COMMENT: 10 years since the crisis – have banking standards improved?

Written by Rebecca O'Connor on 10th August 2017

The ten-year anniversary of the global financial crisis is sobering, not least because it reminds us how much we are still affected by events that began to unravel back in August 2007.

This BBC post demonstrates how much worse off we are economically than 10 years’ ago.

The shockwaves have been felt in infinite ways ever since and it isn’t a leap of the imagination to attribute the Brexit vote and current political division to the impact of the credit crunch.

In terms of positive impact, is there anything to cheer?

The experts do not appear too impressed with the progress chart. Lord John McFall, former chair of the House of Commons Treasury Committee, who oversaw much of the Government’s attempt to manage the fallout, said in a recent post for New City Agenda: “Unfortunately, banks still don’t have enough capital, the rules to improve accountability of bank executives have already been watered down and cultural change in the industry is still unfinished business.”

On the plus side, there will be a separation of retail banking and investment banking divisions of UK banks in March 2019. This reform is considered key to reducing risks to consumers if investments made by banks go wrong. However, Lord McFall doesn’t believe the new capital adequacy requirements – the amount of cash banks have to hold on their books relative to the amount they lend – are enough.

“Back in 2007 the banks had total assets 33 times their capital. Well now they only have total assets 20 times their capital – which sounds better but is still very risky,” he says.

He cites Robert Jenkins, a former member of the Bank of England’s Financial Policy Committee, in his post, who said: “The credit crunch was caused by a mixture of greed, stupidity and leverage… we will not abolish greed. We cannot outlaw stupidity. But we can and must address excessive leverage. Have we done so? No.”

Mick McAteer, founder and director of the Financial Inclusion Centre and on the Financial Conduct Authority board, reckons progress has been made in most areas, but it’s difficult to know how much until something happens to rock the boat: “We won’t actually know how safe the banks are until they are tested by another major financial crisis. But, there is no question about it, we have made much progress in bolstering the defences of our big banks.

“However, there are fears that much of the risk has been shifted to ‘shadow banking’ and levels of household debts are rising to worrying levels.”

Has the culture and conduct improved? “Undoubtedly yes”, he says “There have been major improvements in key markets. For example, the Retail Distribution Review has improved the way investments and pensions are advised on and sold; similarly, the mortgage market review has led to more responsible mortgage lending; and the FCA taking over regulation of consumer credit and payday loans has cleaned up the market. The introduction of the Senior Managers and Certification Regime could be a game changer. This places more responsibility on those who make decisions and, if enforced properly, should force them to pay more attention to what is going on in the firms they are supposed to run.”

Others are not so sure that the culture and conduct changes run deep. Anna Laycock, executive director of The Finance Innovation Lab, thinks what was needed post-crisis was a fundamental re-think of the role of financial services in society. An attempt, perhaps, to deal with the greed and stupidity part, which hasn’t happened: “We’re still a long, long way from having the banking system we need. There’s no shortage of reform initiatives, but there’s also a huge gap between rhetoric and reality. The financial sector needs to rediscover its role as a service industry: it’s here to support society, not extract value from it. That purpose should be at the heart of every bank’s business model, workforce incentives and standards of behaviour.”

Mr McAteer agrees that banks still aren’t properly serving society and puts this down to failures to properly address the lack of competition. “The way vulnerable borrowers with unauthorised overdrafts and problem credit card debt are treated is a disgrace and must be a priority for reform. On the pensions and investment side, the pensions ‘freedom and choice’ reforms exposes consumers to huge new risks of misselling, scams and overcharging.

“Banks still struggle to understand what consumers want and need – there is still some way to go before we have a true consumer culture in banking. To be fair, they are trying and some banks do much better than others. But key parts of the financial services industry are still inefficient and uncompetitive. The illusion of free banking is stifling genuine competition. The numerous competition reviews have made little difference to competition in banking. The big banks are still not doing enough to meet the finance needs of SMEs. The asset management industry extracts huge fees from investors’ funds which means we have to save more for retirement to offset the effects of the costs and is not very efficient at providing long term investment capital to real economy firms.”

Fran Boait, executive director of Positive Money, the financial reform campaign group, is less than sanguine, fearing that our response to the crisis – to create more debt to finance property and financial speculation – could make a real recovery a lot more difficult: “The financial crisis was caused because banks lent too much to mortgages, and households got into too much debt. With the Bank of England’s post-crisis policies of low interest rates and quantitative easing, we’ve fuelled the very problem that caused the crash in the first place. Over 70 per cent of bank lending went to property and financial speculation in 2016, and as wages have failed to keep pace with the cost of living, consumer debt is reaching record levels.

“Our dysfunctional banking system might not cause the next crisis, but it’s guaranteed to make it more painful, longer-lasting and difficult to recover.  To solve this problem, the government needs to work with the Bank of England to direct money directly into the real economy, and boost investment, jobs and wages where our banking system has failed to do so.”

Back in 2008, the wise owls, responding to the “will we learn from this?” question, pointed out that memories are short, particularly when there is money to be made from forgetting.

Policies introduced since the crisis have at least partly done their job, in that they shored up confidence and stopped total economic annihilation. Reforms have gone some way to addressing the culture within banks that was blamed for allowing things to get out of hand ten years ago.

But the policy of more quantitative easing and a further reduction to rock bottom interest rates after the Brexit vote have done nothing to change the view in the City that if there is a problem, policymakers will throw more money at it, so business as usual.

Mr McAteer believes that if the next problem, if there is one, is systemic, then another bailout would again be on the cards. “It all depends on how it happens and how many are involved. If it was one bank, the new regulatory regime should allow for an ‘orderly failure’. But, if it was a systemic crisis again, it is likely the banks would be bailed out again. Our financial system is still not diverse enough to allow a number of major banks to fail.”

Meanwhile the ongoing cost of the last crisis and policies to address it, it seems, is more consumer debt and a slow, prolonged stagnation – a feeling that things just aren’t right and a disquieting sense that in the absence of strong-arm policies on executive pay and lending rules, the only thing that could get things back on track is another shock to the system. Let’s hope it’s not a big one.

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