We pit private equity guru Jon Moulton against the voice of retail banking Eric Leenders. While Eric Leenders argues the banks should remain intact, Jon Moulton argues they absolutely need to be split up. Read Jon Moulton’s piece here.
In Britain, we have a history of building world-class industries. Over the years, we have done this in steel, in mining, in shipping, in nuclear power, engineering, aerospace, pharmaceuticals, manufacturing and electronics – and, of course, in financial services.
From that list, you can see we also have a history of losing world-class industries. This usually happens because either we’ve taxed them incorrectly, we’ve regulated them incorrectly, we’ve not invested in them, we’ve not attracted the right management or we have simply become uncompetitive. We now propose to do it again with financial services.
It is just over two years since Lehman Brothers collapsed and the global system effectively froze. As exhaustive analyses since then have clearly shown, the causes of the problems are many and complex.
The Bank of England’s Charles Bean got it just about right when he said: “It was like Murder on the Orient Express. Everybody had a hand in it.”
And that is right. The banking industry is responsible for banking, it is not in charge of the government of a country; it does not run the central bank; it is not the regulator. All of these have also played a part in bringing about today’s problems.
Some banks did fail, but fairness demands it be recognised that the majority did not. And it should also be recognised that the banks are facing up to their responsibilities, changing their practices dramatically: more than doubling their capital standards; holding more liquidity; addressing accounting issues, changing the risk controls; and, of course, stress testing. Governance is stronger and more structured, derivatives better controlled, transparency and openness are the watch words.
Yet still they face the challenge that some of them are too big to fail. Britain needs big businesses, and big businesses need big banks. Of the UK institutions that failed, the majority were smaller lenders: the big international players largely proved themselves better able to weather the global economic storm. These are the banks that are now tasked with financing the economic recovery. It makes no sense to curtail their commercial capabilities now.
It is absolutely correct that a failing bank, like any other business, should not require recourse to the taxpayer if it fails. But that does not mean artificially limiting the size of the bank – it means getting the right recovery and resolution plans in place so that they can be recapitalised or, if need be, wound down in an orderly fashion without troubling the taxpayer and with minimum disruption to the economy. Last year’s Banking Act addressed this very issue, and further changes are now being devised to ensure no bank will, in the future, need taxpayer support.
Nor is limiting the size of a bank the right way to manage their riskier activities: regulators are using capital controls to do this, so that, even in smaller institutions, the degree – and location – of risk in the business is properly understood.
Any systematic and logical analysis of what we need from the bank of the future shows that nothing is to be gained from artificially constraining its size. The time has come to put this bank bashing behind us.
Eric Leenders is executive director of retail at the British Bankers’ Association