Debunking the banking lobby’s scare tactics

The complete separation of retail and investment banking is an urgent prerequisite for future sustainable growth, not a reason to delay it, writes Compass’s Joe Cox.

The war of words between Vince Cable and the banking lobby continues today with Angela Knight, chief executive of the British Bankers Association, pleading with the government not to launch another “assault on the banks”. Apparently she said it with a straight face.

The banking lobby’s argument is that this is the wrong time to reform the banking system because it will raise the cost and reduce the amount of credit available to UK businesses. This will in turn send the economy into recession they argue.

Whilst delay and scare tactics are age old methods employed by those that want to derail reform it is worth debunking the bank lobby’s scare tactics.

Firstly, a reminder of the cost of the banking collapse: in January 2010 six consecutive quarters of contraction ended, which saw the economy shrink by about 6% – or 10% compared with where it would now have been had the slump not occurred.

As economies across the world continue to struggle out of recession the economic and human costs mount up. The very banks that caused the huge economic contraction are now warning the ICB not to reform their structures in the interests of growth. It surely goes without saying that a stable banking system is a necessary pre-requisite for economic growth, not as the banking lobbying are protesting a luxury that we cannot currently afford.

Secondly, Will Hutton makes the point today that the anti-reform lobby are conflating two major issues, structural reform and changes to capital requirements.

Thirdly and perhaps most importantly, structural reform of the universal banks would make lending to small and medium size businesses (SMEs) more, not less, attractive for their retail and commercial divisions/banks.

Whilst there is broad agreement future growth in employment and demand will depend significantly on small and medium sized businesses they are not being served by the current banking system.

The big banks are no longer able to lend effectively to the SME sector, a point made repeatedly by David Boyle at the new economics foundation (nef). To paraphrase, it isn’t that the big banks don’t want to – politically it would be easier for them at the present time – it is that they have consolidated beyond the point where they can. They have no systems and no local managers.

At present less than 10% of all banking activity is SME sector lending because the returns from SME lending are often smaller and the process of lending to them more labour and time intensive than speculation on assets.

Before the crash, three quarters of bank lending went on financial engineering projects such as private equity or into financing overpriced real estate. Even post credit crunch when credit is scarcer the major problem is one of infrastructure, or to put it another way, the banks have enough money – they are just putting it into non-productive areas and creating speculative bubbles.

A handful of universal, too big to fail banks will never be able to cater for every community and business in the UK. The complete separation of retail and investment banking is an urgent prerequisite for future sustainable growth, not a reason to delay it.

Join the debate at The Good Banking Forum, goodbanking.org.uk

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28 Responses to “Debunking the banking lobby’s scare tactics”

  1. Kevin Gulliver

    Debunking the banking lobby’s scare tactics: http://t.co/1yiGAnV by @CompassOffice’s Joe Cox

  2. Cliff James

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/qSMxsY9

  3. Michael

    Debunking the banking lobby’s scare tactics l Left Foot Forward – http://j.mp/pX5th8

  4. Legal Aware

    Debunking the banking lobby’s scare tactics l Left Foot Forward – http://j.mp/pX5th8

  5. Philip Painter

    Banks' trying to scare Vince. http://s.coop/57ow

  6. Political Planet

    Debunking the banking lobby’s scare tactics: The complete separation of retail and investment banking is an urge… http://t.co/48cke9g

  7. Pucci Dellanno

    Debunking the banking lobby’s scare tactics: http://t.co/1yiGAnV by @CompassOffice’s Joe Cox

  8. Alex Braithwaite

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/I7DrsJI

  9. Garet Ford

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/hrdMXNo

  10. Leon Wolfson

    Seems to be a good argument for local and cooperative banking, actually, who are much closer to their SME’s…

  11. Compass

    Debunking the banking lobby’s scare tactics: http://t.co/1yiGAnV by @CompassOffice’s Joe Cox

  12. NORBET

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/okYwTWJ

  13. Rikbut

    Debunking the banking lobby’s scare tactics: http://t.co/1yiGAnV by @CompassOffice’s Joe Cox

  14. Joe Cox

    Leon, absolutely it is. Structural reform is a prerequisite to achieving this in my opinion.

    We also have to overcome the fallacy that universal banking is ‘efficient’.

  15. Jack Barker

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/EhKWp5J

  16. Les_Dubh

    Debunking the banking lobby’s scare tactics: http://t.co/1yiGAnV by @CompassOffice’s Joe Cox

  17. Q&A: Banking reform – Financial Times | Finance Hourly | Finance News Magazine

    […] sector. Its key proposal – the exact …UK Banking Reform May Be InevitableBusiness InsiderDebunking the banking lobby's scare tacticsLeft Foot ForwardCity hits back at Vince Cable over banking reform commentsThe GuardianThe Periscope […]

  18. Mr. Sensible

    I’m afraid those who believe in breaking up investment and retail banks are simply kidding themselves if they think this will solve the problem; look at what happened in 2008 when an investment bank was allowed to fail…

  19. Joe Cox

    Mr Sensible – It won’t save all problems overnight but it is the major reform to allow other important reforms, regional banks, mutuals, more retail banks etc will not flourish whilst universal banking remains dominant.

    Large investment banks will still pose sigificant systemic risks which is why other disincentives should be considered.

  20. Suki Ferguson

    good piece on banking by @Compass Joe Cox, via @lff :http://t.co/Z8PQewh

  21. Suki Ferguson

    good piece on banking by @Compass Joe Cox, via @lff :http://t.co/Z8PQewh

  22. Suki Ferguson

    good piece on banking by @Compass Joe Cox, via @lff :http://t.co/Z8PQewh

  23. Casper ter Kuile

    RT @leftfootfwd: Debunking the banking lobby’s scare tactics http://t.co/5fY9cxO < great piece

  24. Ed Barney

    For any bankers that want to hear an alternative http://t.co/HoURAVw and http://t.co/Oyv6ZmL

  25. London IWW

    #Capitalism: Debunking the #banksters lobby’s scare tactics http://t.co/JAPZ3wB | #Corporatocracy #ClassWar

  26. Amanda Wilkinson

    “@LondonIWW: #Capitalism: Debunking the #banksters lobby’s scare tactics http://t.co/p0UgHkC Bankers are just SCUM #ClassWar

  27. James White

    RT @leftfootfwd Debunking the banking lobby’s scare tactics: http://t.co/zqDgZ8o by @CompassOffice’s Joe Cox

  28. Small businesses can play a vital role in future growth of the UK economy – but only if they get the finance they need | Left Foot Forward

    […] Debunking the banking lobby’s scare tactics – Joe Cox, September 1st 2011 Share | Permalink | Comments: […]

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