reforms? i would have described them as tweaks and very tame ones at that

Looking at the fractional reserve banking mechanism is a must. The unfettered capacity for banks to lend the same deposits out multiple times acts as a driver for repeated boom and bust.

“Every government in the world got that wrong – and that’s why a fortnight ago I said sorry for the part I and the last Labour government played in that. When the City and the Tories called for lighter regulation, we should have ignored them and been tougher still. ”

That’s one of the best examples of The Apology That Never Was that I’ve seen in my life. Don’t get me wrong, I agree with him on every count, but it’s a bit lame to apologise in the same breath that you point out that a) everyone else made the same mistake, so it’s not your fault and b) the opposition apparently talked you into it, so it’s not your fault.

“And we need tough action to promote greater competition too, including making it easier for customers to move their main bank account. As few as three per cent of customers switch accounts each year, partly because it is so complicated. So I hope the commission will look at ways of making current accounts portable like mobile phone numbers in order to increase switching and so encourage competition.”

I think the main reason that people don’t switch their current accounts is that they’re the same basic product: debit card, cheque book, negligible interest, online banking, extra £5 a month if you want phone insurance.

However, transferable current account numbers is a superb idea in principle. I’d want to know that it was secure, and I suspect that getting banks to share sort codes would require a pretty heavy rewiring of our present banking systems, but if it can be pulled off fairly painlessly we should go for it.

Agree with 2, although the risk is that it then attracts the “funny money” social credit cranks who think that after restricting the banks the government should then print its way to prosperity.

I think Mr Balls has just been reading all the stuff that has already been leaked and is calling for what the commission are going to recommend anyway.

People do not move their accounts for the same reason that they do not shop around in other areas because human beings are lazy. Portable current accounts where direct debits etc could go with the account would make it easier to switch. However. don’t expect a large amount of switching because it would still require a modicum of effort.

Firewalls depending on how severe will result in lots of bank squealing. However, squealing will still occur even if the rules are not too severe and the banks are secretly pleased with the outcome. They want you to think that they are outraged and being penalised. Moreover, the banks employ people to get around the rules who are smarter than the designers of the rules. The devil is in the detail with this one.

I really do not know how it is possible to enforce international consensus. If the US or anyone else want to play by their own rules, how can we secure international consensus? It is always best if everyone plays by the same rules then you do not get regulatory arbitrage, and one does that through negotiation. However, it is impossible to secure without willing parties.

This is a joke, right? Oh.

Talk about a lack of ambition! Ed Balls has clearly got a massive hard-on for global financial crises and is desperate to see another one within a decade.

Anyone with a desire to see the dominance of the socially useless financial sector over politics permanently removed should demand nothing less than:

1. Banks need to broken up so that they are no longer Too Big To Fail.
2. Tobin Tax.
3. Separation of merchant and private banking.

Anything else is fiddling at the margins. And that’s without even stopping to consider the broader insanity of a growth-obsessed economic system.

Basically, everything Richard W just said is bang on the money.

I agree with @2 – abolish fractional reserve lending.

‘Firewalling’ banks is pathetic and won’t work. I think a better solution is to completely and irrevocably separate retail and investment banking – no exceptions. Restrict executive remuneration in retail banks to a multiple of salary of the lowest paid (say, 10). Subsidise free basic financial advice nationally. Then reduce the FSCS limit to something sensible and anything that fails, fails.

Ban credit at extortionate rates, even if it means that some can’t access it. Penalise loan sharks with obscene financial penalties and strict prison sentences; support the growth of local credit unions and regional banks (e.g. the state bank of North Dakota). Reform and simplify pensions. Lower the annual ISA allowances.

There’s loads you could do – but they won’t.

The problem was not lack of regulation.

The problem was the symbiotic relationship between corporations and government and the barriers to entry to new competitors in the banking market.

The banks that failed should never have been bailed out. Having been bailed out they should now be broken up into a million pieces.

But they won’t.

It will be business as usual because it is more profitable to rip us all off.

“tough accountability and transparency and clear, workable and robust firewalls”

Why should we accept “firewalls”, just because bankers would prefer them? We don’t owe them any favours. If the casino part of a bank isn’t permitted (as it mustn’t be in future) to use ordinary bank customers’ cash as collatoral for dodgy speculations, there’s no reason not to completely separate the two parts.

So long as casino operations and normal banking remain in the same organisation, depositors will worry that the City smart alecks will find a way round so-called firewalls and land us all in the same mess as before. So it would be far better to break up the banks, and not pussyfoot around.

