George Kerevan: Banking still in need of treatment

RBS continues to generate toxic headlines in serial fashion. Picture: PA

RBS continues to generate toxic headlines in serial fashion. One day it is allegedly sabotaging viable small businesses to pirate their assets, another day the bank’s IT system goes on the blink again. This week RBS joined other malefactors (including Lloyds and Barclays) in paying hefty fines to the US authorities for flouting international sanctions on Iran, Sudan, the Burmese generals and Gaddafi’s Libya.

Sanction-busting was not conducted in secret nor were the perpetrators in RBS confined to a few rogue traders. According to the New York regulator, methods for circumventing sanctions were posted openly on the RBS intranet. Top RBS executives, including the group head of anti-money laundering, “were fully aware of and in some instances even provided” detailed instructions on how to launder the cash. But RBS was only a bit player. HSBC was fined over £1 billion because it handled money for Mexican drug barons.

We could go on … and on. In November, the ethical Co-op Bank turned out not to be so ethical after all. Its ex-chairman was photographed allegedly using illicit products of the type normally supplied by HSBC’s Mexican clients. This week, Lloyds was fined a record amount by the Financial Conduct Authority for forcing staff to use high-pressure sales techniques. The bank now faces having to compensate another 700,000 unhappy customers for this latest mis-selling scandal.

Don’t imagine that rogue banking is only a British concern, though lax regulation in the City of London has made it the global HQ for financial wrongdoing. Last week two American banks, JPMorgan Chase and Citigroup, were fined by the European Commission for falsifying benchmark interest rates. The commission also slapped fines on … RBS.

After this catalogue of shame, it might seem good news that the EU has just agreed a landmark deal for rescuing failed banks – one that is supposed to free taxpayers from carrying the entire financial can if a bank collapses. Since 2008, taxpayers have forked out around £400bn to re-capitalise Europe’s ailing banks, meaning that the banks’ shareholders and private creditors have had their investment protected. The new rules are meant to force these shareholders and bondholders to bear some of the loss.

Don’t uncork the champagne just yet. The small print gives governments more flexibility to pump in taxpayers’ money – a move demanded by Germany, whose banks are deep in hock to Greece and Spain. The agreement will also force banks to find £60bn to fund a collective insurance scheme. Fine, except that – through reduced lending or higher charges – you and I will end up supplying that £60bn. Altogether, the new rules are so encrusted with caveats that bank shareholders and bondholders can sleep easy.

As part of the new rules, Europe’s biggest banks will now be supervised by the European Central Bank. That might sound a step in the right direction as (to date) Europe’s banks have been overseen by a patchwork of national agencies, which are either incompetent or subject to manipulation by vested interests. Unfortunately, the ECB has absolutely no experience in acting as a watchdog. It is the process of hiring 1,000 new staff.

Running the show is Daniele Noury, who has been in charge of supervising French banks. She recently blotted her copybook when the French government had to take on £40bn of liabilities to bail out Peugeot’s financial arm and Dexia, a Franco-Belgian bank. Ms Noury’s first job is to get the Germans to own up to the fact their banks are still sitting on lots of toxic loans.

The crisis in international banking is systemic and has little to do with human greed per se. Our super-productive world is now saving a quarter of global GDP, much of which cannot find a profitable outlet investing in manufacturing. So the excess goes into the banking system in a desperate search for high returns made in trading paper assets. Computers and mobile phones allow banks to pass this global savings glut between each other like pass the parcel – and cream fees off the top. Result: endemic financial bubbles that offer (temporary) vast profits as long as asset prices rise. We have created a Frankenstein monster of permanent financial instability.

The alleged cures for banking instability only make the patient worse. For instance, forcing banks to hold greater amounts in capital reserves against a rainy day. Keeping these mega-reserves idle costs money. This forces banks to seek ever-higher profits from trading fancy derivatives (aka gambling) because ordinary lending to consumers and small firms earns a comparatively trivial return. Paradoxically, the EU plan to stuff European banks full of non-earning reserves will guarantee the next round of insane derivatives trading.

How do we get off this merry-go-round? As an old free marketer, I fear I am becoming an apostate. I can see advantages in restoring controls over the global free movement of capital, or at least forcing hot money flows to be less instantaneous. Memo to John Swinney: Iceland gave itself the freedom to recover from the 2008 Credit Crunch by blocking foreign capital from exiting the country. Splitting ordinary retail banking from asset and derivatives trading is also desirable. You can boost the profitability of mundane retail banking through tax incentives. But beware: unless you control capital exports, retail banks will evade regulation by gambling abroad.

It may take another banking meltdown before international action is taken to regulate or tax capital flows. Meantime, I’m modestly encouraged by the ECB’s decision to appoint a female bank supervisor, because the organisation’s management has always been resolutely male.

With Janet Yellen running the US central bank and Elvira Nabiullina in charge of Russia’s, we might replace male banking testosterone with some feminine common sense.