Banking needs rules

Today the business of banking is business. Banking is about almost anything. As the news comes of a steep return to profit among state-supported and state-owned banks, and rumours of bonuses and dividends abound, it is worth remembering this.

Our guest writer is Stefano Harney, deputy director of the School of Business and Management, Queen Mary, University of London

Last year, Morgan Stanley leased more oil tankers than Chevron. In the same year Goldman Sachs became perhaps the largest single investor in the Indian economy, even though the bank lacks a license to lend money in the country. And this year Standard Chartered joined forces with the Grameen Bank in East Africa to promote microfinance.

Today the business of banking is business. Banking is about almost anything. As the news comes of a steep return to profit among state-supported and state-owned banks, and rumours of bonuses and dividends abound, it is worth remembering this.

What kind of policy is right for banking? The very question is a trap for government and for citizens; one can’t make a policy for anything… it will always be wrong… it will always be, as we say in the US, a day late and a dollar short…

One can’t make a policy for banking but evidence abounds that one can make rules. Look at the 50 per cent tax on bonuses here in the UK. It worked as a rule, but not as a policy.

As policy, which is to say as an attempt to manage an outcome, it failed to curb bonuses even in the one year it was in force. But as a rule – that bankers would pay into the national deficit 50 per cent of their winnings – it worked better than expected, bringing in a good revenue.

We can also see many examples of rules working from negative evidence – Glass-Steagall for instance. When it was in place, even the massive, and now forgotten, US Savings and Loan scandal did not threaten the global banking system as a whole. How many of us believe that with no new rule of the magnitude of Glass-Steagall, we will not soon be facing another global crisis? This time most likely brought on by emerging market bad debt.

This is not just a matter of language. Rules are also unique to government, and to the citizenry that calls for them. Rules must be followed by all and can be enforced with punishment both civil and criminal. Businesses can’t make rules, except for themselves, and business associations can make them, but as in trade and environment, routinely break them without penalty.

Somehow in the infatuation with management, with elegant policy, so characteristic of this government and the last, government became de-skilled in the one thing it does best. Unfortunately only in security and welfare does it seem to remember this. When to sell the public stake in banks is just the latest infatuation, another obsession with management.

The response to the banking industry should be rules. We need rules that head-quartered banks must provide a percentage of profits to not-for-profit community credit unions, a community reinvestment act. We need rules against usurious lending and fee practices, as the Financial Inclusion Centre has outlined, and we need rules that bonuses and dividends will be permanently taxed to keep up all the infrastructure of the cities in which the banks do business or keep their legal address.

And this last point is crucial. All the threats to leave London because of the bonus tax amounted to nothing. London has unique advantages that banks will pay to keep, from the protection of the British legal system, to the bail-out capacities of the British population, to infrastructure of professional firms, schools, and information and media. The banks can indeed be ruled.

At the same time, there is nothing London or Edinburgh, or indeed Europe can do about the movement of business to emerging markets. The only question is whether it leaves us rich or poor, rulers or ruled.  But given this movement to these markets, it would be foolish not to let our investment in a few of these banks go with them to these new markets, and stop trying to be clever about when to sell.

One Response to “Banking needs rules”

Leave a Reply