@5

“People do not move their accounts for the same reason that they do not shop around in other areas because human beings are lazy.”

Hmm, the success of aggregator websites in the insurance market would beg to differ.

@ 11 Mr S Pill

“Hmm, the success of aggregator websites in the insurance market would beg to differ.”

Actually, insurers rely hugely on churn – the process of getting policy renewals because the customer can’t be bothered to shop around. Obviously this is most common for relatively cheap products like contents insurance, but it’s surprisingly prevalent for stuff like car insurance too.

Aggregators HAVE changed the market dramatically, and I’m sure they’ve caused some consumers to shop around who wouldn’t have done so before. But I reckon the biggest difference they’ve made is getting better deals for the people who would have shopped around anyway – it’s hard to maintain a high margin when someone can compare your product’s price and features against loads of competing policies.

As for current accounts, switching rates are very, very low. That’s why banks promote their products to school children and offer such good deals to students, even though they probably make a loss in the short term from most of these customers. They figure that, once they’ve got you, you’ll be a customer for life – and they’re normally right.

@ 10 domestic extremist

“So long as casino operations and normal banking remain in the same organisation, depositors will worry that the City smart alecks will find a way round so-called firewalls and land us all in the same mess as before”

We should obviously try to prevent future market crashes. But as a depositor you don’t need to worry – the government will compensate you for up to £50,000 held in normal bank accounts if your bank fails. And that limit of £50,000 is per institution – if you have £100,000 in savings, split it across two banks.

People need to be made aware of this, partly for their own peace of mind and partly for the greater good, so to speak – if customers had known their money was protected, there would probably not have been such a rush on Northern Rock. Of course, the government guarantees wouldn’t be worth much if the country itself went bust, but at that point I think we’d all have bigger problems.

According to leaks in the news, the big banks will be required to sell off branches.

Some deal. Try looking to see how many bank branches belonging to the same bank – but possibly trading under another name – there are along your local high street.

When I lasted counted a few weeks along the high street of the town centre of my district, there were seven branches of Santander within a few hundred metres as the result of Santander buying up Abbey and Alliance & Leicester and Bradford & Bingley. Don’t be fooled by NatWest – that’s part of RBS. And there’s often a Halifax branch within a few doors of a Lloyds Bank branch when the Lloyds Group now owns HBOS.

The banks want to get rid of these excess branches – their worry is that these spare branches might be bought up by some genuinely new entrant into retail banking who might just shake up cosy understandings and attract dissatisfied customers away from the incumbents.

@13 – “We should obviously try to prevent future market crashes. But as a depositor you don’t need to worry – the government will compensate you for up to £50,000 held in normal bank accounts if your bank fails. And that limit of £50,000 is per institution – if you have £100,000 in savings, split it across two banks.”

If “people need to be made aware of this” you should at least get your facts right. The limit is now £85,000 per individual, per institution. The FSCS is funded not by government but by a levy on financial institutions.

None of this is an argument against fully splitting retail and investment banks.

I personally think the limit should be much lower – a married couple with joint accounts in two separate institutions can now secure up to £340,000, which is ridiculous. If you’ve got that amount of cash, you can afford to pay for advice – or else, put it in a NS&I account.

As for “preventing future market crashes”, good luck with that. It is impossible to prevent market crashes (unless you abolish the market), but it should be possible to restrict the effect of such ‘turmoil’ to those who are willing to accept the risks associated with speculative investment…

@12 Chaise

Yeah church is a huge element of it, but I used to work in a call centre selling car insurance (for my sins) and the amount of people who’d been online shopping around etc was very very high. Just anecdotal & I don’t know of any data but I don’t think people should dismiss innovations like aggregators being used for banks as well just because most people don’t switch…also (again, anecdote) a lot of my friends (mid-20s) switch bank accounts quite regularly simply because of things like poor service etc (Santander being particularly awful apparently) so maybe the way the market works is changing already on that front. Customers no longer have loyalty towards one particular bank (with good reason, I’d say).

*churn, not church!

@ 15 J

“If “people need to be made aware of this” you should at least get your facts right. The limit is now £85,000 per individual, per institution.”

Evidently the update a few months ago passed me by. So shoot me.

“As for “preventing future market crashes”, good luck with that. It is impossible to prevent market crashes (unless you abolish the market)”

Which is why I said TRY to prevent market crashes. You should at least get your facts straight

“but it should be possible to restrict the effect of such ‘turmoil’ to those who are willing to accept the risks associated with speculative investment…”

How? Even if we ensured that investors took their own risks instead of relying on government bail-outs should the worst happen, any crash would impact society overall.

