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Saturday, 22 January 2011

Shuffling The Deckchairs On HMS Status Quo

I've kept a beady eye on the 'progress' of the Commission on Banking, while holding out little hope that it will result in more than a shuffle of the proverbial deckchairs, rather than any wider solution to our general funding woes.

UK banking, as we know it, would be finished without ongoing taxpayer support of at least £512bn, according to the latest National Audit Office report. And that's assuming the economic headwind doesn't get any stronger.

But this figure doesn't include the subsidy banks get to help gather deposits cheaply, especially in the form of the Individual Savings Account tax-free savings programme. Banks are accused of abusing this privilege by offering a mere 0.41% average interest rate on the £158bn they attract with higher teaser rates. Of course, you can add to that practice the many £millions in fines incurred to date for such things as mishandling customer complaints, reporting failures, lapses in anti-money laundering controls and poor investment advice (keep up with the latest fines here).

So, if it weren't for the uncertainty about the extent to which the government will continue to bend the theory of evolution in their favour, the only way for us to really make money out of UK banks would be to bet against them.

Instead, the taxpayer safety net allows the Commission the luxury of merely wondering whether good old British banking might be delivered more safely (if still more expensively) via independently funded, ring-fenced subsidiaries.

What difference could this possibly make?

Testament to this bizarre preoccupation with maintaining status quo is the government's determination to ignore alternative models. For instance, the government has just meekly referred to Zopa, the UK's own world-first in person-to-person finance, as a form of "giving" (see page 15). That's weird, because with absolutely no government assistance Zopa has so far enabled over £100 million in person-to-person loans, representing 1% of the UK personal loans market. Lenders are seeing annual returns of 7.9% and a default rate of under 1%, while delivering market leading rates for creditworthy borrowers. Banks aren't offering anything like this service, even with the added government subsidy of tax-free ISA status. Imagine how much of the personal loan market would shift to the Zopa platform if people's lending returns were also tax-free? FundingCircle has already launched a similar model for small business funding. Could the greater liquidity enable mortgage funding in the same way? Such horizontal funding processes also offer a more transparent, low cost and efficient solution than the vertical intermediation model that operates in the 'shadow banking system'.

It's one thing to avert overnight systemic failure, but quite another to prop up exploitative, inefficient business models over the longer term in preference to more efficient alternatives. We should expect a more holistic approach to the UK's financing woes than the Commission on Banking is attempting to provide.
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