More banks, Ed? Not your best idea

Miliband’s plan to take five and make it into seven fails to tackle the route of the banking problem

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Never underestimate politicians’ ability to grasp a populist subject and turn it into a crusade. Show them a bandwagon and they’ll rush to climb aboard, no questions asked.

In their clamour they will confuse issues if necessary, blurring fact and reality, allowing – or even encouraging – one argument to dominate and cloud another.

This approach comes into its  own when the subject is complex and not easily resolved, but nevertheless touches a widespread nerve.

Throw in a general election in the offing and the stage is set fair for posturing on a grand scale, proclamations that cannot be justified and promised policies that will not make any tangible improvement.

So it is with Labour and the banks. Ed Miliband has decreed that five High Street banks are not enough and that we must have two more. Apparently, there is too little competition between them.

Ed wants to ensure more banks are vying for our business and in particular they’re willing to lend to small and growing firms.

Since when were five regarded as being too few? To my mind, five brands to choose from represent a healthy selection. And, why are seven so much better than five?

The two newcomers will be smaller, friendlier and more willing to engage with ordinary folk, apparently. Really? How will they  be any different from the current five, which all have specialist consumer units and divisions that specialise in lending to small and medium enterprises?

Still, the move will allow Labour to boast of the creation of two extra banks and make the party appear as though it’s really achieved something concrete.

The truth is the new banks will face the same regulatory constraints as the established players. Supervisory authorities will insist they apply the same ratios and procedures. Worse, as they will have no track record to speak of, they will find it harder to raise capital to fund their activities.

But, why the obsession with the High Street banks in the first place? Increasing numbers of customers are conducting their banking on the internet, without ever setting foot inside a branch.

To insist on the establishment of two more bank brands when others are closing branches due to lack of business is perverse.

Next, Miliband will demand the re-opening of Woolworths and all those retailers that were hammered by the worldwide web and the supermarkets, in some rose-tinted return to how we were.

Even in the days of yesteryear, when we like to suppose bankers were all Captain Mainwaring types who knew our families and kept a paternal eye on our financial affairs, there wasn’t much competition. You joined the local bank, the one your parents went to.

What you did not do was hold a beauty parade involving seven contestants for the right to maintain your current account.

It’s not clear at all what the banks have actually done to merit increasing their number. Their High Street operations were not, repeat not, Ed, remotely responsible for the global credit crisis.

That was caused by banks in the US extending loans to customers who struggled to repay them and those loans being bundled up for  on-sale to international speculators.

Quite where the High Street staff of the HSBC across the road from the office where I write this had anything to do with the meltdown  is a mystery.

Of course, the banks had investment banking arms and, in some cases, those “casino” bankers damaged the entire group and forced it to go cap-in-hand to their governments to be rescued.

However, their activities were  a million miles away from the  hum-drum branches in Britain.

Those High Street banks did make one significant contribution to the mess, in that they all too freely parted with their cash, making advances to borrowers on skimpy security and heating up the property bubble. All that, ironically, overseen by a Labour government.

Perhaps this is what Miliband wants to see us return to – that, just as the economy is exhibiting signs of recovery and house prices are beginning to rise again, he would like to ensure bank lending similarly soars and anyone can gain access to funds. Presumably, in the Labour leader’s new, improved universe, someone’s borrowing application can be rejected by five banks but still go along to the sixth and seventh, and obtain what they require.

Such an outcome is insane, but that is what is likely to occur. Miliband wants to break up the banks; to give them a right duffing, and guarantee that in future  none of them can claim they’re  “too big to fail”.

There is nothing wrong with that sentiment – he’s correct to be aggrieved. But he can’t get close to the nub of the problem – the investment banks and their aggressive, reckless pursuit of profits, because that is too complex to tackle and would require multi-national cooperation and take for ever (more than five years on from the disaster it is not even close to being achieved).

Meanwhile, a unilateral putsch would threaten the hegemony of the City of London and while Labour is not the Square Mile’s greatest fan, the party leadership is all too aware of its contribution to the national economic purse.

Therefore, Miliband is reduced to tilting at an irrelevancy. Ever the showman, though, he chucks into the same pot the loathsome subject of bank bonuses (again, something that more or less by-passes the average High Street branch) and lack of compassion for SMEs. This latter, too, is something of a canard.

Small firms that were any good in the recession tended not to struggle for funding. Plenty of businesses did find the tap switched off but they were deemed high-risk by the banks. They were regarded as unlikely to survive the slowdown.

In taking this view, the banks were not behaving unduly harshly – they were doing what any responsible lender would do under such circumstances and they were being encouraged to take that stance by the banking regulators.

If Labour’s two new banks adopt an alternative, sympathetic and relaxed approach, then they could find they’re soon in trouble.

Now that better conditions are emerging, the banks should prove more amenable to would-be borrowers. Quite how the creation of two further banks will make  that situation any healthier is impossible to discern.

Labour’s sights have alighted on the easiest target, the one that is on the doorstep and enjoys the greatest resonance with the voting public. Everyone enjoys a moan about their bank – and at times the banks do treat their users with astonishing indifference verging on contempt. A lot of that, though, is down to customer inertia –  you’re more likely to get divorced than switch banks.

In that sense, it is our own fault.

Turning five into seven, however, is not the answer. It’s not as if tinier, cosier institutions, indeed mutuals, are immune to trouble – witness Britannia and then the Co-op Bank,  plus smaller building societies such as Derbyshire and Dunfermline that had to be rescued.

As well as Labour’s seven, we already have the Nationwide, plus other, regional societies that offer banking facilities.

Labour has fallen for a knee-jerk reaction which supplies that quintessential necessity of any modern political pledge: the attention-grabbing soundbite.

Good as the idea may seem, two new banks will not make a scrap of difference.

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