Dominic Lawson: Bashing the banks won't do us, or the economy, any good

There is no evidence to suggest that incentive structures led to people taking excessive risks


It's not so much a case of shutting the stable door after the horse has bolted, as telling the stable-boy to close the door he had firmly shut some time ago. This is the more appropriate metaphor to describe the proposals announced yesterday by the Financial Services Authority to make mortgage lenders behave prudently.

The FSA is calling a halt to mortgages in which the lender makes no independent checks on the borrowers' ability to repay – so-called self-certifying mortgages, or "liar loans", as they became known. Yet any self-employed person could have told the FSA that the mortgage firms had long ago tightened up their lending procedures – and in a way which substantially contributes to the torpid state of the housing market.

This, I know from experience, having recently been turned down for a mortgage by two lenders before satisfying a third only after the most exhaustive checks on my earnings – even though the loan amounted to no more than 20 per cent of the value of the property concerned. For those self-employed people seeking a mortgage much closer to the full value of the home they want to buy, the best advice now is: forget it.

If the FSA's proposals ensure that this state of affairs is permanent, rather than a function of the current state of high anxiety in the credit market, it doesn't take a qualified psychologist to work out that the result will be an overall increase in the misery of the public: more people unable to move to areas of greater economic activity, and more cases of housing chains collapsing in a shower of recriminations. For the truth is that prudent lending is something everyone demands in principle but resents when they become the victim of it in practice.

This is why politicians did everything in their power to underwrite the boom in the housing market, most notably in the US, where the authorities told the banks that they would be guilty of unacceptable discrimination if they regarded "lack of credit history as a negative factor" in obtaining a mortgage. In other words, the dangerous "pro-cyclical" conduct of the financial sector – over-lending in boom times and under-lending in a recession– is positively encouraged by politicians.

This might also appear to be the behaviour of George Osborne, who yesterday indicated that the Government proposed to accept in full the recommendations of the Vickers Commission on Banking, which demands that British banks have much higher capital provisions against possible defaults – up to 20 per cent of their balance sheet – than those required elsewhere in the world. This is accompanied by the insistence that British banks ring-fence their high-street networks from the so-called "casino" or trading operations. If the intention is to make our banks the least vulnerable to collapse, and to rule out any future need for British taxpayers to rescue them from the consequences of their improvidence, then the Vickers proposals are entirely commendable.

Those who have the greatest dislike of bankers as a class complain bitterly that the Chancellor – while purporting to welcome the Commission's proposals – is not legislating to this effect immediately and has declared that the banks will have until 2019 to conform fully with Vickers's vision.

To the extent that such criticism has come from those on the left who regard the current management of the economy as disastrously deflationary, this is odd. After all, if the Government were to insist on immediate compliance with the Commission's demands for a much greater buttress of capital against possible future delinquency in the banks' loan books, the consequence would be a sharp cut in lending and, if the banks could get away with it, an equally dramatic increase in the margin between what they pay to lenders and charge to borrowers. It would also act as a brake on dividend payments to shareholders, otherwise known as pension funds.

In other words, speedy implementation of Vickers's recommendations, while satisfying to those who enjoy seeing banks pushed around and told how to behave, would be dramatically deflationary at a time when the Government (rightly in my view) is already tightening fiscal policy.

This point is well understood by the members of the Vickers Commission, a notably intelligent body of men (and woman). That is why, when they produced their report in September, they indicated that the banks would have no fewer than eight years in which to implement the proposals in full. Their idea, or hope, was that towards the end of that period the economy would have returned to growth and lower levels of unemployment, and that it would therefore be in the right shape to absorb what would amount to a tightening of lending and a build-up of capital on the part of the banks.


Little of this, I suspect, is foremost in the minds of the public when they think of the need for bankers to be regulated more strictly: indeed, most people regard incontinent lending as a wonderful thing, and consider banks that refuse to lend to either them or their business as beyond the pale. This, in part, is why such a populist publication as the Daily Mail has been running a campaign entitled "Make the Banks Lend" – rather than increase their capital adequacy, presumably.

No, what most people understand by "bankers' excesses" is the amount such people are paid. Yet, according to research published last week by the University of Bath and Bristol, "there is no evidence to support the argument that inappropriate incentive structures led banking executives to take excessive risks for short-term profits". Said Professor Ian Tonks, the lead researcher: "We are not trying to defend bankers' pay; our argument is simply that any poor decisions by bankers that led to the financial crisis were not made because of their incentive payment structures." Another interpretation would be to say that bankers were paid too much, quite independently of their firms' overall profitability.

This is an argument in favour of shareholders demanding more by way of dividends for themselves, in place of bigger bonuses for the bankers who are in theory working for them. As the Vickers proposals will certainly lead to a reduction in the profitability of the big banks, it is more than ever desirable for the pension fund managers to defend our dividends at the expense of the bankers' bonus pool. That, however, is not a job for government, unless it wishes to return to that relic of the 1970s, a statutory incomes policy – something that caused much more misery even than the existence of overpaid bankers.

React Now

iJobs Job Widget
iJobs General

JavaScript Developer (Angular, Web Forms, HTML5, Ext JS,CSS3)

£40000 - £45000 per annum + Benefits + Bonus: Harrington Starr: JavaScript Dev...


£50000 - £70000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

SAP Data Migration Consultant

competitive: Progressive Recruitment: My client, a FTSE 100 organisation are u...

Programme Support, Coms, Bristol, £300-350p/d

£300 - £350 per day + competitive: Orgtel: My client, a leading bank, is curre...

Day In a Page

Read Next

i Editor's Letter: The final instalment of our WW1 series

Oliver Duff Oliver Duff

Simon Usborne: The more you watch pro cycling, the more you understand its social complexity

Simon Usborne
A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice