Warning over UK ‘fixation’ on nurturing big banks

BANK of England interest rate setter Adam Posen will use a speech in Edinburgh this week to warn that the UK government must end its “dangerous” obsession with growing Britain’s banking sector.

Speaking in a personal capacity, Posen will say that politicians must not offer “too much support” to the big lenders. His comments to the Just Banking conference – organised by academics, environmental campaigners and trades unions – are expected to reignite the debate over breaking up the banks.

Posen, a member of the central bank’s monetary policy committee (MPC), will argue that the risk to the taxpayer is too high if global banks headquartered in the UK are considered “too big to fail”.

He told Scotland on Sunday: “We must be cautious about the government giving too much support and encouragement to large banks.

“We, as a society, need to reconsider the cost-benefit balance of having global banks headquartered in our countries if those banks’ balance sheets become significantly bigger than our GDP.

“For good reason, we do not protect and promote other industries as strategic, or distinguish between, for example, car manufacturers in the UK whether their headquarters are here. The same should apply to financial firms and even more so since having global bank headquarters exposes our taxpayers to risks which other global firms do not.

“Every country has its politically protected obsession – rice in Japan, military technology in the US, autos in Germany – and the UK’s obsession with banking is more dangerous than most.”

Posen, who was once dubbed “the Bank of England’s tame socialist”, will also renew his calls for greater access to finance for small and medium-sized enterprises (SMEs).

Last autumn, he proposed the setting up of a state-owned bank – similar to the Small Business Administration in the United States or Germany’s Kreditanstalt für Wiederaufbau – to help reduce the effect on smaller companies of “credit busts and banking crises”.

Posen said: “This requires putting in place financial infrastructure that provides robust and accessible financing for SMEs, through a combination of public institutions and of private alternatives to individual banks.”

Beth Stratford, a sustainable economics campaigner at Friends of the Earth Scotland, which is organising the conference, said: “It’s time to open up the debate on banking reform and be clear about what we expect from our banks.

“The UK government had to put up £1.2 trillion of taxpayers’ money to rescue the banking sector. It is not acceptable that banks continue to pump money into destabilising speculation and harmful industries whilst rewarding themselves with enormous bonuses.”

The conference will also hear from Tony Greenham, head of finance and business at the New Economics Foundation, who will call for Britain’s giant banks to be broken up into more local operations.

Greenham said: “The UK is an anomaly in having just a small number of large banks. Germany, Switzerland and the United States all have lots of small banks, as well as a smaller number of big international investment banks.”

He said the Financial Services Authority should relax regulations to allow smaller banks to enter the market and for state-owned Royal Bank of Scotland to be managed on a local basis, with regional boards accountable to their local communities.