The grass is always greener on the other side of the fence – or the English Channel. Anyone who has experience with German Landesbanks, Sparkassen, or KfW knows that they are far from perfect. In fact they are terribly corrupt, having costed German taxpayers and savers tens of billions of Euros.
David Shirreff sees the solution not in mistakenly idealising other distant institutions, but making some very simple, but robust changes in those at home.
David Shirreff is one of the founders and current eidtors of BRAVE NEW EUROPE. He is a former finance and business journalist at The Economist, author of “Break up the Banks!”, and playwright
There is a strong case for nationalising big, inefficient private banks which have proved, and continue to be, a drain on public resources. RBS, Britain’s biggest retail bank, which was rescued by the state in October 2008, has failed to make a profit any year since, despite huge support. The support has been explicit, in terms of fresh capital and cheap finance, but also implicit through the bank’s status as “too big to fail” and its coverage by state-guaranteed deposit insurance.
Yet RBS, like many other banks which were rescued in the 2008 crisis, still runs itself as a private fief. It operates not so much for the benefit of its shareholders – of which the state is the biggest with 71% – but for the benefit of its employees, particularly those who enjoy annual bonuses as if the bank had actually made a profit that year and it had been “all their own work”. In fact, cumulative pre-tax losses at the bank since 2009 have been over £30 billion.
Only this week RBS chief executive Ross McEwan called publicly for an end to criticism of the way it had done business in the past, squeezing small troubled companies into receivership by foreclosing on loans. “I’m tired of all this talk constantly badmouthing RBS”, said Mr McEwan, without offering any balancing apology for the bank’s appalling past culture. It is an open question whether that culture is really much better now, since bonuses continue to be shelled out while the bank as a whole is still under-performing.
The case for nationalising a bank such as RBS is strong. UK Financial Investments, which manages the state’s majority shareholding in RBS, has behaved more like an indulgent private shareholder than a stakeholder on the public’s behalf. Not a good business model.
A better model for universal and retail banking in the UK, said Owen Jones in The Guardian recently, would be the cluster of public-sector savings banks and wholesale banks in Germany, known respectively as Sparkassen and Landesbanken. The Sparkassen are designed to operate at a community level, to provide fairly priced banking services to local clients and small businesses. The Landesbanken were originally designed to provide the Sparkassen with wholesale finance, and to bankroll bigger projects at provincial level.
The model is good in theory. But in practice there is a long and sad history of mismanagement, fraud and political manipulation among those very state-sponsored banks. These banks are dangerously close to the communal and provincial political structure, and their managers have often been appointed for their political rather than their business qualifications.
The trouble starts when these banks give credits according to political instead of business or development criteria. Some Sparkassen have strayed far from their brief. The Sparkasse in Torgau-Oschatz, a small town in what was once East Germany, for example speculated heavily in foreign exchange and had to be bailed out in 2004. The history of the Landesbanken is littered with ventures beyond their areas of expertise: Westdeutsche Landesbank threw itself into disastrous wholesale lending in Hong Kong, and later nearly collapsed after a gamble on shares of Porsche AG. Bayerische Landesbank lost billions on banking ventures in Austria and Central Europe. Bankgesellschaft Berlin ruined itself in the property bubble that followed the fall of the Berlin Wall. Most of such disasters were due to hubris among top management, who thought they were as smart as their private-sector counterparts (the difference being that the state banks had an advantageous access to credit due to guarantees by the German government). Actually their private-sector counterparts were not so smart either. But that is another story.
The truth is, all banks are prone to mismanagement. Even the mutual, co-operative model, which is designed to benefit its members first and foremost, has suffered its share of management incompetence or worse. Britain’s Co-operative Bank ran into a crisis in 2013 largely due to its purchase of a poorly performing building society. A £3.5 billion hole in its balance sheet, and a scandal involving its chairman, forced the bank into the hands of hedge fund investors. Although it is still called Co-operative Bank, the Co-operative Group, which once owned it, no longer has a stake.
That tragedy does not disqualify the entire sector of mutually-owned banks. In the last financial crisis it was the British building societies which had been demutualised which proved the most accident-prone, such as Bradford & Bingley and Alliance & Leicester. By contrast, groups which had remained mutual, such as Nationwide and Yorkshire Building Society, weathered the storm and even acted as a safe haven for customers fleeing smaller and demutualised societies.
Co-operative banking has flourished in continental Europe. It is only at the wholesale-banking or investment-banking level that banks such as DG Bank in Germany and Raiffeisen Zentralbank have been hit by scandal, usually as a result of greedy management with delusions of grandeur.
Root and branch reform
Radical reform of the banking sector, so urgently needed, was an opportunity missed after the financial crisis. Now it is almost too late. Cash-strapped governments, still hostage to quantitative easing programmes which are pumping money into the financial sector, are not in a strong position when it comes to forcing banks to change their structure and culture.
Yet that is what should happen if banks are to serve the national economy better. Governments should seize on the fact that banks are privileged, subsidised institutions which should not be run as private fiefs. Apart from contemplating nationalisation, or mutualisation, they should radically change the reward structure so that the bonus culture, which is the curse of modern banking, is severely curtailed or exorcised completely. That would include the institutions which enjoy cheap central-bank financing, ie, all regulated banks whether they be publicly or privately owned. I am convinced that is the only way to switch the motivation of bankers away from feeding their own egos and pocket-books and back to serving customers.
It is a radical solution, and one which politicians of all stripes will shy away from. There are too many fears about alienating shareholders and driving business offshore. National regulators would say that it requires the co-operation of other major financial regulators around the world before such a change can be affected. That would be nice. But even without that co-operation, Britain – where the bonus culture has wrought the most damage – would surely benefit from setting an example and going it alone.
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