Monthly Archives: April 2014

The template for a way forward on banking?

The news that Barclays is now investing money and knowhow in credit unions suggests that some of the objectives set out in our Re-banking UK report may be achievable without legislation, as we suggested.

Barclays is to let credit union customers use their Pingit technology and their branches, which is an important breakthrough.

Given that the big banks now control, not just the payments system, but also around 85 per cent of the domestic account market, this may be the only way of achieving the objective. It is hard to see how any government could provide banking services for the unbanked without the major help from the big players.

The problem with this argument is that it doesn’t apply in quite the same way to the small business market.

Project Merlin and other initiatives were designed to funnel money through the big banks and their branch networks to reach small business. The problem was that they no longer ran networks which could reach small businesses. They were no longer part of the capabilities or the business plans of the Big Four.

But the Barclays link-up with credit unions does give us a glimpse of one way forward. The big banks will provide the money and the knowhow for a new partnership between themselves and the new community banking network.

This could be enforced by legislation, as it is via the Community Reinvestment Act in the USA. Or it could be outlined in Parliament and then be acted on voluntarily by the banks, under their own auspices, as they did with the new transparency about where they are lending money, thanks to Lib Dem peers in the House of Lords.

The voluntary approach, if it is possible, would be far more effective and work sooner.

It would unleash the funding and the knowhow we need to build the kind of community banking sector that most other nations in Europe have.  The lack of it here means that we are now the only European nation, apart from Hungary, where small business lending has not recovered to its pre-2008 level. These things matter.

There are of course objections likely from the banks. Why should they? (Because the current situation is corrosive and unsustainable). Why should they create potential competitors? (To avoid the alternative: break up by competition regulators).

But there are reasons why they may want to do this as well. It will mean avoiding legislation that would force them to. It will also mean they can put an end, once and for all, to the accusations that they are not lending enough to small business. It will be a boast they can fling in the faces of their critics who say they are overpaid and corroding the real economy around them.

In short, the Barclays link is important and may prove to be a template for something much bigger.

It only takes one of the Big Four banks to shift their position on this – rather as the secret manoeuvrings and negotiations hosted by Consolidated Goldfields helped bring an end to apartheid in South Africa.

It looks as though Barclays may be the Consolidated Goldfields of banking.

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Financial markets are changing again

Financial regulators have to be adept at shutting the stable door after the horse has bolted – and especially so in England, where decades of persuasion are usually required to persuade politicians that the horse has left the stable at all.

Minute examination of its straw continues for some time while everyone else can see the animal rampaging round outside, seeking whom it will devour.

The problem is that the English are a deeply conservative breed when it comes to money.

They also have a blind spot about it – they still believe financial systems are exactly the same as they were in the 1950s, with Captain Mainwaring at his desk dispensing sherry, when he has long since been pensioned off in favour of risk software at regional office.

Take share trading for example. The English still believe, along with other economic fundamentalists in the USA, that markets will always create an accurate price. This is the Efficient Market Hypthesis by Chicago economist Eugene Fama.

Fama and his colleagues came up with the idea in 1970 but recent events have shown that it is almost certainly wrong, and disastrously so. Or so you would have thought.

Even in the policy world, there is little understanding about just how fast financial markets are changing, in their technology, their methods and their fundamental purpose.

It doesn’t help that most of thinking about these markets, which now dominate the world, is done behind closed doors. But there are a few thinktanks which now specialise in it – the Institute for Market Dysfunctionality at the LSE is one. The Capital Institute in New York is another.

Both were founded by people with successful careers in the financial markets. John Fullerton at the Capital Institute had 18 years at J. P. Morgan.

So I take his warnings seriously. When he says that algorithmic trading threatens the stability of the global economy, you have to listen:

“Scientists understand that, in any given system, there is a need to balance system efficiency (resulting in high throughput) with system resilience (resulting in an ability to withstand shocks). Yet in the case of financial markets, the balance has tipped too far in favor of speed and perceived efficiency, leaving markets highly brittle and more susceptible to collapse. High degrees of financial leverage compound this, leaving them vulnerable to events like the 2008 financial crisis and the numerous mini-crashes that have occurred since and are continuing…”

Unfortunately, the regulatory system in the UK tends to be busy fighting the last war and congratulating itself on its success in preventing it, without realising that something very different is on the cards.

But don’t let’s pre-judge the new arrangements which have just come into effect. The coalition has taken financial regulation seriously and have a different approach to it, so there is hope.

But it matters, for example, that nobody is now at the controls of the giant trading machine. It matters that the combination of algorithmic trading on a huge scale, and the trading of obscure derivatives, can plunge us into a darkness on a scale way beyond the banking crash of 2008.

It matters that people like Fullerton can see us accelerating towards the next financial crisis far faster than usual.

This is a key question for whoever forms the next government in the UK. It needs to be very high up in the rival manifestos – both how to prevent the looming crash (a financial transactions tax, as Fullerton suggests) and how to deal with it once it has happened (creating the money to pay off the unrepayable debt hole perhaps).

But will it be? Unfortunately, I’m afraid we may still be in the process of minutely examining the straw in the stable…