PRESS RELEASE

Issued: 29th September 2009 Embargoed until: 23:00 hours Saturday 3rd October 2009

An alternative report on UK banking reform

Experts propose and the public mood supports banking reforms more radical than those proposed by the Labour government and the Conservative opposition. This report explains this gap: The key political obstacles to reform stem from the influence of the distributive coalition in and around the City of London which has co-opted the political leadership of both major parties. The distributive coalition pursues regulatory closure and narrows policy choice by constructing a narrative about the social value of finance which ignores the costs of bail out and exaggerates job creation. The report then presents a radical analysis of what went wrong in banking before the financial crisis and identifies: The problem of banking for itself as retail and wholesale banking fused into a giant transaction generating machine which benefited senior wholesale bankers in a kind of joint venture with shareholders. How the pre-2007 result was the wrong kind of credit and debt which inflated asset prices unsustainably rather than generated any increase of resources from debt could be repaid. It ends by proposing more democratic control of finance: Reverse the policy bias towards finance by engineering a smaller, safer wholesale sector and installing a new kind of retail regulator to curb selling to households. Add a vision of what a different kind of finance could and should do to address fundamental issues about how to create jobs in a low carbon economy and how to support retirement for all.

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The report is organised into six sections. The main findings are summarised below and keyed to specific pages and exhibits: The undemocratic influence of the distributive coalition is demonstrated by analysis of the Bischoff and Wigley reports on City competitiveness. Here finance reports on finance by pitching a story about the many benefits of finance: The Bischoff group collectively had 662 years of work experience and 75% of those years had been spent in City occupations or servicing City needs. (p. 24) Wigley called expert witnesses but 90% of its witnesses came from finance or consultancy with revenue links to finance. (p. 25) Earlier public inquiries into finance from the Macmillan Committee of 1931 to the Wilson Committee of 1980 had all been pluralist and open. (pp. 2627) The Citys story about the social value of finance works by exaggeration and the selective use of evidence: Tax revenues from the finance sector are offset by the costs of bank and market bailouts. On our calculations, 203 billion in taxes over five years up to 2006/7, against the costs of the UK bailout which is 289-1,183 billion according to the IMF. (pp. 32-33) The whole finance sector directly employs no more than 1 million workers (mainly in retail) and numbers employed did not increase in the boom years. Indirect employment in consultancy, accounting and law adds no more than an extra half million or so. (pp. 35-36) Retail banks control employment costs and numbers while the business model and the geographical clustering of wholesale activity concentrates rather than diffuses employment opportunities. (p. 37) Banking has become an industry that operates for itself and generates unsustainable shareholder value: Finance and insurance generated more than 30% of FTSE 100 profits n the bubble years when British banks had ROEs of 15-25%. (pp. 42-43) Through financial innovation senior wholesale bankers could increase transactions and turnover as the comp ratio gave them an average 45% of net turnover. (p. 46) Retail was about mass marketing as performance pay for disposable white collar workers on the high street provided incentives to sell to retail customers. (p. 50)

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What should be done? If banking reform is to succeed, it will only do so by building a democratic political alliance for reform which makes immediate demands that are intelligible and actionable: i. Top slice the lump of revenue now allocated to the senior wholesale workforce under the comp ratio. (p. 54) ii. De-risk the sector by simplifying wholesale and explicitly engineering shorter transaction chains. (p. 55) iii. Shrink the sector by reversing the long standing policy bias in favour of finance. (p. 55) iv. Introduce a new kind of regulator in retail, broadly advised by a retail banking committee drawing on the expertise of SMEs, Trade Unions and NGOs. (p. 56) Finally the report presents a mobilising vision of how sustainable finance could address problems about creating jobs and supporting retirement by applying credit to productive and socially worthwhile purposes: During the credit boom productive business investment accounted for just 10% of GDP from 1996-2008; whilst bank lending to productive business declined sharply from 30% of all bank lending towards 10% as bank lending to financial institutions and real estate took precedence. (p. 65)

About the authors: The report is unique because it comes from a 12 strong working group of practitioners and academics based at the ESRC funded Centre for Research in Socio Cultural Change (CRESC) at the University of Manchester. The practitioners include a venture capitalist, a manufacturing manager, a trade union officer, a governance activist and a management journalist. The academics include the CRESC based team of researchers best known for their work on Financialization. A copy of An Alternative Report on UK Banking Reform can be downloaded from the web site at www.cresc.ac.uk

Contacts: Prof Karel Williams via karel.williams@manchester.ac.uk and mobile 07775 514173; or Dr Adam Leaver via adam.leaver@mbs.ac.uk and mobile 07903 666035; or Ismail Erturk via ismail.erturk@mbs.ac.uk and mobile 07796 951788.

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