John McTernan: Banking sector still in crisis

John McTernan writes that, several years on from financial crash, the fallout from the Co-op Bank scandal shows government continues to fail to address the need for reform

The signs were there that the appointment of the Rev Paul Flowers would not work out. Picture: PA

Why do some problems get solved by politicians while others are just ignored? Sometimes it is a question of salience. Energy bills are high, rising and regular. We see them and they make us angry and every time a new one arrives, we get angrier. Politicians are immune to many of the pressures of ordinary life – they do indeed live in a bubble. But they can’t avoid the partner complaining about the price of utilities, or the pub chat from friends about energy companies’ super-profits. So, cost of living moves up the agenda and a symbolic intervention – Labour leader Ed Miliband’s promise of a price freeze – catalyses and channels public opinion, changes the political weather and spooks the government.

At other times, an issue has to become a catastrophic crisis before it becomes urgent enough to address. Before the global financial crisis, there were signs that things were going badly wrong.

I recall meeting David Frum, a speech-writer for former US president George W Bush and a thoughtful Republican thinker, in Washington DC. He said there was an overhang of 16 million houses in the US housing market – that is 16 million more houses than households.

And Joe Bageant, self-styled leftneck (a left-wing redneck) interviewed a real estate agent for his fabulous book Deer Hunting for Jesus. The realtor boasted that he could raise a mortgage for a ham sandwich if he needed to – meaning the system was so slack that your lunch could be granted its own mortgage without any checks.

If the art of the central banker is, in the words of William McChesney Martin, “to take away the punch bowl just as the party gets going”, then the US regulators did the opposite: spiking the punch with vodka, like teens at a school prom.

Now, having nearly halted the global economy in its tracks, devastated shareholders, requiring massive government bailouts that resulted in the ensuing austerity across many countries, you’d have thought that the banking crisis would have prompted urgent government reform.

At the very least, if the problem was banks that were too big to fail, you would have thought that the size of banks might well have been tackled. You’d be in the majority there: most ordinary Brits, Europeans and Americans have returned to the daily grind of their own lives with the fond belief that the political classes are on the case of the banks. One figure should shatter that confidence: today, the big six banks are 25 per cent larger than they were at the outbreak of the global financial crisis. Stunning, isn’t it?

The one problem that is graspable, describable and understandable by the public has not been tackled. So, not too big to fail, but too big to reform.

Where are we now in Britain? There have been pages of newsprint filled with the views of the Prime Minister and the Chancellor of the Exchequer about the chairmanship of the Co-op Bank. The appointment of the Reverend Paul Flowers was a disaster, and there are people in the Labour movement guilty of not stopping this. Enough people must have known that the florid face was matched by an equally florid private life. But Cameron and Osborne are not concerned about good governance. If they were, they would be talking about the failure of the bankers on the Co-op Bank board, and conceding that the Tories also played a role – a Tory back-bench private member’s bill paved the way for the Co-op to take over the Britannia Building Society, and coalition ministers met Flowers 30 times. But no, this is the politics of the gutter, plain and simple.

This, of course, is of a piece with the coalition’s approach to the serious issues of banking regulation. Having resisted – to the point of repeatedly voting down – Labour’s proposed reforms to payday loans, the government has flip-flopped and moved with no evidence base, or logical argument, to impose a cap on interest rates. Will it work? We don’t know. Osborne has done no modelling; he just likes what he has heard about what he thinks is going on in Australia.

In another part of the forest, one of the causes of the global financial crisis is being addressed – the ready access to mortgages that stoked a housing bubble. What is the government doing? Strengthening prudent lending? Preventing another asset bubble? Nope. Stoking house price inflation for all it is worth. Loose credit, debt and inflation. It all worked so well the first time round.

Ironically, this is all happening at a time when there is real scrutiny and deliberation about banking regulation going on in parliament and at the Bank of England. The Treasury select committee – under the increasingly impressive leadership of Andrew Tyrie, who also chairs the cross-party banking commission – is asking the difficult questions. Just yesterday, Labour MP Pat McFadden posed this question: why does 1.4 per cent of lending go to manufacturing and 50 per cent to property? That is the kind of question ministers have had more than three years to tackle, but have failed to.

The banking commission has a developed agenda on reform that is being backed by Labour, and by peers in the House of Lords. Tyrie admitted to the Financial Times that they are “designing a stable door and … making sure it is kept locked. The horse has bolted. We will get it back in.”

Perhaps more importantly, he is urging a movement away from tick-box regulation to a more judgmental approach of right and wrong. After all, the Financial Services Authority approved Flowers’ appointment first as a non-executive director, and then as the chair of the Co-op Bank. What, one must now ask, was it thinking? Perhaps, its members were not thinking at all.

There is a real debate to be had about the future of banking. Not just the banking commission’s concerns about regulation, but also the Governor of the Bank of England’s desire to see tougher leverage ratios – crudely, the amount of money lent compared to deposits. Mark Carney believes that Canadian banks came through the global financial crisis better because of tighter regulation in this area. Maybe he’s right. We also need more competition – or, more precisely, diversity in the market. Should we have regional banks? Or some smaller players?

This is what the government should be discussing, not the student politics of The Crystal Methodism attack.

• John McTernan was political secretary to prime minister Tony Blair