Let’s call their bluff and let RBS directors resign if they can’t face curbs on bonuses

David Boyle is a nef fellow, a writer and the editor of nef’s newspaper, Radical Economics.

Vince Cable was quite right on the Today programme. The response to the RBS director’s threat to resign if they are not allowed to pay the bonuses they want to their failed, cash-strapped, state-owned bank should be to say: go ahead.

But we need to look a little more closely at the business of banking bonuses. They are paid out of a percentage of the profits of the investment divisions, sometimes up to fifty per cent. The money would otherwise go to the shareholders – the same ones who failed to exercise proper control over the bank they owned.

There are some, and Fortune magazine is among them, who would say that they are better shared with the staff than shovelled at the owners – and that’s right as far as it goes.

But the real question is not why the bonuses are so high. It is why the profits are so high. They come, after all, out of all of our pension investments, or the debt that goes to build productive business, or capital investments in public infrastructure. The real scandal is that these bonuses are paid out of fees which ought rightly to stay with the small investors who are watching the value of their pensions falling.

The fact that the banks are able to award themselves such hefty fees is purely because we have allowed a semi-monopoly to build up in banking, both domestic and investment banking. So here is the real solution: slash the bonuses, accept the resignation of the directors, put in their place bankers who are prepared to do what is necessary to break up RBS into its constituent businesses and regions.

Let the Post Office be bold and offer a real alternative to mainstream banking

Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.

The Post Office consultation announced today is a most baffling affair. It’s billed by Lord Mandelson and his department as containing “exciting proposals” on which he wants our views. He wants to see the Post Office at the forefront of mortgage provision and he says it is “ideally placed to bring banking services to the heart of people’s communities”.

The consultation will ask us if we want the Post Office to have its own current account, a children’s savings account, business accounts, the ability to manage our money on a weekly budgeting account, and links between the Post Office and credit unions.

The department for business, innovation and skills (BIS) also wants the banks that don’t allow their current accounts to be accessed at the Post Office – hang your heads RBS and HSBC – to do so. (They could just tell them to do it – why consult us?)

The thing is though, these proposals are good. The Post Office should adopt all of them, and has indeed in the past announced that it will, for instance, offer current accounts. The big criticism is they don’t go nearly far enough. A Post Bank – where all the profits go back into the Post Office and are not halved with the Bank of Ireland as at present – would be a really practical and visionary step. It would introduce diversity into the banking system too.

So why have a consultation? These are mainly business proposals that would extend the Post Office’s thriving and well-run financial services. It’s hard to see the populace rising up in indignation at the idea of Post Office children’s savings accounts. (“How outrageous. I am so against this!”). It’s not like that. Why are we having a three-month consultation on financial developments?

If BIS was serious about quickly expanding and strengthening the Post Office it would say to Alan Cook, its head, that he should just get on with providing these sensible and desirable new services. Whether people want them or not will show up in the market. At nef and in the Post Bank Coalition we think that people love and trust the Post Office and will use these new offers and thus make these extended financial services popular.

The consultation is really worrying on two counts. The main one is that these mouse-like developments – in fact any self-respecting mouse would have a bolder vision than this – don’t tackle the neglect and the lack of government support from which the Post Office has suffered for decades. A third of sub-postmasters and sub-postmistresses have seen their revenues decline in the last year. This is just not sustainable. The government has recognised today that the Post Office is a great British institution but it needs to treat it like one.

That means that it doesn’t need this consultation (reporting cunningly just before the election, when the long grass will be even longer) but it does need to follow the excellent advice of the BIS select committee report last July – on, yes, the future of the Post Office. Having massively consulted, it concluded that financial services should be expanded and that, crucially, the government must put its business through post offices and recognise the Post Office’s potential as an unparalleled social, community and economic network.

Mandelson’s department needs to be more radical, more profoundly committed to strengthening the Post Office, more committed to helping small businesses have the financial advice and help they need, than is allowed for by these virtuous proposals. Consulting us on a Post Bank, on using Northern Rock, on making the Post Office the public alternative to our present dreadful banking system – now that would be worth consulting on.

Lessons from ecology could help us create a resilient financial system

Sargon Nissan is a researcher in nef’s Access to Finance team.

