Chancellor George Osborne is in the news today with new legislation to ringfence retail and investment banking, and tougher powers for the regulator. We’ve been waiting for this for a little while, and it takes a degree of nerve – Britain’s financial sector is large and very powerful. It makes the economy rather unbalanced, and puts taxpayers at risk for further bailouts. As the banks lurch from one mis-selling scandal to the next, it’s clear that something needs to be done to bring them in line, but these are global corporations. Discipline them too harshly, and they could relocate and leave a gaping hole in the economy. George Osborne has referred to this in the past as the ‘British dilemma‘: “protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks.”
The banks like to remind the government of this from time to time. Tighten legislation, ban bonuses, or close too many tax loopholes, and we’ll take our business elsewhere. “It is clearly possible that the commission comes up with a recommendation to break up the banks,” the head of HSBC said when today’s legislation was first proposed. “That has significant implications clearly for where we may choose to headquarter our institution.”
We’ll probably hear more threats like this in the next few days, but Osborne should not allow himself to be blackmailed by the banks. He should call their bluff. There are good reasons why they located in Britain in the first place, and the risk of ‘bank flight’ is lower than the banks like to imply. Here are some reasons why:
- Britain’s corporation tax is lower than the US, Japan, Germany or France, and will be lower still by next year.
- The banks know that the British economy is big enough to step in if they get into trouble, as it did during the crisis. It operates as a kind of unstated insurance policy on banking in Britain. This keeps interest rates lower for banks, and they’d be reluctant to move somewhere that is perceived as riskier. (Campaigners refer to this as the ‘too big to fail subsidy‘)
- The Global Financial Centres Index ranks 77 different financial centers on criteria such as skilled labour pool, business environment, infrastructure and other measures of competitiveness. London is at number one, and has been for five years in a row. It might not always be the case, but right now there really isn’t anywhere better to be.
- London sits between the Tokyo and New York time zones, which is important if you run a 24 hour operation.
- Bankers and hedge fund managers want to live in London. Even the temporary bonus tax under Labour didn’t spark an exodus of young bankers, because London is a vibrant and exciting place to be.
- The majority of Britain’s banking can’t move anyway. According to the Vickers interim report, there are around a million people working in finance. 300,000 of those jobs are in international banking, and 700,000 of them are serving the retail and domestic market, which is much harder to move. There are a further 400,000 jobs in accountancy and business services supporting the financial sector. Of those, 160,000 serve international finance.
In other words, be bold Mr Osborne. The banks’ bark is worse than their bite.
(With thanks to Lydia Prieg from nef – most of the information here is from her workshop)
The Earthbound Report 
At the height of the banking crisis, when the banks were making one of their threats to leave, my minister basically said good riddance in a sermon. We have a lot of people who work in the financial sector in the church. I cannot remember the passage – but it fitted in!
A few points to correct some misconceptions:
Firstly we now charge a premium for the “unstated insurance policy” that the government will bail out banks if they get into trouble. It is the banking levy and it is on liabilities which were not insured under the retail deposit guarantee scheme or other schemes. It is only paid by the large “to big to fail banks”. The banking levy should raise between £2-3 billion per year. Given we spent £120 billion on direct bank bail outs that should cover the costs in 50 years which given these crises seem to occur on that kind of frequency seems about right to me.
Secondly banks don’t have to be based in the UK to operate here. Already HSBC and Standard Chartered are mainly Asian banks. If we make it too uncomfortable for them here it would make sense to be were their main business is. The centre of the world economy is moving East, the banks want to be close to that. While unpopular now finance is an area where Britain has a competitive edge. Like manufacturing to Germany finance is what we do and has been for over 150 years (Germany’s economy is unbalanced too). While living in London is very pleasant that only applies to existing bankers, new ones go where they are told. Banks will just expand in Dubai or Asia and let London wither. Complacency is a killer over 20-30 years. If Nef said “lets cut half a million high paying jobs” then we would look at this differently.
