30 March 2010
TEN years after Don Cruickshank published his Review of Banking Services is a good time to take stock of Gordon Brown’s bizarre relationship with the banking fraternity.
Brown commissioned the report as chancellor in 1998 at a time when, true to his early Socialist principles, he remained deeply sceptical of banks and bankers. Given what has happened since, particularly Brown’s cheerleading of bankers’ recklessness and his decision to bail-out the deeply flawed Royal Bank of Scotland and HBOS with massive taxpayer subsidies in October 2008, the report’s recommendations are worth revisiting.
At the time the review was commissioned, it seems that Brown — then Britain’s chancellor of the exchequer (finance minister) — was hoping that Cruickshank would deliver a report proving the existence of a banking cartel, and that this was having a deleterious effect on consumers, small businesses and the wider economy. Pre-Cruickshank, Brown genuinely intended to use the finished report as a battering ram to tackle excess profits and tear down the bankers’ gilded fortress.
However, by the time Cruickshank delivered his report 16 months later, something had changed in the chancellor’s mind. It is probable that the Dunfermline MP had been “got at” by the “Big Four” banks of the day — Barclays, HSBC, Lloyds TSB and NatWest/RBS. Anyway, by the time the report came out, Brown had become singularly unenthusiastic about implementing any of its recommendations.
Forewarned of the sort of things the report would contain, the banks threatened to make his life a misery, for example by throwing the odd spanner in the nation’s financial works, if he dared to implement it. I know this for a fact. After it became clear the UK government was going to impose “price controls” on the banking sector, a main board director at one of the UK’s big four banks told me this (in March 2002): “We’re hardly going to fall over ourselves to be helpful now. These extreme left-wing policies are more likely to restrict competition. Brown has had his one day in the sun. Now he’ll pay the price, as the banks’ desire to assist him will be pretty minimal.”
Rather than stand up to such sabre-rattling and bullying my understanding is that Brown and his boss, the prime minister Tony Blair, caved in and kicked most of Cruickshank’s recommendations into the long grass.
After this U-turn, Brown and Blair ended up being co-opted by the banking fraternity. By 2004 they had become its cheerleaders. It wasn’t long before they had become so enchanted with the City — having developed a fondness for the tax revenues, the well-paid jobs and the glamour of having the world’s leading financial centre on their doorstep — that they effectively allowed the financial sector to “write its own rules”. Liberal Democrat Treasury spokesman Vince Cable elucidated on this last year (See this video clip from the Guardian website.)
Blair and Brown created a climate of lax regulation in which banking “titans” like the vainglorious former RBS chief executive Sir Fred Goodwin were able to straddle the global stage, and where deceptive accounting such as occurred at Lehman Brothers UK arm (and at plenty of other banks) was tolerated or ignored.
Post-Cruickshank, Blair and Brown saw their role as being t make bankers’ lives easier and ensure the regulators kept off their backs. In a speech to the CBI conference in November 2005, Brown said that he did not just want “light touch” regulation. He wanted “limited touch” regulation. Brown said: “And driving further the risk-based approach [to regulation] in financial services, I will publish at the Pre-Budget Report 10 new simplification and deregulatory measures which will cut demands for information, forms and reporting requirements including cutting by 15% disclosures of change of control and up to 20 FSA consultations each year.”
Brown and his government and their appointed quangocracy also lost all appetite for policing bankers’ wrongdoing and fraud.Instead they became cheerleaders for the City of London, turning a blind eye to the widespread balance sheet obfuscation and mountains of toxic debt that were being accumulated by banks such as RBS and HBOS (naturally, however, they had zero qualms about calling on taxpayers to pick up the tab when everything went pear-shaped).
The small seed of Brown’s decision to largely ignore Cruickshank was what led to a bank-o-philiac policies that culminated in the train wreck of the worst banking crisis of all time. As a direct result, the UK taxpayer has been lumbered with a national debt likely to rise to £1,180 billion by the end of 2010. For the next few years the nation’s debt can be expected to rise at the alarming rate of £150-200 billion each year (see this recent blog post from investor Jim Slater.)
