Unfortunately banking is important in every economic system. I write “unfortunately” because bankers and banks have singularly failed to understand that their decisions not only affect the wealth of their shareholders but also the prosperity of all the people who live in the regions in which they operate. So far banks and bankers have demonstrated that they cannot be trusted to discharge their duties (for which they are handsomely paid) without adversely affecting the lives and well-being of millions of folk, many of whom have no direct connection with the banks and bankers.
In the United Kingdom there are two banks which are effectively state controlled. The Royal Bank of Scotland (which includes NatWest) operates with increasing incompetence. It is becoming increasingly inefficient; its computer systems regularly break down and its middle management has been so ravaged that decision making has turned into some process which compares rather unfavourably to the old Soviet decision mailing process.
The other UK state owned bank is Lloyds. That seems to be run more efficiently that RBS, but has been hit but fines and mis-selling scandal; barely has it paid the last fine relating to conduct several years ago than we find that it is fined again relating to the same or very similar conduct that occurred while the last bad conduct was being investigated officially.
It would not be unfair to conclude that banks, like fish, rot from the head.
What has probably happened is that these guardians of our savings and managers of our loans, having been foolishly reckless in the operation of their banking businesses and lost enormous amounts of capital, are now being faced with two problems; they must replace the lost capital and they must comply with stronger regulatory requirements as to the capital that they must maintain in order to operate.
There are limits as to how much capital the banks can get from their shareholders. Shareholders buy shares because they want the ability to walk away from the business if things go wrong without having to pay more money and throw good money after bad. Governments, for political reasons must use taxpayers’ money to support banks (in order to keep something of taxpayers’ savings) but must also set out an agenda for the repayment of the loans that taxpayers have made.
The only other source of capital for the banks is their customers. Therefore we have had spates of mis-selling scandals and over charges, all of which simply are the result of banks trying to squeeze their customers by increasing profits by means that con men, fraudsters and swindlers use.
The problem of maintaining capital is not confined to UK banks. The Eurozone banks have just as difficult a position and the Eurozone ministers think that they have found a solution. The propose to start a fund of €55 billion which will take ten years to build up, the money coming from Eurozone banks. They will also set up a Eurozone regulatory body which will have the power to decide what happens to failing and failed banks. Ultimately the debts of a failed bank will be underwritten by the member state to which the bank belongs to the extent required under EU law – deposits of € 100,00o will be protected.
This measure is simply window dressing. €55 billion will not make much of a difference if a Eurozone bank fails. At its peak, the UK government needed £1,162 billion (€1,400 billion) to support UK banks. Frankly the Eurozone proposal will not give any comfort to those that have to deal with Eurozone banks. As far as those who need to use the banks for borrowing or for savings all they can do for the foreseeable future is to put their fingers firmly in their ears and sing as loudly as they can.