George Osborne, caught between conflicting interests, is not carrying out the necessary banking reforms to ensure the stability of the industry.
There are two main reasons why the banks will not be adequately reformed to ensure the end of the “too big to fail” phenomena. One is the reluctance of the international community; the other is the reluctance of Mr Osborne himself.
While the motives of the former are rather complex and multilayered, the latter is guided by one simple overarching objective: to maximise profits made from selling the public’s share in the UK banks before the next general election and thereby improve the chances of a re-election via tax breaks and a positive balance sheet.
Let me first take you back a few years: in the midst of the crumbling global financial system, the Labour government necessarily began investing billions of pounds into RBS and Lloyds in the name of heading off an economic collapse. As a result, the government ended up owning 70 per cent in RBS and 41 per cent in Lloyds.
At present, with the sluggish recovery and the over-enthusiastic cuts, the temptation for Mr Osborne to sell the taxpayers’ stake in the banks and flood the Treasury with money, instead of bringing in meaningful reform of the banking sector, is proving to be too great an opportunity to miss. This is because any substantive reform of the banking sector would not only have a downward effect on share prices but also the amount of money the Treasury could make through a step-by-step sell-off.
On the one hand therefore we have the issue of not allowing banks to hold the taxpayers hostage again and on the other there is a party-political interest for Osborne to maximise the value of the UK banks by giving them more or less free rein and then sell off the shares.
There is, however a large hurdle to be overcome before Mr Osborne can do this; namely, the report to be published this September by the Independent Commission on Banking (ICB) on how to overcome the problem of banks being too interconnected, big and risk-loving.
Judging by the ICB’s disappointing interim report in April however, the authorities don’t seem to have much enthusiasm to restrict the banks’ desire for risky deals and big bonuses. There will be some sort of reform to placate the public’s anger, but it will be met with glee rather the gloom by the City, which was highlighted by its reaction last April.
This unwillingness to tinker with the banking sector is further underlined by the vagueness of Project Merlin, which today’s figures show is not on track to fulfil its obligation of greater lending to businesses, and the reluctance of the Tory-led government to extend the bank bonus tax.
Indeed, although the government “does not seek to pre-judge the [ICB’s] final recommendations”, it has been revealed by senior figures that Osborne is already planning the first stage of a massive sell-off of shares in RBS that would amount to £5bn in early 2012.
Adding to this, the institution that is in favour of boosting the value of public shares in the UK banks and is responsible for managing our stocks worth around £60bn (although this number fluctuates due to share price changes) is the UK Financial Investments (UKFI). The secondary objective of maintaining financial stability is undermined doubly by firstly being directly accountable to Osborne, and secondly remaining a highly opaque institution that leaves much to the imagination.
Perhaps you are now starting to see why Mr Osborne will almost certainly show great reluctance to be tough on regulating the fat cats in the City. The ICB’s report is expected of being too weak, the bank bonus tax is too little, Project Merlin is dangerously close to becoming a farce and the public shares are under the indirect control of Osborne.
Ultimately, it is not a matter of if, but when the next financial crisis will hit us. If we allow Mr Osborne to only do the minimum on banking reform at the cost of a short-term balance sheet boost before the general election, then we are fooling ourselves into believing that we will somehow survive the next crisis despite the City being the mirror-image of its former self.
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