with each other for business, because this undermines the orderly conduct of business. But the City accounts for nearly a 10th of the UK’s gross domestic product, and a fifth of its tax revenues. No government, however rabidly anti-bank, will kill that golden goose. And any taxes or controls imposed by the UK will merely drive business to centres that do not have a Turner-like figure making hostile noises.
One has to conclude that Turner was playing to the gallery, which is fair enough, though in doing so he may have damaged the standing of the FSA, which is supposed to be an independent, nonpolitical body. Nonetheless, he has poured strong fuel on a fiery debate, and he will be much quoted in the months ahead.
The way to deal with banks that have become too big and powerful, and too self-centred, is not to cut them down but to break them up. One of the regrettable things about the crisis is that it has led to a suspension of competition policy in many countries, including the UK, as governments struggled to save stricken banks through merger. We shall emerge from the turmoil with fewer and larger banks than before, which means that they could become even more powerful and arrogant. It would be interesting to hear Turner’s views on that.
Lascelles is a senior fellow of the Centre for the Study of Financial Innovation in London and a former banking editor of the Financial Times.