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The new politics of banking

Updated Wednesday 8th May 2013

From ‘light touch’ to ‘durable’: we look at the new politics of banking

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Since the banking crisis in 2007, the relationship between the banking and finance sector and the political system has been put under immense strain, and a relationship characterised by mild disinterest has changed to one of intense scrutiny. 

In many ways for the political class, the finance sector in the UK was an area that required little direct intervention beyond the light touch regulation that characterised the Thatcher Government’s 1986 Financial Services Act and the ‘Big Bang’ of deregulated financial services that followed it.

The City and the activities that went with it and the wider financial services industry were deemed to be trustworthy enough to govern themselves. Self-government was at the heart of the regulatory framework that was put in place; the Financial Services Authority, responsible since 2001 for oversight of the industry had a governing body made up of senior staff from major banks and related institutions including Sir James Crosby, the discredited chief executive of HBOS, who was the FSA’S deputy chair from 2004 until his resignation in 2009.

The trade body of the financial services industry, the British Banking Association, had responsibility for running the inter-bank lending rate, known as the LIBOR. Essentially the bankers were governing themselves.   

To quote Gordon Brown in his speech to the CBI about City regulation in 2005, there was to be “no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch.” 

Without doubt this desire on the part of politicians 'not to rock the boat’ was a consequence of the fact that the financial services industry was a good news story for successive governments, with the contribution that the financial sector made outstripping the growth of the wider UK economy in the boom years.

From 1997 to 2007, average annual growth of the UK financial services sector was 6 per cent per annum, compared to the 3 per cent average annual growth for the economy as whole. By any standards in a mature economy these are impressive figures.

In 2011, financial and insurance services contributed £125.4 billion in gross value added (GVA) to the UK economy, 9.4 per cent of the UK’s total GVA, down from 12.4 per cent in 2007. The importance of finance as a political success story could not be understated.

This point was made on a regular basis by the BBA and by industry leaders through a combination of acclamation and threat. Political action and more stringent regulation would be counterproductive, in a world where capital and more specifically the financial services industry was mobile and could move from the City if regulation increased. 

The banking crisis provides a case study into the way political institutions interacted with interest groups. An influential interest group with a track record of over performance in their specific field, the financial services sector was not in any sense perceived as a risk to be anything more than lightly legislated for.

The overall perception, the ‘availability heuristic’ towards the banking sector amongst politicians and the general public was one of trust, confidence and solidity, of experts in their field who were cautious and responsible, where failure was unlikely and where detailed scrutiny deemed unnecessary.

That has now changed. As John Mcfall, chair until 2010 of the Treasury Select Committee says, “The financial crisis was, first and foremost, a crisis of irresponsibility and poor corporate governance in the banking and financial sector. But since 2007, we have seen that problems in the financial sector quickly spread to the rest of the economy. We need to reform the financial industry with sound ethical values – to make future crises less likely, and to ensure that ordinary people do not pay the price when they happen”

The impact of the banking crisis on the rest of the economy and ultimately on the daily lives of millions of people has now made it one of the most heavily scrutinised areas of the economy and one whose reputation will, according to some bankers, “take 20 years to recover”.  

Banks are too big to be allowed to fail and a precautionary approach will now govern in what amounts to a new politics of banking. A general public appalled at the manifest influence the financial services sector had on public policy will ensure this is followed through.

A new regulatory framework means the Financial Services Authority has been dismantled, replaced with an increased role in financial overview for the Bank of England and two new bodies; the Prudential Regulation Authority and the Financial Conduct Authority, with the latter now likely to take responsibility for administering the now infamous Libor rate. 

Moreover, the role of politicians in setting and scrutinising the framework through which banking will now be conducted is established. This is one area where the intervention rather than the retreat of the state is the dominant political discourse.

 

With the Vickers Report, published in 2011 and the ongoing Parliamentary Commission on Banking Standards, banking will never be the same again.    

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