@ 16 S The Pill

“Yeah church is a huge element of it, but I used to work in a call centre selling car insurance (for my sins) and the amount of people who’d been online shopping around etc was very very high. Just anecdotal & I don’t know of any data”

That’s quite a specific group, if they were calling you to get an insurance quote/policy. Like I said, I think people who shop around do better due to aggregators, but they don’t tempt that many people to start shopping around in the first place. I’m half-remembering a couple of reports that said the same thing, but don’t have them to hand.

“I don’t think people should dismiss innovations like aggregators being used for banks as well just because most people don’t switch…”

Agreed, I just doubt that it would increase switching stuff like current accounts. You’re right about intangibles like customer service, but your basic bank account is almost identical at any bank. Probably not worth the headache of switching.

If, on the other hand, you want a paid-for account with benefits (£5 for phone insurance, for example) or a student account, then shopping around is a very good idea.

@18 – “Evidently the update a few months ago passed me by. So shoot me.”

First against the wall, comrade!

Sorry – wasn’t meant to be narky. At least you’re not entirely financially illiterate, as much of the population is.

“Even if we ensured that investors took their own risks instead of relying on government bail-outs should the worst happen, any crash would impact society overall.”

Only to the extent that society itself is reliant upon the capitalist machine. As I said earlier, if retail and investment banking are split; if a greater market share in retail banking is taken by credit unions and mutuals; if fractional reserve lending is abolished; if financial literacy improves; if a lender of last resort can be found which itself sits outside the investment sphere – well, we’re on the way.

The rest is mostly to do with people’s individual investment decisions; so getting caught up in the financial crisis is far more a matter of choice.

For example, if you take on a 100% mortgage with property prices at all time highs, that’s your decision. If you invest your pension fund 100% in equities and the market bombs, that’s your decision. If you decide to retire early and live off accumulated interest, and rates dive – your problem.

But if your business is dependant on credit to survive, you’ve a far better chance of securing it if your bank is not technically insolvent due to stupid investment decisions and they have a source of funding independent from obscenely leveraged money markets now in seizure!

@ 20 J

No worries! I agree with what you say above, but, even if a market crash only affected businesses and individual investors who had gambled and lost, it would still affect the employees of those businesses, who could potentially lose their jobs as a result. Obviously those employees have technically chosen to work for an employer who had met those bets, but there’s a limit to how much you can expect people to be aware of stuff like that.

The IBC are looking to make the system safer not satisfy the personal hobby horses of a few eccentrics. Therefore, it is almost certain that some people will believe they do not go far enough. Banks do not lend based on their reserves fractional or otherwise. Most of the textbook money multiplier theory does not hold in reality. Banks do not become insolvent when they run out of reserves, they go bust when the run out of capital. Therefore, they lend not on multiples on reserves but capital.

The UK banking system as required by the BoE has a reserve requirement of zero. In the banking crisis the UK banks performed poorly. Canada also has a zero reserve requirement and sailed through the banking crisis unscathed. The difference was the UK banks were undercapitalised and that is why the UK taxpayer was used to provide capital. Depositors do not provide capital for a bank, they only increase reserves. No matter how much deposits a bank takes it only changes numbers on both sides of the balance sheet. The deposits remain a liability on the bank balance sheet. Relying on customer deposits just means they are less dependent on borrowing from the interbank market, it does not make the bank more inherently solvent.

Since capital or the lack of capital through being undercapitalised was the problem only capital can be the solution to having a safer banking system where the taxpayers are not exposed to risk. Splitting retail commercial banking from investment banking looks to have been ruled out by the IBC because it was a pointless idea. Forcing a concrete firewall and ring-fencing each entity to hold their own capital seems to be what will be recommended and should be workable. Capital requirements are key and the higher the capital requirements the safer the bank and leads automatically to the banks being less profitable. If the banks are less profitable they will pay the staff who used to earn them profits less. Safer banks and the great British public have less to worry about some people earning more than them.

The post by Ed Balls is very thin and vague.

First avoiding bailouts and accountability. Alas, the Labour Government blinked first and so we had bailouts. Northern Rock should have been left to fail. If Ed is in favour of the State not paying for bank’s riskier activities, it can start by ending the Deposit guarantee scheme which distorts investment decisions as we saw with Icelandic banks offering 8% but those deposits protected by UK taxpayers.

