The Government has recently proposed that the Bank of England should take on the primary responsibility for macro-prudential regulation in this country (see this thoughtful appraisal). Such significant shake-ups in our fundamental financial (and political) institutions do not happen frequently – they are made possible only by crisis. So we do not have repeated opportunities to get them right. We have one shot. This article is a personal ‘think-piece’, a sketch of how to try to ensure that we get this matter right.
The recent banking crisis has surely shown that banks that are ‘light-touch’ regulated will invariably end up taking ever-greater risks, in pursuit of ever-greater profits. Such endemic risk is not basis for a secure real economy. Thus I have argued previously that there is a case for the banking sector to be genuinely nationalised (i.e. not run at arms-length), on a long-term basis.
But it may not be necessary to go that far. If there is one powerful and substantial genuinely nationalised bank, permanently, a bank that ensures that lending is kept going when it needs to be for the social good, ensures that all citizens have access to banking services (i.e. banking itself ought to be considered a public service, and ensures that the interest rate for borrowers is kept long-term low (See Ann Pettifor here and here for why), then that should be enough. For such a bank would provide a ‘lead’ that commercial banks would be unable to avoid following.
This could be a modern version of the Girobank, such as the ‘PostBank’ that has been widely discussed. Or it could simply be (for example) RBS, kept permanently in Government hands.
Should we then allow the rest of the financial ‘market’ to be purely commercial? An oblique response: it is striking that, in the credit crunch banking crisis, the ethical/mutual sector has been virtually free from harm. The Credit Unions, the mutuals, the ethical banks: in virtually every case, they have sailed through the crisis (the main exception being the Dunfermline). By contrast, virtually every building society turned into a bank in the disastrous Major era of financial short-sightedness has collapsed and had to be taken over by the state. This suggests the following: that a healthy financial sector will be a financial sector of great variety, with a large proportion of it being not-for-profit / for the mutual benefit of members.
My vision then of a healthy financial sector is of a large and powerful state-owned bank ‘setting the tone’ for the so-called ‘financial market’; of the remutualisation of the former building societies; and of a flourishing mosaic of local and mutual banks (including some designed specifically for the benefit of small businesses, as in this example), co-ops, ethical banks, and credit unions, across the country. At the heart of all this, to ensure its enduring stability, should stand a more powerful Bank of England – but not, as the Tories propose, an undemocratic behemoth, a mere strengthened artefact in effect of the City that has so fully failed us. Rather, a democratically-controlled Bank of England: a Bank of and for the people. A powerful publicly-controlled and socially-responsible institution that indeed might appositely be renamed: ‘The Bank of Britain’.
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