Bank-bashing politicians could severely damage the City
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Bank-bashing has become commonplace, as we saw at the Liberal Democrats’ conference last week. But the bank-bashers’ credibility is waning as one of their standard allegations is being refuted by the evidence. This allegation is that the financial crisis would have a huge cost to the taxpayer.
The truth is that the government has spent no money on the banks. Loans have been extended by the Bank of England and the Treasury to some banks at penal rates of interest, and these loans have been almost entirely repaid. Guarantees were provided by the Treasury on certain bank liabilities, but the banks’ creditors have not had to call the guarantees. Instead the banks have honoured their liabilities and paid the guarantee fees. Finally, the British state acquired equity stakes on favourable terms in the Royal Bank of Scotland and Lloyds Banking Group, while snaffling the shareholders’ funds of Northern Rock and Bradford & Bingley. These investments are likely to be sold over the next few years at a profit running into tens of billions of pounds.
The likelihood of an immense taxpayer profit may puzzle the bank-bashers. Moreover, the large salaries paid in the British banking industry owe nothing to government subsidies. They are instead due to receipts of various kinds (interest margins on loans, commissions, underwriting fees, trading profits, management and advisory fees) on transactions with customers. The bank-bashers assert that large personal incomes have depended on hidden official support. In fact, the large incomes were and are justified in the marketplace. They have been and remain attributable to high productivity in the financial industries.
Official data show that, in 2007, average hourly pay in the City of London was £28.77, whereas in Great Britain as a whole it was £12.69. Moreover, the differential between City incomes and the national average has been widening since the mid-1980s, a 25-year period in which the notion of a state-subsidised financial system was obvious poppycock. The 25 years were actually characterised by enormous tax payments on profits and incomes earned in the City.
Why did productivity in international financial services grow so rapidly? Two forces were dominant. First, computerisation and advances in information technology enabled a multiplication in the volume of transactions that could be processed and recorded, and so dramatically reduced the “cost per unit of output”.
The second dominant influence is the relentless tendency towards the globalisation of trade and finance in the post-war era. In the 1950s a US company would finance its operations almost exclusively in dollars from securities sold in the USA or by loans from US-owned banks operating only in the USA. The same would apply for British companies, German companies and so on. But nowadays a US company can finance its operations by a yen- or euro-denominated loan or securities issue, arranged in London by a syndicate of European, Asian and Arab banks, possibly with some US participation. Financial markets have ceased to be national. Instead they are global and cosmopolitan.
The main centre for the value added and created is London. Computerisation and globalisation, not implicit government subsidies, are responsible for the personal incomes in the UK’s financial services industries. But will the high-productivity, high-income people in the financial sector want to stay in the banker-bashing UK in the long run? Perhaps not.
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Prof Congdon
A vibrant, competitive and profitable financial services sector is absolutely vital for the UK economy. The extent of the financial crisis, demands a reasoned, if at times, highly impassioned public debate.
Dr Cable played to two audiences: the electorate, who are pretty fed up with the “bashed” bankers; and party conference delegates.
Reasonable, experienced and knowledgeable professionals, as well as a few consumers and voters, take the view changes are needed to secure the sector’s long term future, reducing recurrence risk.
The £155bn budget deficit and £1trillion government debt projections are not an insignificant cost to taxpayers, unless you earn top bankers’ pay.
@Jonathan Harris – are you saying current levels of government borrowing are the result of the bank ‘bailouts’? Surely Gordon Brown’s spending binge played a major role.
Richard – maybe.
What was the UK’s NPBR in 2007/8 before the credit crunch and the collapse of Lehman Brothers? How much had government borrowing been reduced before 1997-2001?
Equity prices collapsed in 2008 and how much value was lost from property values, caused by the crash? What value has since been reinstated after government stepped in with credit guarantees, emergency loans, equity, £200bn Quantitative Easing,etc?
What would have been the potential additional financial costs in banks and other institutions, going bust in the aftermath as per 1929? Bank runs, etc?
Has the fiscal position worsened due to lost tax receipts and increases in social security post ‘08 collapse?
@Jonathan Harris – but your comments are entirely based upon an erroneous (or at best highly questionable) view that the bankers ’caused’ the credit crunch rather than the actual cause – which was perverse incentivisation of the FS sector by government intervention and manipulation of the money supply. Such cross-sectoral crashes and universalised malinvestment can only have one cause – government – the only economic actor with such pervasive influence.
Further intervention in the sector is unlikely to reduce the risk of recurrence – it might, but it’s more likely simply to create the conditions for a future, unintended set of conditions that will result in a future financial catastrophe.
I agree with much of your article but I think you have underestimated the costs of the credit crisis to the public finances. One of the consequences of the banks’ accounting losses was a similar hole in their taxable profits. The main UK banks will have paid next to nil corporation tax from 2008 onwards.
You omit to mention that much of the equity owned in UK banks has been wiped out with most of the losses sticking with UK shareholders. You should also bring into your glowing account of the UK banks their role in facilitating corporate tax avoidance, where the real losses to the Exchequer each financial year are in staggering amounts.