The banks must accept reform or lose access to quantitative easing funds.
By Richard Heller
Another 'day of shame' for Britain's banks, yelled the Daily Mail yesterday – and with plenty of reasons. Barclays' chief executive, the ever-more-aptly named Mr Diamond, collected a package valued at over £25 million, and over 200 of his executives had million-pound bonuses. These awards followed the bank's recent fine for mis-selling payment protection insurance, and its brush with the Treasury and the revenue authorities over schemes used to avoid up to £500 million in UK taxation. Meanwhile, the normally restrained Financial Services Authority denounced the bankers who ruined HBOS for "very serious misconduct".
Business secretary Vince Cable reacted to all these stories at his party conference with a speech full of futile fretting. He had no new policies to offer. Essentially, he promised that the government would maintain its hands-off policy towards the banks, even the ones which it owns.
This is foolish. The government has plenty of leverage over the banks and could gain major political and economic rewards from using it.
It might begin by demanding that all bankers' bonuses above a certain value should be taken in the form of national savings, which the recipient would have to hold for a set number of years. This is a much simpler idea than any special tax and it would guarantee that the major part of all bank bonuses went to work automatically for the country as well as for the banker. It would be a form of forced savings, a concept which has a long and successful history in wartime, and I cannot think of a better group of people to road-test it in the present emergency. However, in fairness the same idea might also be applied to ministers: they should take any future pay rise in national savings unless and until the British economy achieves declared targets for growth, jobs and deficit reduction.
Returning to bankers' savings, I think that all senior retail bank executives should be compelled to reveal how much of their personal savings are invested in the products they offer to their personal customers. This information would be highly instructive and the revelation might conceivably improve conditions for Britain’s battered savers.
In his speech Vince Cable moaned yet again about the failure of the banks to lend money to local businesses. The government tried to meet this problem with a voluntary arrangement with the baffling title of Operation Merlin, named after a successful magician. Operation Tommy Cooper would be a better title for the government's scheme, and the government should now consider a spot of compulsion.
Lost in some intray in Cable's department is an interesting idea which would empower local people to promote local lending. I know it is an interesting idea because I sent it to him myself.
The banks should be compelled to offer all their customers a facility called a good neighbour account. The customer would receive a guarantee that all the funds from such an account which are available for investment by the bank would be lent exclusively to local people and local small and medium-sized businesses. They would not be lent to foreign dictators or racketeers and they would not be used to speculate in fantasy financial products which their bank cannot value or even understand.
The bank in question would not have to track its use of every single such account. But it would have to publish accounts to show that all the available aggregate funds in such accounts had at least been matched by aggregate local lending to individuals and qualifying businesses. There seems to be a market for this kind of lending, as witnessed by the recent growth of peer-to-peer financial institutions. Britain's largest such company, Zopa, had its best-ever month in January. But no one has yet tried to bring the concept into a current account.
If demand for good neighbour accounts really took off, it could force the banks to revive the old model of Captain Mainwaring banking. The hero of Dad’s Army received money from local people and businesses in Walmington-on-Sea. He kept some of this in cash or at call. He lent the rest to other local people and businesses in Walmington-on-Sea. Captain Mainwaring, and others like him, helped Britain to finance the huge demands of the Second World War and then to finance a generation of recovery and growth. All this was achieved with the minimum of government regulation or support.
In contrast with the Mainwaring era, too many of Britain's modern banks have been run by Private Walker, the spiv, or worse still by Private Pike, the stupid boy.
Britain's banks still expect the British people to be grateful for their existence. But without the British people they would not be in existence. On behalf of the British people, the government should stop wringing its hands over the methods and behaviours of British bankers. It has the power to change them, and bring in new ideas for British banking, without the need for lengthy negotiation or complex legislation. Banks which resist should be told that they will cease to be eligible for quantitative easing, that they will not have their deposits guaranteed and that they face losing their licence to accept those deposits.
Bankers who wish to enjoy more "days of shame" will no doubt threaten to move overseas. Is that a promise?
Richard Heller is an author and journalist and a former adviser to Denis Healey. His latest novel is The Network.
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