The financial system must contain a diversity of institutions with different structures and focused on specific market niches, something more like an ecology than a monoculture. | Photo by Panoramas, via Flickr

Quantitative Easing. Bank bailouts. Building society rescues. Fiscal Stimulus packages.

What do they have in common? They are all preventative measures. That is to say, they are trying to stop something bad from happening; in this case stopping the financial crisis metamorphosing into an economic depression.

While the jury is out on how well they succeeded, it is clear there is widespread acceptance of the need to have done something.

Now the question becomes, what next? Prominent commentators and regulators have weighed in but without providing a huge amount of detail. Adair Turner, head of the Financial Services Authority, defined the problem succinctly when he reminded us that

British citizens will be burdened for many years with either higher taxes or cuts in public services – because of an economic crisis whose orgiins lay in the financial system, a crisis cooked up in trading room swhere not just a few but many people earned annual bonuses equal to a lifetime’s earnigns of some of those now suffering the consequences. We need radical change.

But that doesn’t take us any further to understanding what needs to be done. The Treasury’s summer white paper, Reforming Financial Markets, set itself this task and concluded that to achieve a well-functioning financial system that would be stable and effective, what was required was greater scrutiny, competition and diversity. Increased scrutiny, especially of ‘systemically important institutions’ (bailed out banks that were too big to fail), greater competition and an increased role for diverse institutions such as building societies would ensure that a crisis of this kind would not happen again. Yet if we scratch the surface of this gathering consensus, it seems there is little substance underneath.

Despite almost two million people excluded from even having the most basic banking services, the Treasury’s solution boils down to more money for financial capability training rather than difficult decisions about what financial services should be for, and which ones are exploitative. As Faisel Rahman, chief executive of Fair Finance in London’s East End that battles predatory lending amongst excluded and vulnerable communities, reminded me last week; there are almost eight million people reliant on ‘unorthodox’ credit in the UK, meaning often doorstep lending at rates of several hundred per cent, yet while this problem grew we in the UK celebrated having the most sophisticated financial sector in the world, on the doorstep of the communities Fair Finance works with.

Released yesterday, The Ecology of Finance: An alternative white paper on banking and financial sector reform tries to take up this challenge. We argue that radical reforms are needed, but preventative measures will not be enough. To deliver a landscape of financial institutions capable of lending and investing a manner consistent with fairness, inclusivity and long-term economic sustainability an entirely new approach is required.

To achieve the ambitions of a competitive and diverse sector, The Ecology of Finance breaks down what the finance system should be for and used to provide. The short-term profit models of ‘plc-finance’ needs to be constrained by a diversity of institutions with different structures and focused on specific market niches – more like an ecology.

Don’t just take it from me either. Andrew Haldane, the Bank of England’s Executive Director for Financial Stability, has identified the need to look to ecological and epidemiological lessons for better understanding how complex systems – be they ecosystems or the financial system – behave. It is not simply a question of more complexity is always better, but rather that there are lessons to be learned from the robustness and the vulnerability of things as diverse as rainforests and outbreaks of epidemics.

Hence, to create a financial system fit for our complex society and economy, we identify preventative and positive financial reforms that could ensure the health of our economy and also enable a greater diversity of institutions to flourish.

We recommend

• Separating retail from other banking and preventing deposit-taking banks from engaging in other, risky activities
• Setting up a social investment bank, a green investment bank and a Post Bank
• Regulating financial institutions according to their functions and how risky their activities: the bigger the bank the higher the capital requirements
• Reforms to encourage more mutuals,  co-operatives and community finance institutions
• Legislation to force banks to be open about their lending and to lend to the financially excluded.

 

Good News, Bad News

Andy Wimbush is nef’s Communications Assistant and blogmaster.

I am trying to make this a regular Friday thing…

The good news:

• The billions we currently spend on unemployment benefits could be used more effectively help deprived communities weather the recession. So says nef’s latest report Benefits that work.
• Breaking up the banks is no longer a marginal idea: it seems that everyone from Andy Haldane at the Bank of England to Alistair Darling now thinks that breaking up the mega-banks would be sensible. nef called for this earlier in the year in our report I.O.U.K.
• Age of Stupid director Franny Armstrong was ’saved’ from a mugging by Boris Johnson . The Mayor of London just so happened to be cycling past as Franny was being intimidated by a group of teenagers wielding an iron bar. Saving a green activist while riding a bike has got to be the act of eco-friendly Good Samaritanism par excellence. Let’s hope Franny managed to get Boris to sign London up to 10:10.

