Last week, Chris Skinner spoke at Gresham College, asking “Are Bankers Good or Bad for Society?”. (He was talking on the eve of the eightieth anniversary of the Wall Street crash…) Then today there is the news that the Government are considering splitting up RBS, Lloyds Banking Group and Northern Rock by selling off some old high street banking brands – Williams & Glyn from RBS, and TSB and Cheltenham & Gloucester from Lloyds. If not more bankers – it would seem this is more a sale-and-rebranding exercise – at least more banks. So we’d better get used to it.
Chris’ talk was interesting, though he seemed to conflate bankers, banks and money. His answer to his rhetorical question was generally “yes”, but within a moral, societal context. Regulation and competition have a role here, introducing a moral dimension – though Chris was sceptical of the effect of regulation (he thought regulators would always be trying to catch up with bankers, rather than leading the way).
Banks – and hence bankers – do perform some very useful roles for society, such as:
- facilitating financial planning and management
- enabling individuals and organisations to borrow and lend
- spread the risk of lendinging
- allocating capital within the economy
- thereby enabling trade and projects that would otherwise not be undertaken
- thereby promoting innovation
They do others things too, of course; at the moment they seem to provide society at large – and media and politicians in particular – with hate figures to mock and pillory. Of course, bankers are just a reflection of society: there are a few selfish, greedy bankers out there just as there as selfish, greedy people in all professions. It is just that the riches available to those working in banks can seem so wildly excessive and the people receiving can seem remote from the society they serve.
Over the past decade or so, they have also completely misjudged the risk of the business they were in. Chris quoted David Vinar of Goldman Sachs from 2007:
We are seeing things that were 25-standard deviation events, several days in a row
As Chris explained, a 25-standard deviation event should be expected once every 100,000 years – that is, they are pretty rare! – not several times in a week. That is a pretty big error to make, and resulted in severely flawed, highly complex business models based around derivatives – and the economic crisis we find ourselves in.
Chris then went on to talk about the future of banking and the role of competition to make bankers behave well. He could have been talking about the suggested split up of RBS, Lloyds and Northern Rock. I doubt this will introduce any more bank branches – we won’t have greater access to banks – rather, existing branches of these institutions will be relabelled with the revived banks’ brands. This probably won’t be too hard – I remember meeting an RBS bank manager in a branch in north west England that proudly proclaimed that it was a former “Willy Glyns” branch rather than RBS. It might be harder for customers – will customers be given a choice which bank they will go with? Customers are famously more likely to get divorced than change their banks, so will they really benefit from being moved wholescale from one bank to another, new one?
On the other hand, increasing the choice of high street (retail) banks for customers should provide them with more choice, and competition could lead to innovation of products and reduced costs.
Then again, it will lead to the loss of the economies of scale that lead to the banking mergers in the first place – so some costs may increase instead.
I guess we’ll just have to wait to find out!
Edit: John’s comment reminded me that Chris was concerned by the increase in moral hazard resulting from the nationalisation of banks. Mervyn King recently identified this as a critical issue. If banks believe that the Government will step in if things go wrong, they essentially become a one way bet: heads they win, tails the taxpayers lose.