We respond to the Banking Standards Commission

Our big banks are like cosseted, unruly teenagers refusing to wean themselves off parental largesse. We need to cut the umbilical cord.

The Commission’s report sees the political establishment still struggling to find the resolve to deal with the scale of that issue. Changing Banking for Good is better at analysing problems than identifying commensurate solutions.

Criminal sanctions and clearer management accountability are welcome as far as they go. But they will not stop banks from ‘perpetually gaming the system.’ They have the air of displacement activities for politicians unwilling to grasp the nettle of Too Big To Fail.

“We note that George Osborne did his best to limit the scope of the Commission’s deliberations, allowing in November that it was ‘correctly’ enquiring about industry structure, yet warning it to be ‘aware of the consequences’ if they arrived at a view different from his, since they may not ‘carry the day.'

“Despite this, the report makes at least one important recommendation. Occupy Economics agrees that a leverage ratio should be substantially higher than 3 per cent. We also agree that ending the tax incentive to debt finance is overdue. And obliging banks to publish, and remedy, the gender ratios on their trading floors is, we think, also a step in the right direction.

“However, Occupy Economics would also point out that - as both the Chancellor and the Commission now acknowledge - Too Big To Fail is a substantial driver of the so-called ‘cultural’ problems in banks that the Commission was set up to address.

“Unfortunately, as Andrew Bailey acknowledged in the hearings for this report, sector concentration is also behind the power of banks’ relentless lobbying. This has inhibited efforts to tackle the problem effectively. There is now wide recognition among non-bankers that the government’s current, post-Vickers proposals are not adequate to deal with Too Big To Fail. As John Kay remarked before the Commission in October: ‘I would be slightly surprised if anyone really thought they were.’

“With regard to the Commission’s proposals on pay incentives, too, rather than ‘trying to replicate … some of the features of partnership’, it would be better to cut to the chase, and remove limited liability from ‘intra-financial’ trading. As long as limited liability remains, it will be ‘heads we win, tails they lose’ for investment bankers. And, as Andy Haldane has suggested, ten years may not in fact be long enough to see through an entire risk cycle.

“The UK’s major banks are too big to fail, too big to manage and too big to regulate. We need our banks to be smaller, safer and saner - and that means capping their size, limiting their borrowing and encouraging a greater variety of ownership models.”

Cut their size

Britain lives in the shadow of a few megabanks. They're unwieldy, over-complex and unmanageable.

Bigger banks don't contribute more. They exist to turn public money into profit.

Cap bank size at $100 billion.

Curb borrowing

Megabanks want to borrow a lot and own little. With the taxpayer in a headlock, it’s the easiest way for them to extort money.

George Osborne would let banks borrow 33 times what they own outright. Noone would expect to get a mortgage worth 33 times their deposit. It's far too much.

Cap bank borrowing at 14 times their net worth

Saner institutions

Most of our banks are run in the name of a narrow group – their shareholders – who have always the option to get out while the going’s good.

This drives banks to be permanently on the make, regardless of the cost to their own organisations - never mind wider society.

Most French and German banks are run differently – as mutuals or in state ownership. Why not ours?

We're planning future actions. Stay in touch.

On 16 May we took our message to Canary Wharf. There will be more to come. If you'd like to receive email updates from us, please fill in the form below.