What should be done with UK banks?

7th September 2011

On Monday morning, the Independent Commission on Banking will file the 350-plus-page report aimed at ensuring greater competition and financial stability for the UK's banks, reports This is Money.

So far, extreme measures may have been taken – but there are increasing calls for regulation and further action. Citygroup analysts estimate the break-up of the big banks has knocked between £20bn and £25bn off the combined market value of Barclays, Lloyds Banking Group and RBS in recent weeks.  

What about further reforms? There are calls for reforms to the sector, but also strong opposition to this. British Bankers' Association's chief executive Angela Knight believes any further reforms should be delayed because of ‘a high degree of uncertainty and market turbulence' – while CBI's director-general John Cridland said bluntly that reform is ‘barking mad'.

Newspaper commenters are giving their pennies worth, with Simon Jenkins in the Guardian saying: "Indeed, each new shot of so-called quantitative easing – or cash to the banks – had led to the opposite of what was intended. Lending fell and growth weakened. The banks pleaded for ever more easing, but for a quite different reason, to bolster their balance sheets against past and future bad debts. Cash intended to go into consumer demand thus disappeared into bank vaults.

"There is not a shred of evidence that three years of astonishing Treasury generosity to the banks has done Britain's private sector economy one iota of good. They continue to escape any remedial regulation."

And so it appears we are treading water when it comes to tackling our banks – yet headwinds facing the UK economy are being added to by the weakness of this sector, says Mindful Money's economist blogger Shaun Richards.

This has been a theme of his for some time, and is finally coming to a head.

He points to signs last year that this was a problem, writing on his blog: "If we look at the UK banking sector in isolation I argued back on the 14th of December last year that the accelerated withdrawal of the Special Liquidity Scheme by the Bank of England would lead to a tightening of monetary conditions and less bank lending. I was thinking mostly of the impact on mortgage lending then but the impact has been to weaken our banks and their lending just as other factors have weakened them too. You cannot with draw some £185 billion without expecting some impact…"

As a result, a "zombified banking sector" is a problem for us all – we need credit to flow as freely as it can right now and our weakened banks are unlikely to be able to provide enough of it, says Shaun.

James comments on the blog: "It is completely extraordinary that, after three years of treading water, as you put it, we are still no clearer as to what to do with the banks.

Leave a Reply

Your email address will not be published. Required fields are marked *