Royal Bank of Scandal Reaches New Low

The Tomlinson Report into the practices at the Royal Bank of Scotland, compiled under instruction from Vince Cable's Business Department, has been passed to the Financial Conduct Authority we read this morning. It will apparently demonstrate that the bank that we saved and which we own, had gone beyond being parasitical on the businesses of this country to actively working to destroy them and profit from their demise. It has long been clear that the financial sector in this country is sucking the lifeblood out of our economy, but the fraudulent nature of RBS's business activity takes us to a new level of revulsion.

Since the crisis of 2008 banks have found it more difficult to generate huge profits that were possible at that time. They have looked for ever more ingenious ways to exploit their customers which has given rise to a continuing tale of scandalous mis-selling, first selling insurance against potential redundancy to employees who did not need it, then selling financial products known as swaps to small businesses who had no need for them or understanding of them.

But the latest scandal to be revealed in the Tomlinson report is another step down the ladder into the slough of public opprobrium. It relates to one part of the bank known as the Global Restructuring Group (GRG). RBS's customers who got into difficulties paying back their loans were sent to this part of the bank apparently to receive help with turning their businesses around. Instead they were deliberately charged high fees so that they would become bankrupt, enabling the bank which had inside information to be the first on the scene to pick up their assets cheap. This is a shocking allegation that will now be investigated by the Financial Conduct Authority that has received a detailed report on the activity from the Business Innovation and Skills Department.

It has been clear for years that the banking sector in the UK is pernicious and not serving the real economy, but to find that it is actively working to destroy the small businesses that we need for our economy to thrive is another shock. It undermines yet again the suggestion that what we need is a change of culture in banking. What we actually need is significant structural reform and a much stronger role to be played by politicians in controlling what is possible in this most important sector in a capitalist economy.

Here is a simple idea which I have suggested before but which seems particularly relevant today: the Royal Bank of Scotland should be broken up and turned into a system of local community banks on the model of the German banking system which has done so much to support their Mittelstand - the layer of small and medium-sized enterprises that is the engine of the German economy. Each local bank could include local business people and others with an understanding of local economic needs on its board. It could still lend at interest but do so in a way that served its local economy and built its resilience rather than actively destroying businesses.

That a bank would work to undermine its customers for its own advantage is shocking and probably fraudulent, but that this activity would be undertaken by a bank that owes its existence to public support and is 80% owned by the public is, quite frankly, unbelievable. Of all the politicians who have been in a position to act on the disasters of the British banking system, Vince Cable has been the most disappointing. He clearly has the knowledge about how to do the right thing so we can only assume that he does not have the power within the coalition. Let us hope that this latest and most shocking scandal gives him the authority to take the action our small businesses so desperately need.

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Financial Ignorance a Sinn

The next step on the rocky road of the Eurozone crisis is the financial union, proposed by Barroso last weekend. The proposal for a banking union is suggested as a way of saving the euro and the European financial system. If we will not take this step then the finance houses will not trust us and will destroy us. But just a minute. If the financiers are so all powerful how come they needed us to bail them out? This is one basic logical flaw. Another is why a system that failed because it was too consolidated and too centralised is to be saved by becoming entirely centralised, with just one regulator overseeing all of Europe's 6000 banks.

The answer is that German money is needed to make the banking union work, and the German monetary authorities will not agree to this unless they have control of what those banks are able to do. A proposal so draconian and disempowering will never be acceptable to banks in the countries of the European periphery that still have the economic strength to resist, which will make withdrawal from the EU much more likely, and especially in the UK. The proposal is the opposite of a real solution to the crisis, which would rely on more diversity, the breaking up of the larger banks into smaller banks more responsive to their local communities, and the creation of many currencies rather than the monopoly of the Euro.

The public debate about the Eurozone crisis has been lamentably shallow. A recent exception was an interview with Hans-Werner Sinn on Hardtalk. He was responding to George Soros's recent call that Germany should either 'lead or leave' the euro, which Sinn portrayed as a veiled demand for Germany to pay more. As a financier it is unsurprising that Soros should call for the German government to create more money that, as previously identified on a guest post on this blog, will mostly end up in the hands of financiers.

The most interesting parts of the interview have been cut from this video, although Sinn does identify how the 'policy of making private debt contracts public debt contracts is dangerous to Europe'. By increasing tensions between national governments, as the northern countries become the creditors of the southern European countries. This will raise tensions between the nations of Europe, the very tensions that the EU was set up to diminish. The whole interview, available as a podcast, is well worth listening to, as a heterodox view of the Eurozone crisis that also exposes the ignorance and lack of understanding of BBC staff.
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Banking Mad

Holmes and Watson pursue an errant banker

So the Vickers Commission has reported and made its bland recommendations. In view of the apocalyptic views expressed about the behaviour of the banking sector by Bank of England Governer Mervyn King earlier this year the proposals seem mild indeed. More telling is the eight years that the banks have been given to wheedle, wangle, and reorganise their business to avoid the legislative changes that are proposed having any potential to curb their room for manoeuvre.

Given the devastating consequences of the banks' nefarious practices over the past 30 years the only conceivable response is one of rage. But while rage seems to me quite appropriate, and proposals along the lines of a national audit committee to repudiate much of the debt that is presently destroying our society may be a way of channelling this rage, there is also a need to engage in the debate about the future shape of the banking sector in the UK.

My Green House colleague Thomas Lines has done this with admirable grace and restraint (not to mention some wit) in his recent report The Dog that Didn't Bark. As its subtitle indicates it provides useful historical background to the present limited debate by analysing 'when banking crises did not occur and what we can learn from that'.

Lines reaches some rather unexpected conclusions. If I may risk mixing his extended metaphor (over which he himself is quite scrupulous) he finds that the focus on competition between banks is a red herring. During the nearly three decades following the end of the Second World War when there were no significant banking crises, British banks were not very competitive and operated more like an informal cartel. This was elitist and resulted in the rationing of credit, but it did achieve stable banking.

Interbank lending was also rare during this period. It was the interconnectedness of banks, as much as their size, Lines argues, that left them so vulnerable in the period leading up to the 2008 crash. Its origin lay in the laziness of bankers, who sought easy profits without effort:

'An uncharitable way to describe inter-bank lending would be as lazy banking, since the wholesale markets make it possible to build up a bank's assets without the hard work of developing a customer deposit base.'

The report recommends that banks return to their function within a stable economy: that of unglamorous utility banking, providing a haven for savings and a source of reasonably priced loans. A key recommendation is one that finds a comfortable home on a blog on the theme of Gaian Economics:

'Ecological theory suggests that a system will be most resilient when it is divided into compartments to protect it from external dangers. The banking system should be set up in this modular way too, without financial interconnectedness between banks. For this reason we proposed severe restrictions on interbank lending and derivatives trading, and a reintroduction of exchange controls designed, among other things, to sharply reduce international flows of money between banks.'
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