Two weeks ago the Deep End featured John Lancaster on the PPI mis-selling scandal. In a new article for the London Review of Books, he adds a twist to the tale:
Things have moved on since, as demonstrated by the latest GDP figures. Still it is extraordinary that before the start of this recovery (if that is what it proves to be), PPI fines were a significant source of growth – “a boost of 0.2 per cent to GDP” according to one estimate. Lancaster notes the irony:
This Government, unlike its predecessor, has not been slow in reforming our deeply dysfunctional banks; but, while acknowledging what has been done so far, Lancaster argues that the culture of banking is so rotten that the very fundamentals of the system have to change:
The argument here is that banks are just too big and complicated to allow top-down management – however saintly – ensure good practice. Something more pervasive is therefore required:
Drawing upon the work of Anat Admati and Martin Hellwegg, Lancaster’s answer is that the banks should carry more equity – meaning that their assets should exceed their liabilities by a greater margin than is currently the case. This would have an obvious cushioning effect against insolvency, but even more importantly it would bring about cultural change:
Would higher equity requirements mean less lending – for instance, to small businesses? Lancaster believes not, because loans to customers are on the asset side of a bank’s balance sheet. However, the banks still need to find the money they lend out. So, if they can’t borrow as much (loans to banks being on the liability side) then they need to attract more equity investment and/or reduce their running costs. The most obvious way of achieving the latter is to cut salaries and bonuses.
No wonder the bankers aren’t so keen.