The speech by the Bank of England’s Andy Haldane, reported on page 32 of this issue, took as its premise that there has been a breakdown in trust in the financial system. While Haldane was careful not to join the attack by the FSA’s Lord Turner on “socially useless” banking, nonetheless he drew a distinction between private and socially beneficial banking. He also raised the question of the size of banks, touched on the benefits of unbundling services, and questioned the need for standardisation in banking services (the "generic supermarket").
The ACT’s view is that most companies do not need super-large banks. Treasurers welcome a diversity of providers to access a diversity of products, ideas and expertise. Competition is important too, so market dominance is not helpful and there should be some limits on size or market share.
However, regulators should remember that the banking system exists to serve the wider business and consumer communities. A key need for society is to have effective mechanisms for maturity transformation – a principle keenly misunderstood by those criticising bank balance sheet management. The twin goods of the provision of capital to business and sound demand deposits, properly regulated, allow the economy to flourish.
We take the view that the flourishing of sound, deep and liquid financial markets in general is a very good thing for non-financial services companies and society generally. In the absence of such markets the opportunities of non-financial services companies would be much reduced and overall welfare diminished. British and European business benefits from having a vibrant financial sector on its doorstep in London. Banking industry standardisation has of course been a key feature of the EU’s recent regulation of banking services through SEPA and the Payment Services Directive, neither of which would have happened if national systems had been left to their own devices and local models.
But it is questionable whether regulators – of ratings agencies, overthe- counter derivatives or banking systems – are actually taking into account customers’ needs. More generally, there is more than suspicion that regulators and politicians are happy to make common cause against a financial industry that they do not fully understand and, worse, whose importance they do not recognise.
