Conservatives should make bank privatisation a priority, so that this crucial sector can flourish without political interference
Before the panicky queues formed outside Northern Rock two years ago, the idea of a run on a bank seemed quirky and out of date – something we might see in old films. "The money's not here," says George Bailey (played by James Stewart) when his savings and loan company gets into trouble in It's A Wonderful Life. "Your money's in Joe's house; that's right next to yours. And in the Kennedy house, and Mrs Macklin's house, and a hundred others … Now what are you going to do? Foreclose on them?"
Bailey managed, just, to persuade enough of his customers to leave their money where it was and avoided being taken over by Mr Potter. Northern Rock was less effective in resisting being taken over by Gordon Brown. Elsewhere in the sector we have had nationalisation in all but name – the government has a 70% share of RBS. In Lloyds it is 43%.
How is nationalisation working out? We've had some interesting half-yearly results recently. Northern Rock reports losses of £724m. Significantly £122m of that is current loss – that is, on top of the £602m of losses from historic dud loans. Apparently the losses have kept piling up because of pressure from the government for them to lend money to people who can't afford to repay it. This was what got us is into the mess in the first place, with the Clinton administration forcing US banks to lend irresponsibly for social reasons, sowing the seeds for the "toxic debt" of sub-prime mortgages.
Barclays kept its nerve: it told the government it didn't need any help, and the bank has seen its profits rise to almost £3bn subsequently. RBS has made a tiny £15m profit. Lloyds a £4bn loss.
As Winston Churchill said: "It is a socialist idea that making profits is a vice; I consider the real vice is making losses." It is certainly a concern for any chancellor wishing for a return to buoyant corporation tax revenues. So an early priority of a Conservative government should be bank privatisation so that this crucial sector of the economy can flourish without political interference and the frequently contradictory demands made from Whitehall.
What else? The Financial Services Authority is discredited. It must go. Shadow chancellor George Osborne's pledge to get rid of it is an excellent decision.
Switching banking supervision from the Bank of England to the FSA was a colossal early blunder by Gordon Brown for which we are paying an enormous price. It wasn't that the FSA didn't have enough regulation. It had masses of staff spewing out the stuff at a demented rate. Huge numbers of boxes to tick with the banks employing huge numbers of staff to tick them. But the regulation was ineffective. In contrast, the Bank of England had the expertise required. They knew how to go through the books as the banks would come to them over the years asking to borrow money.
Richard Jeffrey, the chief investment officer of Cazenove Capital Management, says: "Regulation should be much less orientated towards process and much more focused on principles and outcomes. Regulators should be more concerned about where we are going, and whether that is a sensible place to be, not how we travel there."
So there should be less regulation. But it should be tougher in certain respects. Most notably in terms of fractional reserve banking. This is the ratio of money a bank is allowed to lend against the amount it has on deposit. Scams such as special purpose vehicles (where a subsidiary is set up that technically isn't a bank) might tick the FSA boxes but a proper regulatory system needs to take a grip on them.
Smaller banks should be encouraged. The merger of Lloyds and HBOS, apparently encouraged by the government, was a thoroughly retrograde response. We should be breaking up the banks and encouraging new ones to start. George Osborne has suggested that bank privatisation might be done in such a way as to secure this. This is an area where the regulatory burden has done more harm than good. Only the huge banks can employ enough box-tickers. Then they become reckless, secure in the knowledge they are "too big to fail". There should also be far greater opportunities for new retail, high street banks.
The surest way to another financial sector crash is for the bankers to calculate that they can get away with anything, and if it goes wrong the government will bail them out. Such a scenario is not ultimately in the interests of the banking industry and is certainly not in the interests of the taxpayer. It is right to protect those with small deposits – with an equivalent of the Federal Deposit Insurance Corporation, which protects deposits of up to $250,000.
But bank shareholders should not get special protection. Nor should big corporate risk-takers. Let the fat cats have their cream – but only where they have earned it in open competition and without state handouts. A Conservative administration needs to tackle the dependency culture, not just of the inner cities but of the City of London.
Copyright Speakers Corner 2016