Jill Sillars: Banks will take note if game rules change

POLITICIANS are playing to the gallery on the banks. Rowdy scenes in the Commons, vicious exchanges between Osborne and Balls. Vince Cable going round television studios saying how wicked banks are, that never again must taxpayers’ pockets be emptied by the Gods of finance too big and too important to be allowed to fail. All to show us they really care.

Backbench MPs summoned Bob Diamond for a toasting, roasting, grilling. What happened? Nothing. He got chummy, called them by their first names and received no hard questioning. A duel with powder puffs at dawn would have been more lethal than the Treasury Select Committee versus 
diamond-hard Bob.

Now Ed Miliband demands the big five be stripped of a thousand branches, with these transferred to a “new two” called “Challenger banks”. And, wait for it, all seven are to have a code of conduct with life bans for those caught fiddling. He calls it a revolution. Truly, the spin doctors have been busy sculpting the 
headlines.

Miliband’s policy is an addition to the idea of an internal division of banks into retail (sober high street) and investment (casino gambling). This is meant to ensure that that the lying, cheating, greedy, bonus-motivated bankers on the investment side don’t rob the cash we have in our current accounts.

Suppose both these changes happen – seven banks each split into two divisions, ring-fenced and separated by the famous Chinese walls through which nothing can pass. Does anyone believe that, within those banks, each side, when meeting the other, formally or in the local supping Champagne, will not talk business about how one can help the other? Codes of conduct are not law. Greed will break them.

What about more rigorous regulation by the Bank of England? The problem is that regulation is only as good as the regulator, and the Bank of England has a lousy record in dealing with banks’ malpractices. In November 2007, the Bank of England’s Money Markets Liaison Group headed by deputy governor Tucker was told by some bankers “that Libor fixings had been lower than actual traded interbank rates”. There was a fiddle going on. The Old Lady did nothing to stop it.

Should we despair? Should we tinker as Miliband and Business Secretary Cable say they will, knowing their plans will not work? I am indebted to a Scot, Jim Walker, one of the best economists I know, for providing me with the answer that will really fix the banks for all time coming. When Alex Salmond’s panel of world-renowned economic advisers was telling him in 2008 that there would be no recession (as the minutes show) Jim Walker was telling a very different story.

It was, in fact, in early 2007 that he produced a series of documents forecasting that the world economy, led by the US Federal Reserve, was heading for the rocks. Not the first time he got it right when the rest got it wrong. He also forecast the great Asian crisis back in 1997. While people with claims about economic ability were continuing to tell us that China would grow and grow, Jim, an expert on the place, was telling the truth – China was heading for trouble.

It is a puzzle to me how Jim, a Scot, a nationalist with a wide experience of the world, is not on the Salmond panel. But then, you know the old saying about a prophet in his own land. Jim is not a fellow socialist. No, he is of the Austrian school of economics, hard as nails in their analysis and belief in the rule of the market, and no lover of regulation. Yet it is from this man the easy way to fix the banks has emerged. Easy, if our politicians have the guts to do it.

All our banks are plcs. The “l” stands for limited liability. That means if they go down owing cash to creditors then their shareholders are liable to lose only the value of shares they hold – not the billions in debts that took the bank down. Jim argues that if we abolish the limited liability status, you change the game – the shareholders would be liable for all the debts. What a difference that would make. Boards who run the banks and the big institutional shareholders who are part of the “City” and share the arrogant belief the taxpayer will bail them out, would suddenly find that they, like all gamblers, are at big risk – because all their money, not ours, would be liable for all the billions of bank debts.

I would add one thing to Jim’s idea. Pass a law forbidding the government to bail out banks under any circumstances. You wouldn’t need regulation after that. Real shareholder self-preservation power would do the trick.