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Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.


As you’ve probably already seen, today saw the launch of a major campaign to introduce a Robin Hood tax on financial transactions by a host of organisations working on issues of global and domestic poverty, international economic reform and social justice. Bill Nighy and Richard Curtis have produced a great little film explaining the tax’s merits and appropriateness and nef is just one of the organisations backing this campaign.

The Robin Hood tax would impose a very small fee for every financial transaction between financial institutions. That means it is not a tax on the financial services you or I would use.  It is intended to make those who brought our economy to its knees, massive multi-national financial institutions, pay for the $20,000,000,000,000 (that’s twenty trillion dollars or a third of global GDP) of bailouts, guarantees and quantitative easing they have benefitted from. Here in the UK we’ve spent more than $ 1 trillion (£635 billion) to bail out our banking sector.

Very conservative estimates suggest it could raise £100 billion for domestic and international issues, helping to limit how far we have to cut public services in the UK and ensuring that we meet our commitments to the developing world to alleviate poverty. At a rate of just 0.05% per transaction, and given the huge sums taxpayers have stumped up, it seems a no-brainer in terms of being an appropriate and feasible policy option.

It may seem uncomfortable to line up the usual cast of celebrities and endorsements. It may seem too good to be true. But it actually gets better. Read the rest of this entry »

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.

Listening to the debate on bankers’ bonuses over the past week is enough to make anybody seasick. It veers terrifyingly from righteous vengeance to doom-laden warnings.  The Chancellor says he “won’t be held to ransom” by the RBS directors.  Then we hear that taxing wealth-creators is bad and counter-productive.

Rather than being dogmatically for or against bonuses, we should take a step back and ask: what is the point of a bonus?

Bonuses are incentives. And we know that incentives are powerful and do work. So while there is a question about size – City bonuses are obscenely large and out of all step with pay in the much vaunted “real world” – the most overlooked question seems to be: are we using bonuses to incentivise the right kinds of actions and behaviours in the City?

Put like that, it is obvious that there are fundamental flaws with the City bonus systems.  The current bonus system in the financial sector encourages the behaviour that wrecked our economy. My own experiences as an investment banker echo the observation by Lord Turner and now many others: much of it is indeed socially useless. It also has the potential, as we’ve seen, to bring the economy to its knees. It is dangerous and useless primarily because the opaque bonus system breeds short-termism and speculation.  It pushes bank staff into overstretching their institutions’ capacity to bear risk. My experience is that even if traders want to invest long-term, they find they can’t because they are not paid to. When I traded shares for an investment bank, the managers’ patience for losing money was counted in days, not weeks or months.

A recent Harvard Law School study documents how executives from America’s two biggest failed banks were rewarded hugely for their efforts in the years leading up to the crisis.  We now know that they were being paid so handsomely to bankrupt their own institutions and threaten the world economy.

I have just taken part in a Royal Society of Arts debate about whether the bonus system could possibly exist in an effective finance sector. The City insiders who defended the system inadvertently revealed the two reasons why this debate continues going in circles.  First, they over-estimate the contribution of the sector’s high-paid.  Second, they believe,  wrongly, that bonuses reward good performance.

Even the Bischoff Report, commissioned by the government, makes this same mistake.  It assumes that because the financial sector is vital that the bonuses must be vital and, crucially, that there is nothing wrong with the way bonuses are structured.

In reality, the sector’s contribution to the economy is not dependent on the bonuses likely to suffer from a windfall tax. Most bonuses that non-bankers receive (including doctors, teachers and many other private sector employees) are no more than a portion of overall annual pay.

A windfall tax will send a strong signal that bonuses have gotten too big. But a windfall tax is not enough. Incentives, rules and regulation are not encouraging the behaviour our businesses and economy need.  They have encouraged the banks to become casinos and their staff to bet the house and our economy.

For banks, just as for bankers, it isn’t that incentives are the problem.  Bad incentives are the problem.

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.

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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.

 

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.

George OsborneWhen 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?

To mark the publication of I.O.U.K.: banking failure and how to build a fit financial sectornef‘s new report on banking – the nef triple crunch blog is staging a debate. Sargon Nissan, one of the authors of the report, kicks things off. Replies from our special guest bloggers will be posted below.

Banking unfit for purpose

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.


When Lord Mandelson said, last November, ‘It’s completely unacceptable to the Government and to business in this country for banks indefinitely to stop functioning as banks.’, he inadvertently revealed policy makers’ confusion over what to do amidst this unprecedented crisis of banks and the financial system.

They’ve recogI.O.U.K.: The failure of banks and how to build a fit financial sectornised banks have stopped functioning (who hasn’t?) but not that they’ve become unfit for purpose.

Our banks have become far removed from their roots as lenders and investors in communities and businesses, as we reveal in our new report, I.O.U.K.: banking failure and how to build a fit financial sector. Decades of banking sector consolidation have been encouraged by lax regulation. There are now fewer bank branches than post offices in this country – and the number is set to drop still further. Meanwhile, Community Development Finance Institutions (CDFIs) have been starved of support while attempting to address this failure directly.

Increasingly desperate Government bailouts – witness Monday’s £260 billion underwriting of Lloyds and Barclays now reportedly ‘mulling’ the Treasury’s offer to underwrite its toxic assets –  are having little effect bar robbing the taxpayer.

The Government is throwing good money after bad. Read the rest of this entry »

Bookmark and ShareSargon Nissan is a researcher in nef’s Access to Finance team

Whos to blame?

As the financial crisis continues to unfold, one myth keeps getting repeated: the crisis was caused by poor people defaulting on sub-prime loans.

In short, if only they hadn’t been so feckless then the great edifice of sub-prime debt need not have brought the financial system crashing down upon us.

This isn’t just wrong, it’s dangerous and wrong.

Read the rest of this entry »

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