Yesterday the Independent Commission on Banking, chaired by Sir John Vickers, published its final report. As expected, it recommended that banks should separate their ordinary High Street activities from their more risky (and more profitable) investment banking (dealing in derivates, securitised loans, etc). The aim is avoid any future bail-out of the whole of a bank in the event of another banking crisis as in 2007-8. If this happened again a bank’s investment arm would be allowed to sink or swim while the proposed requirement for extra capital reserves for the High Street arm should be enough to allow this to weather the storm.
The banks are up in arms and have been lobbying strongly against any such reform because it will hit profits for their shareholders. First, by tying up more of their capital and accumulated profits in reserves. Second, without the prospect of a government bail-out if things go wrong, by making their investment activities more costly. It remains to be seen how successful this lobbying will be but the government has said it will accept the Commission’s recommendations and implement them sooner or later, if later rather than sooner.
Should we as workers care either way? In a word, No. This is an internal problem for the capitalist class, a factional fight between two sections of them. The non-banking section is annoyed at having to pay for what they regard as the irresponsible activities of the banks which contributed to making the 2007-8 crisis worse than it would otherwise have been. They don’t want to be put in this position again and have been able to exploit people’s dislike of banks to gain popular support for moves to regulate banks more.
People don’t like banks as they perceive them as parasitic on real activity. As indeed they are, but they are still essential to capitalism, their role being to channel money to productive industry to invest with a view to profit in return for a share of these as interest. Since profit is derived from the unpaid labour of those who work banks are parasites on parasites.
The Report is of some relevance in that it provides an insight into how banks work. No nonsense here about banks being able to make loans out of thin air by a mere keyboard stroke. Banks are recognised as “financial intermediaries” whose role is to “bring together savers and borrowers”. Banks of course do other things as well (such as derivatives, securitisation, underwriting share issues) . The Report proposes to “ring-fence” a bank’s “core economic function of intermediating between depositors and loans” from these other activities. It proposes that only what they call “ring-fenced banks” (which will include building societies) should be able to take deposits from and provide overdrafts to individuals and small and medium-sized business (defined as businesses satisfying two or more of: turnover of less than £25.9m, balance sheet of less than £12.9m, fewer than 250 employees). They will also be able to accept, if they so choose, deposits from non-financial bigger businesses and make loans to them. Non-ring-fenced banks will not be able to take deposits from or make loans to individuals or small businesses, but will be able to do everything else they have been doing until now.
The clear assumption throughout the Report is that a bank’s loans are financed out of its deposits. Ring-fenced banks will, however, be able to borrow money in a limited way to cover their short-term needs to make payments. In this connection, the Report makes a reference to the famous (or notorious) cash reserve which banks have to keep to deal with withdrawals, the basis of so-called “fractional reserve banking”. It is not very high now (about 2-3 percent) and doesn’t all have to be kept in cash but also in part as very liquid assets (i.e. assets that can be converted more or less instantly into cash). “Within a bank”, says the Report, “the treasury function maintains an appropriately sized pool of liquid assets so that it can be confident of meeting its obligations to pay out depositors and other creditors”. The rest of what is deposited with it the bank can lend out (if it can find enough suitable borrowers).
This feature of banks (which applies equally to building societies, credit unions and savings clubs) has given rise to all sorts of misunderstandings and confusions and claims about a bank being able to lend more than has been deposited with it. As stated, the Report doesn’t give any credence to this sort of nonsense. It simply takes it for granted that banks make loans out of deposits.
The Report does not go the whole hog and propose, as was done in America from the 1930s till 1991, a complete separation of “ring-fenced banks”. Lloyds, HSBC, Barclays, etc can continue exist to exist as universal banks, only they will have to take legal steps to “ring-fence” their lending and deposit-taking to and from individuals and small businesses from their investment activities. No doubt the banks are already thinking up ways to get round this and, when the present crisis is history, to launch a campaign for de-regulation.
One thing that the banking reform will not do is to stop another economic and financial crisis, as some politicians are suggesting. We hold no brief for the banks but they did not cause the present slump. This was caused by capitalism’s tendency to overproduce in a boom, not by monetary policy or institutional arrangements. So, no banking reform is going to eliminate the boom/slump cycle that is built-in to capitalism.
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