Saving global economy will hit Britain hardest

Published on Saturday 7 November 2009 16:37

ACTOR Brendan Gleeson reminded us in Into The Storm – a Second World War drama screened last week in which he portrayed Winston Churchill – Britain has previously bankrupted itself trying to save the world. And today, UK taxpayers are bearing a disproportionate cost for rescuing the global economy from Armageddon, one which will burden generations to come.

Every family in the UK faces a direct 4,350 tax bill following the collapse of the banks. But more serious damage to our future financial well-being has and will yet be caused by the attendant company bankruptcies and redundancies.

So economists, leading bankers, regulators and other great geniuses of our age are busy devising reform plans to prevent this happening again, amid predictions of a looming revolution on the high street.

While our experts are musing, those in Brussels have been stamping their feet and ordered some dismantling of the biggest institutions. Lloyds Group and Royal Bank of Scotland are to begin disposals.

But RBS's sale of 312 Royal Bank of Scotland branches in England and Wales and five NatWest branches north of the Border, still leaves the group with 1,951 high street offices. Lloyds will be left with more than 2,400 branches after offloading 180 Lloyds TSB Scotland branches, 164 C&G and 250 TSB offices south of the Border.

Sad though it is to see the disappearance of the Trustee Savings Bank, disposals announced to date fall a long way short of the high street revolution or reform of the banks we have been promised.

The Bank of England favours more radical change. It would put a bomb under the lot of them and start again with a new fragmented system of much smaller institutions. It wants to see an end to "too big to fail" institutions.

The Financial Services Authority (FSA) believes this would be unnecessarily disruptive and potentially damaging. Its chairman Lord Turner argued on Monday that more regulation, requiring additional capital, is the answer. This accepts future failures, requiring taxpayer bailouts, are inevitable. So it's Hobson's choice for taxpayers and consumers. The less we pay for our banking and borrowing, the greater the likelihood that a bank will fail and require taxpayer funds.

Or rather, it's a trade-off between the interests of those who pay tax, those who use banks most and those who work in them.

The greater the level of regulation, the more expensive mortgages will be, for example. But the risk of a taxpayer rescue should be lower. As consumers, we have to decide whether we would rather have a cheaper mortgage and accept a greater risk that tax bills will rise intermittently to pay for bailouts. Or would we prefer to pay more to create banks with foundations of gold, bound by a regulatory straitjacket, and which would be unlikely to fail or call on the taxpayer to be rescued?

Those who use bank services less, because they do not borrow much, may take a different view on this balance of interest than those who profit most from cheap banking and borrowing, through, for example, property speculation or conspicuous consumption.

However, the money paid out by the banks to investors and staff through dividends and bonuses exceeded the money they needed to bail them out. If more of these earnings were retained, the risk of collapse would also be lower, as would returns to investors and staff.

Another way of looking at it is that taxpayers are underwriting borrowers' gains on property through loans for mortgages, dividends to investors and bonuses to staff.

Unfortunately for the FSA, the Bank of England has little confidence in the powers of regulation and regulators, and iIt favours structural reform. Governor Mervyn King wants to be rid of banks which are too big to fail, and believes casino banking – high-end speculative global investment – which has caused most of the current problems, should be split from the boring bit of banking, providing current accounts, credit cards and personal loans etc.

But Lord Turner is not convinced that these risks can be averted by simply making banks smaller, or more one-dimensional, as small mortgage banks have crashed along with big ones. Rather, he believes, the interconnectedness of banking relationships creates a house of cards. When one bank becomes unstable, it brings the whole structure down. This, he says, could be curbed by, you guessed it, more regulation.

The global nature of many of our big banks left UK taxpayers bailing out defunct banks all over the world. King would have these split up. In other countries, for example Iceland, governments were unable to rescue their banks, which had vastly outgrown the wealth of the nation.

But Turner believes it would be possible to create group institutions, where national subsidiaries were responsible for losses within their own borders alone.

Alternatively, a global-damage sharing agreement could be reached, which precluded some countries shouldering an unfair burden, as it could be argued UK taxpayers are doing today.

Who gets to decide the future shape of UK banking will depend on the outcome of the next election. As things stand, big groups will continue to dominate. The fragments being spun off will probably ultimately disappear into other big groups. Meanwhile consumers can expect inconvenience and upheaval as their accounts are switched and familiar faces at local branches disappear.

They will face higher taxes to pay for this crisis, and higher bank and borrowing charges to meet the cost of new regulations. After that they can look forward to higher taxes to pay for the next financial crisis, when a new generation of freshfaced hungry traders set their sights on becoming masters of the universe.

On the other hand, if the Conservatives win the next election, and Mervyn King holds court, then the game is blown wide open. But as Winston Churchill discovered, the outcome of general elections can never be taken for granted.