Specific findings and recommendations from the Report of Don Cruickshank (pictured right) which were ignored and kicked into the long grass by Labour included:
[The big four bank’s] close links to the regulatory establishment raise the prospect of regulatory capture … changes are required to ensure the FSA is sufficiently independent from government and industry pressures.
Ian Fraser’s note: No changes we made. Indeed the regulator became even closer to the banks than before.
In reviewing the operation of the FSMA, the government should give consideration whether to continue to appoint to the FSA members who are, or recently have been, employed by any of the firms authorised by the FSA.
Note: This advice was glaringly ignored by Labour when in January 2004 it appointed the “out of control” boss of HBOS, Sir James Crosby, as an FSA director, even though he retained his day job running the deeply flawed and sales-mad bank. Brown made Crosby deputy chairman of the FSA in November 2007.
[There is an] informal contract between successive governments and banks, designed to deliver public confidence in the banking system. In return for co-operating in the delivery of government objectives, the banking industry escaped the rigours of effective competition. This contract cannot coexist with desirable levels of innovation, competition and efficiency in UK banking markets.
Note: Even though some foreign lenders were briefly active in the UK retail and corporate banking markets, they have now gone, and so the paucity of competition has actually intensified since 2000. The recent revelations about price-fixing in lending to professional firms by Barclays and RBS proves the old cartel is alive and well.
In the UK, the supervisory process has historically been shrouded in secrecy, with the government seeking to deliver financial stability through a regulatory contract which may have had all sorts of unintended consequences … All too often, concerns about the safety of deposits and the soundness of banks have been translated into something close to a general decree that banks should not be allowed to fail. This is inappropriate.
Note: “Too big to fail” banks represent a massive danger to any economy, as we found out when RBS and HBOS crashed and burned. However Blair and Brown did nothing to rein in the problem. Indeed they actively encouraged banks to become even bigger, with the regulatory framework they created sanctioning RBS’s £21bn takeover of NatWest in 2000, RBS’s €71bn takeover of ABN Amro in 2007 and Lloyds TSB’s £12bn takeover of HBOS in 2008.
Transparency is a cornerstone of effective regulation … The government should examine the costs and benefits of requiring authorized firms to publish disclosure statements of their risk exposures and risk strategies, across all activities … The statements should also include details of regulatory requirements such as capital asset ratios.
Note: The annual accounts of banks have remained opaque and with no requirement for candour over risk.
The government should examine the benefits of introducing a requirement making all lender of last resort operations subject to public disclosure. While intervention is legitimate to protect fundamentally solvent firms threatened by the failure of another firm, it is not appropriate for firms which are insolvent. A competitive market means not just that firms should be allowed to enter the market but also that they should exit the market if they are unsuccessful.
Note: What Cruickshank meant by this was that if banks fail, and they were the authors of their own demise as was the case with HBOS and RBS, then they shouldn’t be bailed out by the taxpayer. Clearly this advice was ignored and none of the resolution mechanisms that would have made it possible were put in place.
The government should encourage the FSA in its efforts to make the regulatory process more transparent … there would be real benefits in firms publishing risk disclosure statements setting out their risk strategies and any significant individual risks or exposures.
Note: Obfuscation remains the FSA chief executive Hector Sants’ second name.He won’t even reveal the names of third party investigators used by the FSA or the results of investigations, for heaven’s sake.
There is a strong case for requiring the FSA to publish information on an individual firm’s risk position. For example, if the FSA is concerned enough to require a firm to hold relatively high levels of capital, then there are strong grounds for disclosing this to a wider public. The knowledge that a firm’s regulatory capital asset ratios would be published could act as a spur to prudent management.
Note: This was never made a requirement by the UK authorities, and we all know the consequences.
(As far as I can recall, the only areas where changes were introduced as a result of the Cruickshank report were in bank charges for small businesses and possibly also in payment systems.)