Institutional Reform

Getting banking reform right is a moral issue - and Labour must seize this opportunity to act

News about large bank bonuses is shocking and it demonstrates that the banking system still needs reform. A progressive party such as Labour should be up to the task. The banking system has been near collapse, both a year ago after Lehman Brothers went bankrupt, and at the beginning of the year when a further bank bailout was required. Central banks have slashed interest rates and governments have injected capital into banks, taking stakes and insuring their toxic assets. Quantitative Easing has seen money created electronically and pumped into the banking system. It is difficult to understand why individuals are receiving such large bonuses: with so much easy money in the system and backed by government guarantees (explicit or implicit) it will be hard for the average bank trader not to make a great deal of money for his or her bank.

Banks are institutionally incapable of reforming themselves. Yet if they are not reformed, we risk another disaster with millions more out of work and worse consequences for the very poor around the world. This is why the Christian Socialist Movement is supporting an Early Day Motion on bank reform (number 2008, the year it all went wrong for banks). Backed by Treasury Committee chair John McFall MP, it calls for banks to be split between traditional ‘retail’ banks and high risk investment banks. Getting this right is actually a moral issue, given the impact of the financial crisis. Bank of England Governor Mervyn King, in a speech yesterday, argued for the same reform. Labour, surely more progressive than the Bank, should seize the opportunity and act now while we can.

When investment bank Lehman Brothers went down in September 2008 it became clear that it was entwined with the global financial system. If only a few investment banks had collapsed and their shareholders lost the money they risked, that would have been manageable. But the esoteric securities, linked to the US subprime mortgage market, in which Lehmans traded, were also owned by more traditional retail banks. This is a key reason why the entire financial system, including people’s savings and ability to pay bills, were threatened.

Strong regulation is essential of course and there is still hope that governments will overcome bank sector lobbying and enforce a much stricter regime. Regulation is not enough however. As Mervyn King said, ‘The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the ‘too important to fail’ question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.’ Institutional reform is required. Government should continue to guarantee retail banking but not more speculative banking activities, which would be carried out by separate investment banks.

The financial crisis has seen the Treasury make the essential bold moves to save us from economic depression. However when the pressure is off it can default to a pre-crisis mindset, supported by bank sector lobbying. Labour needs to break through such ‘forces of conservatism’ and make the reforms that are essential for the common good and the national interest. Separating banks is one such reform. That is why we should urge Labour MPs to support Early Day Motion number 2008.

First published on the Progress website on 21 October 2009.