Sunday, 16 December 2012

The banks

A few weeks back I blogged about how the labour movement ought to position itself if the UK's banks need recapitalising. Since then we've obviously had the Bank of England saying the banks may indeed more capital and also making the point that they went into the crisis with too little (potentially £50bn too little), something which I'll come back to.

As I said before, if the banks need recapitalising then the UK public will likely be on the hook one way or another. The state may directly assist in the recapitalisation as it did before, or UK institutional investors, managing the nation's savings, could be tapped up via rights issues. It's the latter possibility that particularly interests me as this will be a key point at which the need for accountability within the financial system could be asserted.

It's notable that the ABI has already put out a document about the banking sector and what investor expectations of it will be. Already some have commented that they seem to have 'pre-crisis' ideas of what kind of return they can expect from organisations which many hope will operate more like utilities in the future. That aside, it is important that ABI has to some extent set its stall out.

Asset managers are only ever the intermediaries. As I never tire of boring on , they have views about, for example, what's reasonable in terms of executive pay that are completely out of touch with those of the people whose capital they invest. But whilst the responsibility for the assessment of such issues is delegated along with the managment of capital their views will dominate the investor side of corporate governance discussions.

And so it will be with the banks. I suspect a lot of ordinary punters think bankers could be paid a lot less and that banks should be cut down to size. But unless someone tries to get those views into the corporate governance microcosm pretty quickly we could see the banks recapitalised with our money without any reform demanded in return. If you think I'm overdoing this, consider how weak investor ideas about 'reform' of bankers' pay are. It's all about structure, not scale. When Paul Myners was City minister and wrote to the heads of the big asset management firms to ask them what they were doing about pay at the banks several of them wrote back saying they didn't want to put too much pressure on.

So what could we do instead? Why shouldn't we draw up a set of reforms that we wish to see enacted in return for supporting any rights issues. Retail and investment banking split? Pay freeze and no performance related awards for directors of any bank that requires extra capital (after all, management of capital is the core business of banks, so if they need a lot more of it they aren't doing the job very well)? I would actually make the list pretty extensive on the understanding that there will be pushback from vested interests. Therefore the the real point of the exercise would be to make the point that the asset managers are just the middle men and that their views are not the only ones that are legitimate.

The obvious groups who could do something like this are the TUs, in particular through member nominated trustees who are TU members, and Labour-controlled local authority funds. I recognise that it sounds a bit of an unusual idea, but then think, in contrast, how odd it would be if we don't do something. The banks may well be recapitalised with our money (again) without us getting any meaningful reform in return. This after a year when the UK's banks have been tied up in Libor manipulation, money launderings and sanctions busting.

A final related issue - let's consider the Bank of England's point that the banks went into the crisis with too little capital. One of the arguments for why this happened is because of the way IFRS distorts banks' profits (as I understand it this is principally through the way provisioning for bad loans now works). If that's the case, and the banks really weren't profitable in the late 2000s, that raises some serious questions - why were the directors paid any performance related rewards, why were dividends paid out (and were they legal), and why did auditors sign off the accounts?

There are some very big issues here that haven't yet been properly dealt with. Another reason, I would argue, why those on the Left should be on the front foot if we're expected to pump more money into the banks.

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