The bad news:

• Climate change could lead to a new era of global insecurity, so say the top military figures who make up the Military Advisory Council at the Institute for Environmental Security in the Netherlands (via New Scientist).
• Ed Miliband has admitted that the chances of a global deal at COP15 in Copenhagen is increasingly unlikely. The Minister for Climate Change and Energy said that a full treaty could be up to a year away.
• Lord Griffiths perpetuates the myth that inequality is somehow ‘good’ for us. The Conservative peer – who is also the vice-chair of investment bank Goldman Sachs – tried to justify the bonus culture of the City by telling an audience that “inequality is a way of achieving greater opportunity and prosperity for all“. Richard Wilkinson, of the Equality Trust, provided a rebuttal, while nef’s own research in The Great Transition shows that inequality could cost the UK alone up to £4.5 trillion over the next forty years, because of the social problems it causes.
  

Mervyn King is right about casino banking

Dr Stephen Spratt is Director of nef’s Centre for the Future Economy.

Mervyn King has annoyed Gordon Brown and Alistair Darling again with his call for UK banks to be split into smaller groups focusing on either retail or investment banking, but not both. King does not share the government’s belief that stricter regulation would prevent banks heading straight back to the casino, describing such thinking as a “delusion“.

He is almost certainly right. Banks like being big, and they particularly like being too big too fail. With the backing of the taxpayer, should their gambles go wrong, they can borrow cheaply and make huge bets in the market, safe in the knowledge that they will capture any gains but be protected from losses.

It is not surprising then that the banks also oppose King’s idea. Of course, they say that this is because of the enormous complexity, or “practical difficulties”, that implementing it would involve. Another reason is more likely. Simply, they are able to make a lot of money from leveraging their depositor base to support speculative activities elsewhere.

But this creates strong incentives to focus on the more “exciting”, and highly lucrative, gambling activities at the expense of the “boring” business of providing banking services to individuals, families and small businesses. This is nothing new in the UK, where financial exclusion remains a huge problem and small businesses struggle to access finance at all. The closure of branch after branch, particularly in disadvantaged areas, is just the most brazen example.

It seems very hard for banks to concentrate on providing a good service to these parts of their customer base when the global casino beckons. If some banks want to roll the dice in the markets, fine – they just shouldn’t be allowed to gamble our money to do so, and they certainly should not have these bets underwritten by the taxpayer.

For banks to serve their retail customers well, they should be dedicated to this essential function, and only this. By cutting banks down to size we could bring them closer to the communities they should be serving, and so better able to meet local needs.

At nef we would go further. Will Hutton on this site rightly calls for root and branch reform. Here are a couple of ideas of how that process might start. Most “investment” banks don’t really do any real investing. They are trading banks. But we do need real investment banks that focus on long-term needs, and nowhere is this more obvious than with green energy and transport infrastructure.

As well as separating out retail banking, why not also restructure the investment side? The government, on our behalf, retains its stake in the banking system, and it could use this as the means to form a green investment bank, charged with financing these long-term investments. And why stop there? A national housing bank to underpin a more stable housing market that meets people’s needs is an idea whose time has come.

For a while not so very long ago, people remembered that the purpose of banking was not to feather its own nest, but to provide the vital financial services and long-term investments that underpin our economy and society. King seems capable of seeing through the hard sell of the financial lobby to recall this. It would be good if the chancellor and prime minister could do likewise.

Brown is right: the Post Office can become a community bank

Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.

The Prime Minister’s commitment to bringing Post Office banking into the heart of communities, and to giving the Post Office a much greater role in the economy, is a brilliant and simple declaration that this government will protect the public realm, that community matters, that localism matters and that it wants to offer diversity within our astonishingly monolithic retail banking system.

It was also the commitment that got one of the biggest cheers of the Prime Minister’s speech.

If we can now, fast, build up the people’s bank at the Post Office, now that it has effectively been given the wholehearted stamp of approval by the government, it will safeguard the Post Office network – no more dreadful and unnecessary closures – and will offer a real banking alternative to people who think banks should be about more than slicing consumers and then gambling with their money.

