Making Banks Fit for Purpose: Banking Reform Must Be Based on an Alternative Vision of Their Role in Society-And a Better Understanding of Their Recent Disfunctioning

By Engelen, Ewald | Soundings, Spring 2010 | Go to article overview

Making Banks Fit for Purpose: Banking Reform Must Be Based on an Alternative Vision of Their Role in Society-And a Better Understanding of Their Recent Disfunctioning


Engelen, Ewald, Soundings


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The December 2009 Pre-Budget Report announced that banks paying bonuses of more than [pounds sterlling]25,000 would be levied with a non-deductible tax. This swipe at the bonus culture marked an apparent symbolic break with the previous deference to financial elites, exemplified by Brown's praise of the City's 'creativity and ingenuity', in his 2007 Mansion House speech. Predictably, the proposal sparked a hostile reaction from the City and the right, who emphasised the importance of maintaining a competitive and profitable UK banking sector and claimed that the tax would force banking 'talent' to leave London for Zurich. Angela Knight, Chief Executive of the British Bankers Association-for example-warned that such a tax would be 'populist, political and penal', whilst a shrill Jeremy Warner, Deputy Editor of the Daily Telegraph, argued the reforms were 'tantamount to the self-harming antics of the mentally disturbed' (Daily Telegraph, 11.12.09).

That Labour ministers are willing to think what was previously unthinkable in regulating financial markets is welcome. The bonus tax is the result of public disquiet at City excess, to campaigning effort, and to analysis provided by experts and stakeholders from across the spectrum. But 2010 is an election year, and it is never clear whether such policies-combined with a rhetoric about 'radical alternatives'-are examples of populist opportunism or part of a broader political programme of deep-rooted reform. Labour has much to lose by favouring tougher financial regulation, having courted the City so vigorously before and after the 1997 election victory. Yet it is not unthinkable that Labour might reconsider its relationship with the City if too many Parliamentary seats are put at risk.

For this reason it is important to keep pushing the reform agenda, as the City learns to relish its newfound pariah status and tests the mettle of governments with its shameless attempts to return to 'business as usual'. It is important to have the right arguments to counter the cliches about the dependence of the UK on its financial industry and the pressing need to return banks to profitability at any cost. These platitudes are not only factually dubious but also play into the hands of these self-serving elites. The crisis caused by the banks is being re-written as a public expenditure crisis as we write, so it is imperative that we challenge these tropes as and when they arise, and establish alternative visions about what banking could and should do.

Countering insider perspectives

The CRESC Alternative Report on UK Banking Reform, written in October 2009, was an attempt to do just this. (2) The aim of the report was to counter the claims of the Bischoff and Wigley reports, which were subsequently repeated in the July 2009 Treasury White Paper Reforming Financial Markets. The Bischoff and Wigley reports were written from a City-insider perspective: 75 per cent of the work experience in the Bischoff report came from the City or City-related services; and the Wigley commission drew on expert witnesses, 90 per cent of whom were from finance and consulting. Both reports-and the White Paper subsequently-sought to frame political choices by constructing a narrative about the 'social value of finance', in a two-stage argument. The first stage emphasised the contribution of financial services to the national economy in terms of tax contributions, job creation and the diffusion of prosperity. The second described the modest regulatory reforms necessary to preserve the sector's positive economic contribution. In doing so, problem definitions were heavily framed, and the world of possible interventions narrowed.

But this argument about the 'social value of finance' is easily challenged. The CRESC report found that tax revenues generated in the finance sector in recent years are offset by the immediate cost of bank bail-out. In the five years up to 2006-7, the finance sector paid and collected [pounds sterlling]203 billion in taxes in the UK, but the immediate upfront costs of the UK bail-out were [pounds sterlling]289 billion, and could rise potentially to [pounds sterlling]1,183 billion. …

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