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)