Thursday, 14 April 2011

Of Banks And Leaky Buckets

I saw that Philip Stephens of the FT reckons the Independent Commission on Banking has let the banks off the hook.

I'm not so sure.

Once you accept the principle that retail banks must be 'ring-fenced' from their casino counterparts, it's a slippery slope. Firstly, it's questionable whether ring-fencing will work without formal legal separation. Secondly, ring-fencing won't mean much without a prohibition on the retail bank either directly or indirectly financing any of the casino operations - including providing security for casino activities. Surely the two businesses will have to behave truly independently. Mere firewalls will not prevent a repeat of the banking crisis.

But forget all this talk of fences and firewalls. Today's banking model is just a very leaky bucket.

Banks rely on you not having the first clue where your savings end up, or even caring how much interest is earned or who by (proof of that, if you needed it, is in any Barclays' TV ad with a Stephen Merchant voice-over). Your savings and the interest can leak into anything from a credit card balance to a synthetic CDO tracking shonky mortgages in Florida. Similarly, you sign up for loans and insurance, and your money runs out some more holes in the form of fees, charges and commissions or a giant fine to the FSA. For every hole that gets plugged - whether it be restricting early repayment charges or forcing better disclosure in consumer credit, stopping the Great PPI Robbery or requiring customers to be treated fairly - other holes appear in the form of additional current account charges and so on. Now they whinge about having to sell branches to create competition, and the costs of restructuring to prevent more holes being made by toxic investments.

At what point do we throw away the bucket?

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