I was fortunate enough to be invited along by Cicero Communications to listen to John Kay present his paper on the The New Financial Service Leviathans. The event was Chatham House, so I can’t really transcribe what was said. The basic theme from John’s speech (which was recorded), was that we need to build a financial services industry that serves consumer needs, is stable, and not a drain on the taxpayer. This is not what has happened so far. His answer is (extremely) narrow banking.
I personally think there is a really major clash between banking being competitive and it being stable. Being stable means having a lot of capital for the assets. Being competitive means offering more loans more cheaply to more people on lower credit standards. Northern Rock was actually competitive – it offered a far better bargain to the consumer than previously existed, or could exist during the Captain Mainwaring period.
This is why, for the first time ever, I was a bit disappointed by Kay. He seemed to evade this difficult dilemma by equating “competitive” with “innovative at delivering payments solutions”. This is not what most people would this was either at the heart of the financial crisis (it was not a failure of payments systems), nor what people think is the problem with uncompetitive banking. The latter means: not getting enough on your savings products, paying too much for your borrowings.
His paper/talk makes lots of good points – about financial conglomerates, about the difference between supervision and regulation, the perverse way the Basel accords seemingly stopped banks taking their own decisions about the right level of capital (after all, other companies don’t abdicate responibility for having enough cash to an external standards setter). Competititon in banking is certainly distorted by tax payer guarantees. But it is extremely telling that his description of what a narrow bank should look like fails to say anything much about assets. In other words, the things that banks currently invest in are largely uninteresting to JK – he thinks everything that is not vanilla is casino, a rhetorical point that no doubt wins him fans in the angry brigade, but is ‘solving’ the problem of modern finance by simply pretending it is all useless and stupid. That won’t do. If it were all useless and stupid, Lehman’s collapse would not have mattered as much.
When conditions improve, banks, narrow or not, will leap forward to lend more, increase the amount they offer to savers in order to capitalise on beter opportunities, chase asset prices higher, and all that. This will both offer the consumer a better deal, and increase instability. Interesting, exotic opportunities, if not pursued by HBOS and Northern Rock, will be pursued by other vehicles. John’s angry and slightly atavistic prescription would be politically popular – Vince would like it – but it would not solve the instability.