Friday, 10 May 2013

Scottish Government Banking Strategy: some early thoughts

Earlier today, the Scottish Government published ‘Sustainable, Responsible Banking: a strategy for Scotland’ the purpose of which is to ‘set out what Scottish Ministers consider to be the key principles of a sustainable, responsible and healthy banking sector in Scotland’.
It’s a disappointing paper. Some fundamental issues are dealt with in a very flimsy manner or, worse, ignored altogether. The paper is imbued with a worrying naivety (‘in the wake of the crisis, the attitudes of consumers, UK and EU regulators and the banks themselves have changed’) and a level of optimism about the benefits of greater competition that might kindly be described as unjustified.  
The STUC will publish a full response in due course but here are my early thoughts on some specific issues:

1     Key sector?

The strategy implicitly accepts the approach whereby banking, as part of ‘Financial and Business Services’ is treated a priority or ‘growth’ sector by the Scottish Government. Publication of the banking strategy should have provided an opportunity to state what has been apparent since 2007: chasing growth in banking as an end in itself is a mugs game.
A too large banking sector absorbs resources (e.g. engineers, mathematicians etc) that could be more productively deployed elsewhere. It contributes to higher inequality, destabilises the wider economy and exerts a degree of political influence that cannot be reconciled with a healthy democracy.
Debating whether an independent Scotland could have coped with the crisis of 2008 is ultimately pretty pointless. The pressing issue is surely what needs to be done to avoid future crises under any constitutional scenario.  This requires Government to measure success in banking not by the sector’s output but whether banks are fulfilling their fundamental purpose of allocating capital efficiently.
2     Too big to fail, too complex to manage
The strategy doesn’t address issues of scale which, to put it mildly, is something of an oversight. As was surely proved beyond all reasonable doubt by the crisis, large financial conglomerates are very dangerous entities. They enjoy an implicit public subsidy which hands them a major competitive advantage over smaller players. (Again) they hoover up resources and exert a nefarious political influence. Boards are unwilling or unable to exert effective oversight. Executives don’t understand the businesses they purport to run.
So here was an opportunity to state categorically that serious structural as well as regulatory change is required to make the system safer and more efficient. The opportunity was flunked.
3    Competition

Scotland’s banking sector is highly concentrated; more so since the crisis enforced consolidation. Therefore support for greater competition has never been stronger. Proposals include liberalising entry conditions and reducing switching costs. Interestingly other barriers to entry such as the remuneration of executives (the strategy doesn’t address remuneration) are not mentioned.
The recent LSE Growth Commission (UK) report argued that increased competition would have a variety of benefits:
"It would encourage banks to seek out profitable lending opportunities more assiduously. It could also stimulate relationship lending as retail banks focus on more mundane finance rather than ‘casino’ activities”.
But how well does the competitive mechanism function in the retail banking market and would more players necessarily lead to the benefits described above? Many have their doubts. Here’s the economist Roger Bootle (no socialist he) in ‘The Trouble with Markets’ his excellent book on the crisis:
 “At the retail end of financial services, despite the appearance given of a large number of providers, because of asymmetries of information and opacity in charging structures, most services are provided in a non-competitive way, again, with the result that the interests of the ultimate customer – the retail client – are not properly reflected through the system. Across much of the financial sector there is a tendency to regard retail customers as helpless victims, there to be exploited, rather than as business partners from the satisfaction of whose needs derives the justification for profit. More milchcow than market”.

If ‘asymmetries of information and opacity in charging structures’ persist then the supposed benefits of greater competition will not be realised even if more players enter the market.

4     Workers

The strategy includes a section on ‘professionalism and standards’ which, as the title suggests, is very tightly focused on the qualifications and professional accreditation of senior staff.

There is no mention of the retail counter staff or call sector worker; workers who in the recent past have suffered redundancy or the intensification of performance management regimes. Banks are no longer a good place to work. The golden rule of Scottish and UK economic development policymaking is once again strictly adhered to: do or say nothing which might possibly be perceived as infringing on managerial prerogative.

5    Restoring Trust

Consider this:

“The banks want to change the public’s often negative perception of them and they recognise that the only way to do that is to prove to their customers that the desire to change is genuine and that it is for the long term. That is a hugely important step and one that deserves to be supported”.

I can only say that that this is not the world in which I live.

6    Scottish Business Development Bank

The strategy includes a laudable proposal for the Scottish Investment Bank to evolve into a Scottish Business Development Bank. Although not presented in these terms, this is clearly an attempt to overcome a long standing and extremely serious structural problem in the Scottish economy: the failure of the financial sector to support productive, growing and innovative businesses with patient and committed capital.

But the proposal is messy and confused, lacking in detail and ambition. It fails to mention that innovation is currently heavily penalised by banks (for perceived higher risk) and that supporting such activity should be the primary purpose of such an institution. Another opportunity missed. Give us something like this instead?

7     Diversity

On the day that the full extent of the Cooperative Bank’s problems were revealed, it’s good that the strategy promotes the value of alternative business models and different forms of ownership. The expanded role that credit unions could play in providing services to customers that banks have hitherto refused to service is also highlighted.

But the strategy has nothing substantial to say about how a greater role for such institutions might be achieved. This isn’t something that can be wished into happening.
This leads on to the final issue: what can be achieved at Scottish level under current or new constitutional arrangements? The strategy states that ‘independence would allow Scotland access to the necessary levers to encourage a responsible, sustainable banking sector that better meet the needs of the Scottish people, that enhances Scotland’s competitive advantage and that better enables us to address the economic challenges facing us’.  
At the moment nothing can be achieved at Scottish level to reform banking. But it’s not immediately clear to me that the macroeconomic framework proposed by the FiscalCommission would provide any additional levers in this respect under independence. Scotland and the UK would be in a banking union with whole UK institutions in charge of oversight. It remains to be seen whether other important responsibilities – e.g. corporate governance – will be exercised on a whole UK basis. 
If nothing else, maybe publication of this strategy will provoke a debate about the future of banking in Scotland that might force the Scottish Government to address these issues head on in the white paper if not before. I hope so.
Stephen Boyd - STUC

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