The idea about being able to move bank accounts simply is a good one. It can be done not by altering the sort code + account number system which banks use today as some have suggested and rightly warned of being a logistical nightmare, but by adding a layer of indirection so your bank account number is mapped to a particular account at a bank just as physical computers on the Internet have a URL mapped to it. A Bank Account DNS is needed, as it were.

Ed then moves into One World Government fairyland expecting one set of rules to avoid job movements. It will result in a bad decision being inescapable. Good ideas can be copied, but it will be a struggle to avoid a bad idea that is internationally enforced.

The push for pay transparency is a bootstrap built upon the bailouts (“you have taxpayers’ money, so…”). End the bailouts and subsidy, then it becomes the Banks’ decision. This is just what Authoritarians like Balls will not want to do.

The third point is motherhood and apple pie – says nothing.

The Coalition has not done a great job. If any administration wants to see this sorted, the way forward is Free Banking, ending the monopoly status of The Pound and creating the environment where the only practical way to survive is to offer Sound Money, as your money will be in competition with other forms of money. We need the right regulation, not “light vs heavy”. You can have alot of bad regulation that is “heavy”, and very good regulation that is light or, better still, instead turn to supervision, which means banks cannot hide behind the letter of the law but know they are being watched as to their behaviour in conforming to the spirit.

Sterling does not have monopoly status in the UK. The Bank of England has exclusive note-issuing powers in England and Wales and they issue sterling. However, any two parties are perfectly free to denominate and settle debts in anything that they wish. The law does not prevent them anyone settling debts in seashells if that is what they want to do. In law in the UK, there are very few legal tender laws except in relation to contracts. If no currency is stipulated in a contact then a court assumes sterling as currency.

It’s already been pointed out, but I’ll say as well: end fractional reserve banking, plus 100 per cent gold or silver backed currency.

All you lefties who have noticed how we all get screwed by the banks have to look at the monetary system to see how they do it.

@ Trooper Thompson

The problem is those are eccentric views and not widely held by the type of people on the IBC. Even amongst Austrian type folk outside of the Rothbardians they do not all agree on the desirability of a gold standard because it was a monumental disaster. The world has move on from the 1930s. Working with the world as it is will always be superior to setting up Nirvana fallacies that will always leave one disappointed.

@26

it’s got nothing to do with nirvana fallacies. If you want an example of that, look at our present monetary system. The world monetary system of Bretton Woods was based on gold, I presume you know, and it collapsed for completely predictable, and predicted reasons (see Jacques Rueff et al).

You can dismiss my views with a haughty shrug if you wish. The issues of money and banking have been raging controversies throughout the history of economic thought, and many of the greatest economists spoke out vociferiously against paper money and fractional reserve banking, because it leads to booms and busts, and because it constitutes a massive fraud by the bankers.

I will reiterate my point above: people should consider how the monetary system functions. I’m trying to educate myself, and I advise others to do the same. Many of you know we’re being taken for a ride. Find out how! Tinkering with the regulations won’t change a thing.

btw

“the type of people on the IBC”

I’m sure Sally would know what to do with these people. Where is she when she’s needed?

The Bretton Woods system was only tenuously tied to gold. All currencies were fixed to the USD and the USD was fixed to gold at $35. Fixed currency regimes will always eventually break down. In reality, the Bretton Woods system was the start of the dollar or US Treasury bill standard . The gold standard as such collapsed in the 1930s, and those who left it earliest did better than those who stuck it out to the end. Setting up the Bretton Woods system after WW2, the US took every advantage to make it to their advantage and to specifically disadvantage the UK. Our best buddies and all that. Nixon closed the gold window, but it was collapsing anyway with US Vietnam deficits. Although, nominally we are still in the dollar standard, I would argue that the world monetary system is really on an oil standard. That is quite a complicated story that would take pages to write.

“The gold standard as such collapsed in the 1930s, and those who left it earliest did better than those who stuck it out to the end.”

That was the Gold Exchange Standard, not the Gold Standard. Not the same thing at all, and Bretton Woods was a variation of the former. The Gold Standard ended in 1914. Why? Because the governments of Europe decided they wanted to organise the most destructive war in history. The Gold Standard wasn’t abandoned because it didn’t work, but because it did! It restrained governments to spend within their means, and raise the money they needed through taxation, which meant they needed the consent of the people.

“Nixon closed the gold window, but it was collapsing anyway with US Vietnam deficits.”

Are you spotting the pattern here? That’s right; governments printing money so they can engage in massive wars, without the need to worry about the public agreeing to them.

