Reforming the banks--the opportunity of Brexit.

AuthorBerry, Christine
PositionPost-Brexit Analysis

Brexit offers an unexpected opportunity: to use the taxpayer's stake in RBS to begin to transform our banking sector into a locally-based, locally-focused system that works for small and medium-sized businesses in the real economy.

The campaign for Britain to leave the European Union promised to let people 'take back control'. Hardly anyone now disputes that the resonance of this sentiment was about much more than Brussels bureaucrats, or even--despite the terrifying lurch towards xenophobia we have witnessed since the referendum--immigration. In recent decades we have built an economy and a politics that has left large swathes of the country behind and millions of voters feeling powerless.

If we want to understand how this has happened and how we might begin to put it right, our banking system is not a bad place to start. After all, since the crisis of 2007-08, big banks have come to exemplify the feeling that our lives are controlled by an unaccountable elite, and that we are powerless to do much about it. But it goes deeper than that: the political decision to build an economy specialised in financial services has allowed the City of London to flourish at the direct expense of many of the communities that voted Leave.

Moreover, with the pound plummeting and signs pointing towards a 'hard Brexit', it looks increasingly likely that Brexiteers may have blown up the very economic model they claimed to be defending. Our economic settlement is in genuine flux - but what comes next could well be even worse. It is crucial that progressives seek to understand the political choices that lie ahead in the coming months and years, and begin to build the solutions, the alliances and the new economic consensus that could really give people control.

How did we get here?

There can hardly be a better illustration of who's really in control of our economy and our politics, and of how we've lost control, than the banking sector. The 'Big Bang' deregulation of the 1980s did not bring greater competition and dynamism, but the exact opposite: the UK's local banks and building societies were almost all destroyed and swallowed up by conglomerates, until we were left with a top-heavy system dominated by four shareholder-owned banks so huge they could not be allowed to fail.

This matters because banks themselves control the lifeblood of our economy: the money supply. Banks don't just take in customer deposits and lend them out, as is commonly assumed. Rather, when a bank makes a loan, it creates a corresponding new deposit--in other words, new money--out of thin air, simply by typing numbers into a computer system. (1) This means that the shape of our banking system determines where money goes--and where it doesn't.

Our banking system is now one of the most centralised and least diverse in the developed world. Shareholder-owned banks control nearly ninety per cent of the market, compared to less than half in Germany, France, and Spain. Less than five per cent of the market is controlled by regional and local banks, compared to around two-thirds in Germany, half in Spain and a third in the United States. (2) This makes us extremely vulnerable to financial crises, since we are highly dependent on a small number of very big banks that all look and act in similar ways, and are therefore likely to experience problems at the same time.

And our system is not just a monoculture: it's a monoculture of a peculiarly dangerous type. Over the last thirty years, the business models of large, global commercial banks have shifted radically, from mainly investing in the 'real economy'--for example through business lending--to mainly pumping up the price of assets in the 'financial economy'--for example through mortgage lending and lending to other banks and financial institutions. This process has been turbo-charged by securitisation: the practice of packaging loans up and selling them on, which proved so toxic during the financial crisis.

All this is no accident. The 'Big Bang' reflected a political choice to focus on the UK's 'comparative advantage' in financial services--to nurture finance as the thing we sell to the rest of the world, as a sector in its own right creating jobs and profits, rather than as a means of channelling investment into productive activities. In other words, finance was to become not the oil in the engine, but the petrol fuelling it.

But, as the Brexit vote has made painfully clear, this came at the expense of the system's core function. Highly centralised City banks could make much easier profits trading on international markets and providing high-value investment banking services than...

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