So Gordon Brown has done the right thing with his one-line announcement. It’s great.  nef has been campaigning all year, with the Post Bank Coalition, for a Post Bank).

The idea is that the Post Office can also have a Post Bank, such as those that have been set up so successfully in other countries (France, Italy, New Zealand). It is a simple and practical way into a future where community, key information points and financial diversity will be needed more than ever.

A Post Bank will revive and protect the Post Office network, support local economies and small and medium-sized businesses, combat social exclusion and financial inequalities and introduce banking diversity.

Really there is hardly anyone who doesn’t warm to the idea of a great increase in Post Office banking services. (Apart from the British Banking Association, which thinks banks are doing a fine job without the need for another model. Where to start on this peculiar view?) The key now is to make it work.

Sources close to the prime minister are apparently saying we could see increased and improved Post Office services by the end of the year – we need to keep Whitehall to that.

But we also need, in comradely fashion, to ensure that what we get is a true, independent, proper Post Bank and that it keeps its radical roots. The UK has an amazing history of non-shareholder driven banking models – mutuals, trustee savings banks, co-operatives – and Post Banks must be set up using these.

There are all sorts of nifty technical innovations a Post Bank could use to bring in younger clients such as versions of mobile phone banking. And the Post Bank provides the reach to give practical financial advice and help to the poor and the debt-laden. There are very interesting systems available now that can offer planned financial systems to individuals at either no or low cost. Antony Elliott’s Fair Banking scheme is one.

And we don’t need to start from scratch in making the Post Bank a full banking alternative. As an initial step, building a Post Bank around an existing 100% publicly owned bank, Northern Rock, is a logical and brave step. Don’t sell it off to Tesco or whoever – will they provide a true People’s Bank? – keep it working for the public who own it .

In the worst of the crisis last year people flocked to put their money into the Post Office. It’s trusted, even loved. Today’s news is just what we need to keep it like that.

Money matters: beyond banking status quo

David Boyle is a nef fellow, a writer and the editor of nef’s newspaper, Radical Economics.

“Future students of history will be shocked and angered by the fact that in 1945 the same monetary system that had driven the world to despair and disaster [in the Great Depression], and had almost destroyed the civilisation it was supposed to stand for, was revived on a much wider scope.”

So wrote the French economist Jacques Rueff in 1964.  It feels much the same now: we would be insane to go back to the same disastrous banking pattern we had before the bail-out, but – thanks to the government – we probably will.

Only a miserable 0.6 per cent of the government’s stimulus package is going on green measures, to genuinely shift the way the economy works.

Lord Mandelson has come out as a born again defender of the financial status quo.

But worst of all, the latest Bank of England assessment shows that, despite everything, business lending to small and medium-sized businesses is down again.  Differential interest rates and fees are both still rising.

Local bank managers who know their community well are largely a thing of the past.

It has become a lot more expensive to borrow money, even for the lucky few who make it through the approval stage.

One of the many tragedies about the Westminster expenses scandal, as Vince Cable pointed out last week, is that it robs MPs of the moral authority to tackle our dysfunctional banking system.

Ministers daren’t say anything too interesting, or too bold, in case heir colleagues assume they are throwing their hand into the ring for the Labour leadership.  It is a miserable prospect, and it may guarantee a swift return to banking business-as-usual.

To start with, it is time we broke the all-party consensus that somehow the government can use their holdings in the big banks to kick-start local lending again.  It hasn’t worked, and seems unlikely to work any time soon.

This is not only because banks won’t lend, but because they can’t lend using their current infrastructure and systems.

They have been consolidated to the point where they point towards the speculative economy and have little local lending infrastructure left.  Their lending decisions are taken by computerised systems which, because we are in a recession, naturally recommend against.

There are no longer bank managers, or local staff with the authority to pick out the success stories, using their knowledge of their local economy.

Our businesses are now in a far weaker position than American or German competitors, and potential competitors, because we have no equivalent lending infrastructure.  There are only 170 branches per million people in the UK, compared to 520 in Germany and 960 in France.

