Alf Young: The problem that ‘isn’t really there’

ACCORDING to leaks from Alistair Darling’s memoir of his time as chancellor, the bankers he confronted in the autumn of 2008, as their sector teetered on the brink, were “so arrogant and stupid they might bring us all down”. They showed “a lack of gratitude” for the billions taxpayers were about to pump into their bail-out. Sir Fred Goodwin in particular, we are told, behaved as if he would rather be “off to play a game of golf”.

I trust that, when the complete text is published on Wednesday, Darling also gives due weight to how governments of all stripes were complicit in the process, ongoing since the 1980s, that allowed this over-leveraged and increasingly risk-driven monster to thrive in the first place. By the time the roof fell in, a number of UK banks were deemed too big to fail. Were the current eurozone crisis to trigger a second banking collapse, against the backdrop of extremely fragile public finances in the UK and elsewhere, some could prove too big to save next time.

After the crash in 2007-08, politicians all told us this must never happen again. Labour completed the bail-out. One of the first things the new coalition at Westminster did was create an Independent Commission on Banking, chaired by Sir John Vickers, to consider reforms. It produced its interim report in April. Final recommendations are due on 12 September. Only yesterday, on the BBC’s Today programme, David Cameron conceded there are still “problems of a lack of responsibility in the banking system”.

Why then are both Downing Street and the Treasury signalling that the Vickers reforms, already described by the commission itself as “moderate”, will be punted into no-man’s land, somewhere the other side of the next UK election in 2015? The simple truth is that our bankers, however arrogant, stupid, irresponsible or ungrateful they might appear, are still an extremely powerful force in the land.

They are lobbying ruthlessly to have any banking reforms delayed, claiming the cost of compliance and any loss of competitiveness could constrain their ability to lend to businesses, further compromising an already-precarious economic recovery. Banks have even enlisted the CBI’s new director-general John Cridland to back them. He’s called implementing any of the Vickers proposals in the current climate “barking mad”.

I wonder how many of the CBI’s 200,000-plus small and medium-sized businesses, still finding banks less-than-helpful when it comes to agreeing new lending, will have been consulted before the director-general positioned their organisation so foursquare behind its much tinier group of banking sector members? Perhaps he, like many politicians and despite everything that has happened since 2007, remains a little too in awe of big bankers.

Alistair Darling now calls them arrogant. Sensing they have the politicians on the run, just as they did over continuing to pay big bonuses in the immediate aftermath of the crash, big bankers certainly haven’t lost their chutzpah. The other evening Sir Martin Jacomb, a former deputy chairman of Barclays, went on Newsnight to suggest Vickers is “addressing a problem that really isn’t there.”

Jacomb, who back in his stockbroking days famously claimed that insider trading was “a victimless crime”, now suggests no bank is ever too big, if it’s “sensibly” run. He goes further. The idea of too-big-to-fail was dreamt up by politicians, he argues, scared that depositors might lose some of their money.

If Jacomb had his way, big universal banks like Barclays won’t ever be subjected to the kind of moderate ring-fencing between their retail deposit-taking activities and riskier investment banking activities, proposed by Vickers. They would be allowed to get on with business, much as now. And if any did fail, “all creditors, including depositors, would lose money – say 10 per cent”.

Quite how he would sell that deal to the millions of people who never even think, when they open an account, that their money will be used to underwrite operations on what has come to be known as the casino side of universal banking, he didn’t say. Jacomb did claim no universal banks failed in the recent crash.

Northern Rock, Bradford & Bingley and Lehmans. Not a universal bank among them. And what of RBS, which came to the brink of collapse? That, he ventured, was down to “insane” acquisitions not its universality. He wasn’t asked which bank was competing with Royal to buy ABN-Amro. Good job. That rival was, of course, Barclays.

If Vickers is kicked into the long grass, it will be business as usual. Politicians will still have to worry about the fate of depositors if another bank gets into trouble. But apart from the Darling memoir and Vince Cable’s short-lived attack on the banks’ “special pleading” earlier this week, it is not even clear there is any clear divide between government and opposition on whether the Vickers reforms should be put into a siding.

Earlier this year I heard a member of Ed Milliband’s shadow cabinet say in private what he would never dare repeat in public: that too tough a line on regulating or reforming the banking sector should be resisted because it could destroy even more jobs across the sector and put at risk an important stream of tax revenues for government.

Banks know they have that hold on whoever is in government. According to Vickers, there are about 700,000 jobs in the retail side of the financial services sector, contributing up to £36 billion of the £54bn in taxes that come from the financial services sector as a whole each year. In the hard-nosed lobbying that will continue right up until the final Vickers report is published, that’s a pretty big stick to have to hand.

It’s not the only one. The state currently owns 84 per cent of Royal Bank of Scotland and 41 per cent of Lloyds Banking Group. Shares in both have slumped recently, way below the break-even exit price at which we could all get our money back. Unsurprisingly there are reports that the UKFI, the body set up to manage these investments, has been whispering in George Osborne’s ear that too uncompromising a line on the Vickers reforms could further delay the state exiting at a profit.

When he launched his interim report in April, Vickers claimed “Everyone says that taxpayers should not be on the hook for the banks.” If Osborne and Cameron succumb to this intense lobbying, it’s UK banks that will be off the hook, while unsuspecting depositors and all of us as taxpayers will be destined to wriggle on the next hook that comes along.

Four years on from the start of the last banking crisis, the prospect of substantive reform is receding. Last year the US signed its version of legislation designed to promote financial stability and address the too-big-to-fail problem, the Dodd-Frank Act, into statute. Switzerland has also passed more draconian measures.

If we blink now we have only ourselves to blame when the next banking crisis hits us.