Besides, I never said we should go back to the Gold Standard, which was certainly flawed. Free banking with a 100 per cent backing of gold or silver would be best I think (but not, of course bimetalism). I don’t for a moment think it would be easy to shift, but it is not utopian. You should see how much gold certain countries are buying. They are preparing for the dollar to go the way of Weimar, and for similar reasons.

@24 Richard, you are splitting hairs. No other bank in England can issue notes, no other currency but Sterling can be issued in the UK. That is a monopoly for Sterling.

You do not address Free Banking which will enable competing currencies to come about. That is a million miles away from your “seashells” example.

@25 TT, “ending” fractional reserve banking is not really possible unless you want to be a steaming Authoritarian, for all it is is on-lending. What is needed is a clear opt-in for depositors and that banks must tell lenders – for that is what they are – that their money is not really guaranteed “on demand”.

As for 100% gold backed, you can only do this if one creates a new currency that is basically gold scrip. Trying to back an existing currency with gold is problematic. How would you see that happening? By that I mean explain the mechanism, balances, etc.

@ 30. Trooper Thompson

I would not deny that the Gold Standard during the 19th century worked quite well. Although, as you say it did have some inherent flaws. Moreover, there were wars before 1914, and wars before the Gold Standard. If governments want to fight wars pieces of yellow metal will not prevent them. WW1 did not just happen in a vacuum. Britain and Germany had been engaged in an arms race especially naval for over fifteen years before the outbreak of hostilities. The Gold Standard did not prevent the arms race. What I really meant with monumental disaster is the version that was set up after the war during the 1920s. Sterling was fixed at a rate far too high to please the City and the Conservative party who were obsessed with seeing sterling as some sort of national virility symbol. As you know this version fell apart in the 1930s, causing much suffering and a national strike in the interim period.

@ 31. Roger Thornhill

I think ideas like that nowadays if there is the demand are even easier to evolve naturally through so many money transactions being electronic money transactions. The UK money supply is now only 4% actual currency. It would be interesting to watch and Gresham’s law and status quo bias would come into play.

During the time of the debate about British euro entry, Samuel Brittan had a column about competing currencies. On that theme, he was of the opinion that euro competition with sterling should have been encouraged. Although, wisely he was unpersuaded of the benefits of formal British entry to the EMU. He mentions that sterling does not have special status in Britain in the eyes of the law.

” There is nothing in British law to prevent contracts being made in any medium to which the parties agree – whether sterling, dollars, euros or cowrie shells. Legal tender is a formality which only applies if the currency of the contract is not clearly stipulated. The question then arose of why there was not already more currency competition and what if anything governments could do to stimulate it. ”
http://www.samuelbrittan.co.uk/text103_p.html

What the law prevents is people making their own sterling. However, I can’t see any legal impediment preventing people setting up their own currency as long as it is not being presented as sterling. Compared to other countries legal tender laws, sterling does not have much status in the UK.

@ Richard W

“What I really meant with monumental disaster is the version that was set up after the war during the 1920s. Sterling was fixed at a rate far too high…”

I agree absolutely with the point of the return to the pre-war Sterling price, but the Gold Exchange Standard was significantly different from the Gold Standard. It kept all the original flaws and added some more. The flaws in the previous system were there right from the start, which made it something like the Maginot Line – rigid and well-defended for as long as it ran, but with a gaping wide flank – that being the lack of restraint on the Bank of England from causing inflation by other means, and the reality that when push came to shove the government would allow the Bank to suspend specie payment.

@ Roger Thornhill,

“@25 TT, “ending” fractional reserve banking is not really possible unless you want to be a steaming Authoritarian, for all it is is on-lending. What is needed is a clear opt-in for depositors and that banks must tell lenders – for that is what they are – that their money is not really guaranteed “on demand”.”

I don’t know if you noticed the recent attempt by a Tory backbencher to introduce something along these lines? I wondered whether it would make that much difference, as I don’t know how many people would opt for the bank to hold it as a ‘bailment’, if they then had to pay the bank for the service – which no doubt they would. As for the point on steaming authoritarianism, I don’t see that this would be necessary. All it would mean is that bankers would be held accountable under the same laws as any other business.

Anyway, gentlemen, it’s a complicated matter, and I haven’t the final word. One thing is seeing the problems. Another thing working out the solution, but I must say I’d like to see the VAT taken off silver, which would allow it to compete against the BoE’s paper. I will return to my studies – I’m reading about the South Sea Bubble. plus ca change…