Tuesday, 13 July 2010

Tossing a coin.

Blogging ideas are like buses... you wait all week (humble apologies, dear reader) for one to come along, and you end up with two arriving at once... So what is it to be - banks or The Archers...

Well, having tossed a coin, it's going to be about banking policy. My love of The Archers will have to wait.

In the course of my work today, I came across this story on Citywire. The first paragraph piqued my interest:
"Stephen Hester [Chief Executive of RBS] says taxpayers can and should make a profit on the banking bailout, but new Treasury Committee chairman, Andrew Tyrie, says the government should instead focus on improving competition."
Surely these two aims aren't mutually exclusively? We must ensure we make money on the direct investments we have in the banks, and that we recoup the indirect aid given to the banking sector as a whole. Doing so doesn't preclude working to create a new environment within the industry.

Of course, Mr Tyrie has a point - working to improve competition will be easier while we hold a stake in the industry, so any rush to divest to divest UK Financial Investments holdings will weaken the government's hand. That said, the larger holdings - RBS and Lloyds/HBoS - were always going to be long-term investments, in my opinion.

So what should the government be doing?

Well, Vince Cable wants to introduce a UK version of Glass-Steagall. Although in agreement with the general principle - the separation of Investment Banking from Retail Banking, I'm slightly uneasy about the idea of enforcing it on the market. While RBS and Lloyds are public property, HSBC and Barclays survived the worst of the financial crisis without direct government support. To insist they divest their investment banking arms would be, in my view, unjust.

I would like to see the following priorities followed:

  • Re-focusing on retail banking - particularly RBS and Lloyds. While I'd be reticent about seeing these companies butchered, both have large businesses in a variety of sectors. For example, Lloyds has Scottish Widows and Clerical Medical while RBS has Direct Line and Churchill. I'm not suggesting a wholesale sell off, but some divestment, in the right circumstances, should help strengthen the balance sheets while potentially increasing shareholder value.
  • Application of competition policy - allied to the above, the current enforced sales of surplus branches should, hopefully, encourage new entrants to the banking sector. The arrival of Virgin and Tesco should be viewed as a positive step towards bringing a new approach to the high street banking.
  • Facilitating and easing access to the sector - competition should not be feared by the state owned banks. It should encourage them to be more effective and be more innovative in developing customer service.
  • Strengthening balance sheets - this is surely just prudent following recent experience.
  • Promote responsible lending - although this may sound at odds with improving balance sheets, and today's definition of "responsible" differs from that prior to the recession., government should be seeking ways to ensure the banks allow business and individuals access to credit during the recovery. This will be all the more important when public sector cuts take effect.
Of course, none of these ideas are startlingly original and many of the above points are contained in the coalition agreement. We are lucky to have a Business Secretary who has studied the area closely who will have his own approach.

I look forward to seeing what proposals the coalition does bring forward. Recent events have created an opportunity to radically change banking and financial services (and it's regulation, but that's another story) - the government should look to do what it can to aid the process.


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