So the LibDems are once again taking a more radical lead within the Coalition by demanding that ‘casino’ investment banks are split off from traditional High Street banking to protect the taxpayer against another ruinous bail-out. Where is Labour? There is no question whatever that this is a necessary reform not only to end the curse of ‘banks too big to fail’, but also to lay the foundations of a sustainable revival of Britain’s manufacturing industry. Why isn’t Labour leading the charge on this? Why are we following behind a LibDem rebellion (if indeed we are) rather than ourselves advancing a vitally needed reform?
Ed Balls of course was City Minister when the big banks so terribly abused their position by hitching themselves so recklessly to the sub-prime market derivatives fiasco and the Brown Administration failed to put in place the institutional reforms necessary. But that does not absolve Labour now from learning the lessons of that disconsolate episode and demanding what is arguably the most crucial strategic reform needed in today’s economy.
The Vickers Commission interim report was a bitter disappointment, ready to wound by laying bare the analysis but unwilling to strike by proposing the reform that the analysis cried out for. Its hesitant response was merely to suggest ring-fencing different parts of banks’ operations rather than a formal separation or at least a ring-fence between retail and investment throughout. Only the latter will really prevent Fred Goodwin-type activities deploying capital and deposits from High Street banks on reckless trades abroad like lending to Irish property companies or making a grossly over-priced and disastrous takeover of the Dutch ABN Amro.
The sheer scale of this folly is revealed by the Financial Stability Review report last week showing outstanding UK bank loans of £7 trillion, over 4 times our total GDP. And most disturbing of all, where did all that capital go? Only 5% went in lending to British companies, whilst more than 3 times that total went in euro lending to European borrowers. Innovative and potentially high-growth UK business is starved of capital while the banks concentrate on insurance, pension and wealth management which requires little offer capital but yields fat fees.
The really key point is that if retail and investment were fully ring-fenced or better still completely separated, SME lending would immediately offer much more attractive scope for lending to support Britain’s sustainable economic revival. If Labour stands for anything, it must be for a fundamental rebalancing of the economy by reducing an over-inflated finance sector in favour of a massive regeneration of a hollowed-out industrial base. Putting backbone into Vickers before their final report in September is the single best way to achieve this. Why isn’t Labour leading the charge?