Now that the elections are over, this is what politicians need to do immediately:

• Break up the banks in government ownership, not just by dividing domestic high street banks from risky investment banks, but to rebuild an effective local lending infrastructure to kick-start local enterprise.
• Launch a new bank based in post office branches, along the lines of the successful postbanks on the continent and in New Zealand, using the latest mobile phone technology.
• Invest in a new generation of community financial institutions, funded by the big banks, as they are in the USA, under a British version of the Jimmy Carter’s Community Reinvestment Act.

Why is this still not top of the agenda?  I think this is partly because, in this country at least, people don’t understand the money system.  Their mental map of it is nearly a century old: safe reliable Captain Mainwaring and vaults full of money.

I was assured some years ago by the Washington correspondent of a national newspaper (admittedly it was the Sun) that all money is based on gold.  It hasn’t actually been since 1931.

This is my excuse for writing an accessible guide to the way money works: Money Matters: Putting the Eco into Economics.

I hope (no small ambition this) that it might help dispel some of the bizarre mystique that bankers continue to exercise over the minds of the English.  Because what we really need to do is abandon the idea that our current useless system was somehow placed there by God, and demand the new local banking infrastructure we need.

Fat Cat Fightback

Sargon Nissan is a researcher in nef’s Access to Finance team.

When George Osborne, Shadow Chancellor, called for the break-up of Lloyds and RBS, he echoed the recommendations of our report I.O.U.K. on the failure of British banks to provide credit appropriate to our economy’s needs.

It seemed inevitable that this issue would rear its head again, and now we finally witness the financial sector’s response, via its ever-willing ally, the Government and Treasury. Their response came today with a Treasury report  – commissioned before the worst days of the current crisis – that staunchly defends the right of big banks to get bigger. According to today’s Financial Times, the Chancellor and the authors reiterated the report’s findings that “an industry constrained on narrow lines would find it harder to develop new products”.

What does not seem to be acknowledged in the current debate is that the failure of overly-consolidated banking pre-dates the crisis. As we discussed in I.O.U.K., the inability of the banking sector to provide the necessary credit for thoses small businesses and sectors of the economy which do not enjoy unwavering Government support is not a result of the credit crunch and economic crisis. The reality is that banks have been withdrawing from communities, closing their branches and abandoning relationship-driven banking for over two decades now. And it is this retrenchment from the real economy which has made them so vulnerable to the kinds of economic shocks we have seen in the last eight months. Northern Rock and Bradford & Bingley used to be mutuals, but they abandoned old-fashioned banking and converted into shareholder-owned institutions in search of better returns. And the result of this shift? They both went bankrupt and had to be rescued by the taxpayer.

It was  selfish herd-like behaviour seeking the easiest profits, encouraged by policymakers since Margaret Thatcher’s 1980s reforms, which thoroughly undermined our financial system. Perversely, it is now the Tories who seem to perceive the contradiction of a banking system with a permanent Government get-out-of-jail free card for banks that are, in the Shadow Chancellor’s words, “too big to fail, too big to bail”.

Perhaps the Conservatives are willing to contradict the prior orthodoxy just to win political points? Or maybe Osborne is just concerned about how big a headache a banking system in need of permanent subsidy will be when he has to present the next Budget?

Budget reaction: Banks are too-big-to-fail and must now be broken up

Dr Stephen Spratt is Director of nef’s Centre for the Future Economy.

Bail-outs have now boosted UK national debt to staggering levels but have done little to stop the rot in our financial sector. By refusing to acknowledge the deep structural failings in the banking system, the Government is storing up debts they’ll probably never have to deal with, and no future government will be able to meet without decimating core public services. Banks that really have become too-big-to-fail leave the UK very vulnerable and must now be broken up. Soon to-be-published plans for banking regulation must go much further than tinkering with corporate governance and transparency. We need to separate investment banking from retail banking. We also need local banks that are in touch with their customers and able to respond to the needs of the dynamic small businesses on the frontline of our economy that will lift us out of recession.

Budget reaction: where was the Post Bank?

Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.

The Chancellor rightly talked about his careful preparations for the future and about the need for increased regulation of our failed cowboy banks.

He should also have offered a tangible reform in both areas in the form of a Post Office Bank which would simultaneously help small local businesses- the underpinning of our economic future- and increase people’s trust in the banking system. It’s not too late. As a practical and popular measure, he can still announce the setting up of a Post Bank in the wake of the Budget.

Read more about our campaign to establish a Post Bank and sign the petition to make it a reality.