nef's new book, Banking 2020: A vision for the future, brings together 12 of the leading voices behind the emerging regulatory architecture and its rules and asks them for their ideas on what to tackle next. It's available now in paperback, or as a free digital download.
As its editor, I worked on the book for almost a year. Before setting off on a six-month trip around Asia I contacted MPs, MEPs and others, asking if they wanted to contribute to a book about the future of banking. It quickly turned out to be an exercise in the surreal. For one Skype meeting I sat in an internet cafe in Laos, surrounded by novice monks in bright orange robes playing on-line shoot ‘em up games. Standing outside the only grubby guesthouse with wifi in a small Cambodian town trying to guess the password so I could send an email came close to farce. But it’s done now, and - as I hope you'll agree - well worth the effort.
Cast your mind back to 2008: liquidity was drying up, capital levels were suddenly found wanting, and over-leveraged banks toppled. Even those which didn’t take direct help relied on a huge state-led operation to support systemic liquidity. Suddenly, the red-braced and red-blooded capitalists in the City were all in favour of state intervention.
The legislative response to the heart attack suffered by banks has been energetic but it has largely dealt with making the existing system safer. There are new regulators in the UK, new EU supervisors and a nascent European banking union. A new Financial Policy Committee will help steer the financial system away from bubble trouble. New prudential rules have been devised and structural and corporate governance changes are on the way. This new banking landscape will be in place in 2019.
Our new collection of essays may span the political spectrum, but everyone agrees on one thing: reform ain’t over yet.
Thinking about the book while on my trip, it was fascinating to see how East and West compared. At home we are trying to flog off the state’s bank shares while India has a multitude of state-owned banks. Here banks are criticised for restricting the use of cash machines (their only socially useful innovation?); in Burma ATMs had only just arrived, foreign cards were not accepted and visitors carried brick-sized wads of cash around. Here we talk about the devaluation of the pound, but in Cambodia the US dollar is the main currency and the Cambodian Riel is used merely as change. Life goes on.
Things clearly can be done differently. Couldn’t state involvment in grass-roots retail banking be a good thing? Isn’t that what gave us the good old Post Office, which politicians seem so keen to save when a branch in their constituency is threatened with closure? What about a state-run business bank?
Maybe, despite recent evidence to the contrary, salvation lies in redeeming the market. Could we change banks' corporate personality and their very motives by ending the primacy of shareholder rights and requiring more equal consideration at a board level of the rights of customers, employees and even the community? Could we have a choice of more than one currency?
Moderation and populism put a break on change. Politicians in or with ambitions of Government do not want voters to think them too radical, or 'swivel-eyed'. But they do want to be seen as ‘in touch’. So we see policies emerge which tweak the existing system, albeit often in a necessary way, but which have one eye on voter perception. This might help win elections but it also restricts change to measures which are incremental and often counter-productive. Will banks find it harder to game two completely separate regulators? Probably not.
Even assuming the new regulators and rules create stability in the medium term, trust in financial services will remain low as long customers are being failed. This will become even more of a problem when compensation costs for PPI and other scandals are covered and profits surge. If the economy begins to recover at the same time, we risk focus shifting away from banking and leaving the job unfinished.
We must take this opportunity to look at the banking and financial system as a whole. Is banking a utility? Is it for anything, and if so what? What are the sacred cows holding us back? I hope that this book might do something to encourage that debate.