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The central fraud in banking

18 July 2014

escher_stairToday’s announcement by the Competition and Markets Authority might give you the impression that the authorities will do something about the deep-seated problems underlying the banking industry. But if you read the consultation document, you will find that the focus is confined to personal current accounts and banking services to small businesses. The word “deposit” occurs only three times in the 56 page document, all trivially. Whether your cheque clears in two days or two hours is frankly incidental to the central fraud in banking which (although it will be familiar by now to attentive readers of this blog) has evaded all scrutiny by the committees of Vickers, Tyrie et al.

The point is simple. What is the right price at which to make a subordinated loan with inadequate financial information to a business with a history of regulatory breaches and criminality, with astronomical leverage and profits that are mainly diverted to the employees? The answer is certainly not the 1% we are offered on bank deposits, or even less on current accounts. Yet we accept these rates not because of the financial services compensation scheme (which covers only a small part of the deposits banks raise from retail and corporate customers) but because we all believe that the Government will step in when they go bust. If banks had to pay the right price for those deposits or for the guarantee (or were forced to reduce leverage and stop the interbank pledging of assets that effectively subordinates your deposit) they would collapse.

The underlying real business of banking simply can’t support the overheads the industry has created without fully exploiting Government’s inability to confront this basic structural flaw in the business model of the industry which is central to the growth plans of both parties. Like an Escher staircase we know it can’t be right, but banks have succeeded in getting politicians, regulators and journalists to look only at part of it at once. The CMA will now don blinkers to do their bit to lull the public into a false sense of security.

Update, 19 July

Here is my submission to the CMA.

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