Thirdly the problem isn’t banks that are too big to fail, but that banks are interconnected by wholesale deposits. Northern Rock wasn’t big but depended on wholesale deposits.
The fourth point is that separating ‘casino’ investment banking from ‘safe’ high-street banking misses the point that it was ‘safe’ high-street banks that failed in the UK whilst the investment ones survived. The mis-selling scandals are from: you guessed it; ‘safe’ boring high-street banks. You should more properly argue that separation would defend safe investment banks from risky retail banking.
We need sensible capital rules, sound regulation and insurance for the risks the taxpayer underwrites. We are getting those so I’m not convinced we need to hit banks because we don’t like them.
Can you point to the bit where I suggest we hit banks because we don’t like them?
I’m with you that we need sound regulation, and it’s bleedingly obvious that the financial sector is under-regulated at the moment – LIBOR, PPI and business insurance mis-selling, HSBC’s fines for money laundering, Standard Chartered breaking sanctions, rogue traders at UBS – and that’s just 2012. It clearly needs some discipline, but that doesn’t mean we should attempt to do without it or take it for granted that will always be there.
This post isn’t about the merits (or otherwise) of various policies, though I have opinions on ringfencing and the banking levy. It’s about the ‘British dilemma’ specifically, which I think is overstated.
Your post doesn’t advocate hitting banks because they are nasty, but much of the general tone of this debate in Britain does, and since you were using NEF as a source I worry that you are taken in by their ill informed wibbling.
I disagree with you that the British dilemma is over-stated. We have had a long decline in British banking before; just compare the City in 1918 to that in 1960. It was only by the endeavour, hard work, openness and flexibility of British bankers and the City (along with policy mistakes and over-regulation by others) that we had the growth of our financial sector from the mid 1970s. With the decline of many other industries this has been a real asset to the UK.
Realing off a list of why they won’t leave is complacent. Finance naturally gravitates to the centres of wealth creation. That is why the City of London was so important in the 19th Century and why it moved to New York in the 20th. The natural pull will be towards Asia in the 21st. If London is not to gradually wither as it did after 1918, then we need to fight hard to keep our business, not just assume we are indispensable. As De Gaulle said “The graveyards are full of indispensable men”
Most of the argument here is from Lydia, who is a former derivatives trader for Goldman Sachs. She left when she saw how damaging it was and went to work for nef instead, so I respect her views.
My point is simply to point out that the banks always squeal about any attempt to regulate them. It’s not complacent to say so – this is a fact.
Remember the predictions of doom when Labour taxed bonuses in 2009 and put the top rate of tax went up to 50%? Neither of those prompted the dreaded exodus. The City has survived the banking levy and the shadow of the Vickers commission. The decline of the French banks was widely predicted as it put in an financial transaction tax, but it’s still here.
I’m not saying the banks will never leave. Of course you could push them too far. I’m saying their bark is worse than their bite, and we shouldn’t let fears of a banking exodus prolong the rotten status quo.
These changes don’t occur in 1-2 years. Labour’s bankers tax/50% rate was introduced when Labour was likely to lose the election to a party committed to remove the tax so banks wouldn’t go through the cost of moving staff when they could rejig compensation for a time. If we’d kept it for longer then we might start seeing an effect.
Similarly with the French FTT it is too soon to say the result. As I said the risk is expansion being directed elsewhere and slow erosion rather than a sudden stampede. Come back in 10 years rather than stand under a “Mission Accomplished” banner.
Yes, both of Labour’s measures were vote-winners for a party with the hatchet hanging over it. And yes, these changes take place over time, but the bleating about change is predictable and overstated. It’s not unique to banking of course. The roads lobby love to whip up the media with phrases like ‘war on motorists’, as if any government ever declared such a thing.
The City needs reform, and keeping these sorts of things in context is vital.
Incidentally, I agree that the future is East. That will happen whether or not we regulate. As emerging economies grow, the old Western powers are going through a relative decline, and there’s nothing we can do about that.
