Getting on for five years after the banks were bailed out, it is remarkable that so many people are now criticising the road we have travelled so far along.
Justin Welby, the Archbishop of Canterbury, this week added his name to an unlikely alliance that has formed between the Bank of England’s Governor, Sir Mervyn King, Vince Cable and Lord Lawson, the former chancellor, who believe that breaking up the state-backed banks, namely Royal Bank of Scotland, is a better route to boosting lending and curing the economy than the status quo.
Privately too, some of the biggest proponents of the universal banking model that marries retail deposits with investment banking and trading are now saying it might be worth abandoning their cause. Such uncertainty dogs the industry. As capital rules and ring-fences are worked through, they fear that banks will suffer death by a thousand cuts over the next decade. Conservatism based on indecision, driven by political leaders in the G20, has led to redundant capital being piled high on balance sheets, they say.
There are those that reject such conservatism, and say banks haven’t got to grips with the new reality at all. They need to work far harder to comply with the looming Basel III requirements instead of bleating about how hard life is. It is a worry how far apart the two sides are. What constitutes safety and what is merely over-regulation that is stifling economic recovery? No wonder investors are reluctant to buy into banks’ new business models.
Bankers who oppose ring-fencing or break-up point out that limiting size does not limit risk. Just look at the number of small building societies that have had to be rescued – or, in Spain, the regional cajas. And then consider the Co-op, a small bank that this week ended its struggle with the challenge of capital-raising in order to become a big bank when it abandoned its deal to acquire a tranche of Lloyds branches. The City breathed a sigh of relief that it failed.
Instead of trying to artificially reshape the industry, why not more of a focus on resolution strategies that would let lenders fail safely, whatever their size?
Over lunch this week, the case of Standard Oil, which made the Rockefeller fortune, was invoked. Its reign as one the world’s first multinationals, which sought vertical control of every part of the oil industry, ended just over a century ago, when it was ruled to have an illegal monopoly and broken up. Big is beautiful was no valid defence on that occasion.
Of course, RBS has no such dominance. But those tantalised by the carrot of a reprivatisation should think again. Curing the banking sector, and with it the economy, requires far bolder action than just sliding the old vessel out of dry dock. The Northern Rock model of a good bank and a bad bank is a far more straightforward one.
Maybe George Osborne should borrow some resolve from those early anti-trust authorities in America and think the unthinkable. Admitting the road less travelled is the right one could be the toughest call of his chancellorship. I’m convinced his honesty would be rewarded.