Crash, recovery and why boring is good for banks

British Bankers Association head Anthony Browne says that the recovery is a work in progress. Picture: Rii Schroer/REX

Browne was not chief executive at the banking trade body at the time, but an adviser to the newly-elected mayor of London, Boris Johnson.

The two were standing at a window in the mayor’s offices in City Hall near Tower Bridge, with clear views down the River Thames towards Lehman’s London HQ at Canary Wharf – a major banking enclave that also includes Barclays, Citigroup and HSBC.

“I pointed towards Canary Wharf and said ‘one of those buildings has just emptied’,” Browne says. “There was a scary feeling we were in free fall. We did not know where things were going to end up. It was completely unknown territory. There were major panics (including taxpayer bailouts of Lloyds and Royal Bank of Scotland) but at time I was looking at it from a City Hall point of view.”

Fast-forward almost exactly four years to September 2012, and Browne had developed a much greater professional interest when he took over from Angela Knight as chief executive of the BBA.

We are now six years on from the financial crash that shook the western world, a time that has seen the UK banking sector become a lightning rod for political criticism and a target for a pretty draconian regulatory overhaul to make the industry more stable.

How far has it progressed? “It’s not resolved, but it’s getting there,” Browne says. “The banks have far higher levels of capital and liquidity. They have resolution plans, ‘living wills’.” The latter are meant to ring-fence vital high street and small business lending operations if riskier parts of a bank go belly-up again.

While he says the recovery remains a work in progress, “we are nearly there” after a gruelling time for the industry. The new banking model may be less profitable and more boring, but Browne believes BBA must also try to prevent the pendulum swinging too far for the good of society and the wider world.

“We are in a different world”, he says. “We don’t have these highly leveraged [debt-laden] businesses. They are a lot more boring than they were, and that is good because banks have a role to play in society. But we don’t want the stability of the graveyard where banks cannot do anything.”

Browne cites the potential “unintended consequence” of regulatory overreach “having rewritten the rules of banking in the past seven years” since the collapse of Northern Rock and queues of customers round the block trying to withdraw their money.

He says in the new and chastened banking climate, risk-averse international banks – particularly in the US – have led to the termination of more than 1,000 banking relationships with dollar-denominated small banks in emerging markets.

This, he says, is eventually bad for the macro economy. “For instance, Somalia. How do you know your customer’s customer in Somalia? Half the country is run by terrorist organisations. But we need a compromise in general terms in emerging markets between level of risk and the importance of economic development.

“But if law enforcement [on banks] has zero tolerance of any risk of money laundering of terrorist finance, the only way banks can respond is to withdraw from the parts of the world that are risky.”

Closer to home, following last week’s third-quarter banks’ reporting season in the UK, the Competition & Markets Authority (CMA) is expected to confirm within days that it is to investigate the competitiveness of the high street and small business lending sector.

One would not expect the BBA to be anything other than diplomatic about the fresh regulatory scrutiny, while saying the sector is far more competitive already than it once was.

And Browne obliges. “It’s the CMA’s decision. It’s a fast-moving area, competition. Twenty-five new banks have applied for licences.” In addition, the BBA boss says new challenger banks such as Metro Bank, Tesco Bank, TSB and Virgin Money are already taking on the main incumbents.

“I think it’s great. You have got these entrepreneurial types who are coming up with different business models, giving a wider consumer choice. We at the BBA are very pro-competition,” Browne says.

He also points out that the industry has introduced a seven-day current account switching service that has been used by one million people in the past year.

After the lengthy series of banking scandals, from manipulation of the Libor rate at which banks lend to each other to mis-selling scandals like payment protection insurance (PPI), talk has turned to “whistle-blowers” in the financial services industry.

Browne says they perform a valuable service, but agrees with the decision of the British regulators not to follow the American initiative of occasionally paying them for their services via a share of the fines waged on miscreant firms.

He adds: “Whistle-blowers should be able to talk to the authorities and enjoy protection.

“But in terms of getting a share of the fines, we have come out against that. It’s a closed issue in the UK.

“The danger is that you create a perverse incentive. People may happen to see egregious behaviour build up and see the financial potential [for themselves] in delaying taking action rather than going early to report it to their bosses.”

The BBA argues the industry’s case on a wide variety of issues, none more so than its commitment to the European single market amid growing political polarisation of the issue ahead of next year’s Westminster general election. Pressure from Ukip has seen Prime Minister David Cameron promise an “in/out” referendum in 2017 if his Conservative party wins power in May.

“Our position is that we are big supporters of the single market, it’s important for the UK and European Union (EU). We are big supporters of the UK having influence in writing the rules [in Brussels],” Browne explains.

He says the broad interest of the UK banks is they are able to get suitably qualified people to work in this country. Asked whether the British banking industry has a position on the contentious issue of Cameron saying he will seek a limitation of wider free movement of labour within the EU because of immigration concerns, he says: “We don’t at the moment. We have not addressed it.”

The BBA continues to oppose the EU bonus cap for bankers, even though Browne admits that pre-crash payouts were “outrageous, with people in the industry being rewarded for failure”.

But he says the issue has been comprehensively addressed without such a bonus cap. “Cash bonuses are down 80 per cent since the financial crisis, with a lot more schemes paid in delayed equity,” he says.

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