I’m confused, you earlier implied we had nothing to worry about, London was the best place for a bank, now you suggest that decline is inevitable and there is nothing we can do about it so no point fighting. That is a contradiction. The complacent pessimist?
Remember vote-winners aren’t necessarily good policies. If they were we should bring back hanging and close our boarders to all immigrants.
No contradiction at all – losing competitiveness over regulation is one thing, the decades-long movements of history are quite another.
Yet your post makes no mention of long term trends, just complacency about now. Only when closely questioned do you accept it. Question is do we just give up on international financial services or do we try to retain what we can? Talk that London is wonderful, they won’t leave no matter the regulation suggests either secretly you do want to give up or you are complacent. I’m neither.
Because it’s a different matter. I’m talking about lobbyist whinging, not the currents of the 21st century.
And in the longer term the lobbyists have a point.
You’re conflating totally different questions.
Take the comparison with the aviation lobby. The aviation lobby is always fighting to expand Heathrow to keep it competitive etc etc. Fine, Britain can encourage or discourage expansion as it sees fit. Can it hope for Heathrow to be in the top three biggest airports forever? No. It lost the number two spot to Beijing in 2009 and I can’t see how any combination of policies or new runways will push Heathrow back above Beijing. Just ten years ago Beijing didn’t even make the top twenty.
Same goes for banking. The banking sector that is emerging to serve the enormous Chinese economy will eclipse London whether or not we ringfence our retail banks or impose a levy. The Agricultural Bank of China has 320 million customers, five times Britain’s entire population.
That’s not complacency, it’s the facts of the 21st century. If you think London is going to compete with China, you’re living in a dream world where Britiannia still rules the waves.
Now, back to today. Osborne wants to separate retail and investment banking. The banks will wring their hands over Britain’s competitiveness and threaten to leave the country over it, and then won’t.
Now now, I never said we could hold on to our number 1 spot, its your turn to put words into my mouth.
China’s markets will of course grow to a size where they dwarf London. And the big banks will want to be based there. The question is how long we can keep the Wimbledon effect of a lot of the global transactions going though London. Isn’t it better to try to hold on to what we can for as long as we can? The more we hurt the banks now the quicker the move away will be. Even if we just differ it for 10 years then that is billions of pounds of money for the UK economy.
If Osborne did split banks we would see some leave since no one else is going down that route, as I said HSBC and Standard Chartered are only really here for old times sake anyway.
Sorry, are we talking about the same banking system? I’m talking about the one that’s been in the news yet again this week with massive fines for fraud and mis-selling to its own customers. If we had an honest and functioning banking system, I’d be entirely with you. But we don’t. We have a banking system with an almost pathological disregard for anything but its own profits. That needs to stop. The banks want to preserve their profits, so they paint any attempt to regulate as a threat to “competitiveness”. To me it looks more like applying the rule of law.
I haven’t really got into the specifics of Osborne’s policy, but ringfencing is different from breaking up the banks. That’s a last resort for the regulator, but the proposals on the table are actually pretty mild. Of course the banking lobby won’t say that. It’s in their interests to blur the distinction between ringfencing and breaking up the banks, and get the media on their side.
Maybe you should try to understand a policy before pronouncing on it? I do understand the difference between ring-fencing and breaking up banks. One the banks can accept, the other really would make some up sticks. Now you might enjoy seeing your child benefit cut due to the loss of tax revenues that would mean, I don’t.
We’re on the same page here, I’m not sure why you keep bringing up new things to object to. I understand that breaking up the banks is a step too far. It’s not on the table, not what Osborne is planning, and not what I’m calling for either.
Yes Jeremy, the Banks are well placed here and much feathering of nests adds to the attraction of continuing their business in the UK, nevertheless a firm grip needs to be kept-having said that, we must all understand that the control of finance throughout Europe is by the elite banking families with perhaps Rothschild at the centre-they control the central banks make no mkistake.
Shurely its the Bilderberg Group or the lizard people?