Bill Jamieson: Who's in charge of the banks?

Published on Saturday 2 May 2009 13:31

IF THE Government hoped the latest Treasury Select Committee report would bring some closure to the Great British Banking Collapse, it has had a rude awakening. Far from "drawing a line" under the debacle, it is set to spark fierce debate and in the most sensitive area of all: who is now really "in charge" of the banks where the Government is now the majority shareholder? And what is the strategy to be pursued?

The report hurls three spears into a very exposed flank of government. One has already been well aired: the committee's trenchant criticism of the way small and medium-sized businesses are being treated. Complaints pour in with every week, with allegations of sharply raised interest rates on "renegotiated" loans, high arrangement fees and ferociously strict lending terms and conditions. "We regret," it declares, "the reports of sharp increases in bank charges and arrangement fees which can often be more damaging to businesses than higher interest rates. We deplore the behaviour of a number of those banks who have received so much public money and behaved in such an insensitive manner, particularly to established customers."

But the two other attack fronts deserve as much coverage. The first is on the enigmatic and secretive way in which UK Financial Investments (UKFI) – the body set up to hold the Government's equity stakes in banks such as Lloyds Banking Group, Royal Bank of Scotland, Bradford & Bingley and Northern Rock – is operating.

The second is the future of the banking sector and what, if anything, will be done to separate out investment and retail/commercial banking and to break up the market dominance in the mortgage and small business lending market created by the state-sponsored emergency takeover of HBOS by Lloyds TSB.

The scale of the catastrophe suggests no early return to what might be described as "normal" in UK banking. Between April last year and April 7 this year, the market capitalisation of the UK banking sector collapsed from 316.9bn to 138.1bn. Within this total, Royal Bank of Scotland has slumped from 62.8bn to 17.2bn. Northern Rock went from 4.8bn to nothing. Bradford & Bingley went from 2.9bn to nothing. Barclays tumbled from 47.1bn to 14.3bn. HBOS went from 39.3bn to merge with Lloyds Banking Group, and Lloyds itself fell from 31.6bn to 12.9bn. Bearing in mind that nine banks occupied places in the FTSE 100 Index in April last year, the effect has been felt by every small private investor in a FTSE 100 index tracker unit trust.

The magnitude of the collapse in bank lending has been no less catastrophic. In the six months to February 2009, net lending to business by foreign and domestic banks had fallen from 53.5bn in the same period a year earlier to just 8.6bn. Mortgage lending slumped from 300,063 approvals in February 2007 to just 101,942 in February this year.

There can be no easy or early recovery bounce to "normality" from falls as precipitous as this. Little wonder that Michael Coogan, director general of the Council of Mortgage Lenders, warned in Edinburgh in a speech to Homes for Scotland last Friday that "our current perception is that these 'green shoots' have no roots and we will continue to see month on month volatility in the levels of lending, transaction numbers and house prices".

A key concern of the Commons committee is the way that UKFI has been set up and the overall plan or strategy to which it adheres. The Government protests that it wishes to have an "arm's length" relationship with the giant banks now under its wing. But what is "arm's length"?

Glen Moreno is the acting chairman, and UKFI currently employs 12 people, due to rise to 16 when fully staffed. Bearing in mind that the organisation now holds majority shares in two bank giants and is also responsible for the portfolios of two failed mortgage lenders – Northern Rock and Bradford & Bingley – it is a remarkable concentration of power in the hands of a barely known few.

The staff operate out of two rooms in the Treasury's Whitehall building, the main room being, according to Moreno, "smaller than the average bank CEO's office… People work literally adjacent to each other at workstations without any dividers between us." The Treasury has offered "an extremely reasonable deal" on rent and provides human resources, IT and press room back-up. In the words of UKFI's chief executive John Kingman (like many of the staff, a secondee from the Treasury): "We are, to some extent, as it were, working on the back of the Treasury systems."

Arm's length? It did not strike the Commons Select Committee that way at all. The point it makes is that UKFI is managing billions of pounds of taxpayer money "but at this stage too little of its activities are in the public domain". It points to the UKFI website, which is almost devoid of content. The investment mandate is still not in place.

Despite UKFI being at "arm's length", the Government has taken a power of direction that can be invoked if UKFI acted in a way fundamentally at odds with the Government. The framework document states that the Treasury can give UKFI directions of a specific nature and that the board of UKFI "will comply with such directions or resign". These powers, Kingman told the committee, would only be used in "abnormal circumstances". In what state does he imagine we are living now?

"The Government," says the report, "must publish a strategy for UKFI addressing how it will use its control of the investee companies and what role it envisages for UKFI in promoting change within the banking sector more generally. We recommend that this should be done within the next three months. We do not think it is in the national interest for UKFI to remain so enigmatic a body."

As for a exit strategy, or a set of criteria by which to proceed, there does not appear to be any. "We think it vital for investor confidence," says the committee, "that, even at this early stage of ownership, preconditions for UKFI's exit should be outlined and a strategy for achieving exit devised."

As for the future of the banking sector, questions are left hanging. If we now have a system in which no major retail bank is allowed to fail, such a system may be incompatible with investment banking operations within the same group, and indeed would suggest regulation of the type befitting a utility; covering pricing, charging, product offers and service training and standards. The banks will re-emerge – but not as we know them.

The committee still has a long list of inquiries to complete, including the role of auditors and regulatory agencies. Considering the ambition of its task, the evidence collected thus far and that the FSA is working on a report of its own, it is hard to see what a separate Scottish Government inquiry that some now demand can offer that is different to, or better than, the exhaustive inquiries already under way. Judging by the Select Committee's report thus far, we have more than enough to worry about.