Creating a more diverse finance system
We had a fascinating and inspiring session on Friday 1st February, bringing together thirty or so experts with a an important part to play in creating a diverse and sustainable finance system, with more competition, innovation and transparency than the one we have now.
Those taking part included financial innovators, policymakers, advocates and researchers. The workshop was held under Chatham House rules, so none of the outputs and ideas are attributable to any individual.
The event culminated in the creation by the whole workshop of a timeline for potential actions, for the finance sector and policymakers, to take in order to maximise the potential for new entrants and innovations to deliver a more socially useful banking system.
This timeline was presented to Andy Haldane from the Bank of England, who had kicked off the meeting with a set of key questions that he was facing around this problem. Further initial input was offered by Diane Coyle, whose blog on the event can be read here, and Professor Richard Werner.
The ideas from the workshop have been collated and submitted to the Parliamentary Commission on Banking Standards (click the link to download the submission). We have made the timeline into a presentation which you can view and share.
Some clear themes emerged which I can set out here:
The first is the consensus that the UK banking sector, with its monoculture of large, global banks dominating the domestic market, is unhealthy for the economy and consumers as well as being inherently unstable.
The virtual non-existence of new banking entrants (or exits), is a clear signal of a failed market. The Vickers Commission did not address competition issues adequately and current proposals for banking reform from the government, outlined by George Osborne yesterday, have also failed to grasp this nettle.
Barriers to new entrants, be they traditional banks or new innovations such as peer-to-peer lending, are very large in themselves, but when set against the market advantages of the incumbent banks which receive implicit state subsidies for being too big to fail, the barriers become virtually insuperable.
The lesson for policymakers is that these twin problems must be tackled together and with equal vigour. There is evidence that regulators are now putting more resources towards helping new entrants, but some argued that a more explicit legal duty to increase and maintain diversity in the financial system is required. Maybe even a target for a number of new entrants, or percentage of market share.
Some suggested adoption of proposals in the US for setting a cap on bank market share to 10% of deposits, and others to place considerably higher capital requirements on banks as a proportion of the size of their balance sheet. Greater transparency could also be required of the ‘too big to fail’ banks, both as a way of improving regulatory control, but also to rebuild public trust in financial services.
A level playing field on tax incentives for saving products was mentioned by many. Why do we get a tax free allowance to place money in a conventional cash savings account, which could be underpinning risky trading activities in a bank investment arm, when transparently lending your savings to a small business through a peer to peer platform does not?
Other big themes coming through were trust and technology. The need to rebuild public trust in the concept of financial services was acknowledged as vital, and long term efforts to increase financial education and demystify money were part of this.
Also many commented that the IT revolution has not swept through the finance sector as it has in other parts of the economy, certainly not to the benefit of consumer at least. This was seen as a real opportunity for the creation of a fairer finance system, but only if the policy barriers discussed above could be effectively removed.
Lawyer, author and Finance Lab regular, Simon Deane-Johns has also blogged, read his thoughts here.