The £1.3 trillion pound question: what should we do about the banks?

The £1.3 trillion pound question: what should we do about the banks?


Taxpayer-owned banks have had a pretty difficult week. Alongside weak economic figures, there has been talk of greater regulation and the incessant chatter over whether the banks should be broken up.

Splitting the banks
On Saturday, the chairman of the Independent Banking Commission, John Vickers, made it clear that he and the other four members of the panel were considering a variety of ways of spitting up the banks. These range from forcing a complete separation to ring-fencing some activities and separating the finances of different business units.

This barrage of news was reflected in the banks' share prices with RBS down nearly 4% over the week and Lloyds down more than 7%.

Given that the government has an 83% stake in RBS and a 41% stake in Lloyds that means we as taxpayers also lost money, and we were already sitting on a loss with shares trading below the price the government paid for them. The public finance figures this week showed just how much it has cost us to save the banks: £1.3 trillion.That is the official assessment of how much more in debt the UK is because it helped to prop up the banks.

Further losses?
There were plenty of warnings this week that we could lose even more.

David Cooksey, chairman of UKFI (the body which looks after the taxpayer interests in Northern Rock, Bradford & Bingley, RBS and Lloyds), pointed out on Thursday that uncertainty about what might happen is weighing on shares and that he may struggle to secure a profit on our investment if the banks are broken up.

UKFI's chief executive Robin Budenberg warned that clamping down on banker pay may also be damaging to our interests as taxpayers. Of course we have to weigh that against the risks that were taken in the name of making profits. Cooksey conceded that concerns about making a profit could conflict with our desire to improve customer service and grow competition.

Who wants what
On Wednesday, with the publication of a summary of responses to the banking commission, we were provided with a clear steer of what groups as diverse as Which?, Yorkshire Building Society, Lloyds and the unions think should be done.

At over a thousand pages, reading them all is a daunting task, but the views provided plenty of food for thought for us all.

The 150 submissions make it clear that whatever the commission recommends and whatever the government finally decides to do there will still be risks.

A bigger buffer
One other area of concern for us as consumers is the debate about how much cash banks set aside in case things go wrong.. Bank of England governor Mervyn King has always said that current rules remain too low.

A Bank of England discussion paper this week suggested banks need to lay aside twice as much as the current rules suggest.

But while that would make the banks safer and reduce the risk the taxpayer would have to help them out, it could cause problems for us as customers and for the economy as a whole.

After all, the more banks have to keep locked up, the less they can lend. And the less they can lend, the less profit they can make.

We'll know in a couple of weeks just how badly the slowing pace of the recovery is hurting the banks. There are already worries that Lloyds struggled to make a profit in 2010.

The shock news that the economy shrank at the end of 2010 adds to the difficulties facing us all as taxpayers, customers and shareholders. It also makes it difficult for politicians to push through reforms that could curtail the banks even as they try to force the banks to lend more.

Causes of the crisis
The US commission finally published its findings about what caused the financial crisis. It concluded that 'the crisis was avoidable—the result of human actions, inactions, and misjudgements.'

It said 'warnings were ignored'.

The researchers warned that we need to accept that we could have actually stopped the financial crisis. That is, after all, the only way we can stop it happening again.

What about shareholders?
What few people are talking about is the role of the shareholders who voted through deals and did little to stop the relentless rise in bankers' pay.

As people who buy pensions and insurance and invest that - indirectly in some cases and directly in others - means you and I.

Nor do many people talk about the role of those of us that maxed out our credit cards or signed up for 125% loan to value mortgages.

The crisis has taught us how important banks are as well as how dangerous they can be.

This week we had access to a deluge of information about what could be done to reduce the risks.

But we also learned more about what could go wrong if we rush through the wrong reforms.

source: citywire.co.uk