Services To Banking

20/03/2015 at 4:41 pm

This week’s Budget was, of course, highly political. The Chancellor’s £250,000 reduction in the lifetime allowance for private pensions deprived his Labour opponents of a funding source nominated for one of their policies; his single announcement on inheritance tax was nothing more than an opportunity to poke fun at the Leader of the Opposition for his tax avoidance twenty years previously; and he devoted much of his speech to refuting high-profile opposition criticism of the government’s record and intentions.

There are, however, areas of economic policy over which the Labour and Conservative parties are in total agreement. They compete to paint themselves as the true pursuers of tax avoidance, especially by maleficent multinationals. And they unite in their commitment to bashing Britain’s banks.

As is well known, a coterie of lavishly-rewarded financiers were single-handedly responsible for the credit crunch and ensuing Great Recession (forcing those Northern Rock borrowers to take out 125% mortgages, for example, and then compelling investors to purchase these assets at hideously mispriced levels from the originating banks). So the special tax on bank assets which has been running since 2010 is a great moral enterprise as well as a revenue generator, and we should all applaud the Chancellor for increasing it to bring in another £900m per year.

On the other hand, some of the Budget’s fiscal arithmetic depends on raising capital from sales of the government’s stake in Lloyds Banking Group plc. Indeed, quite a lot of the UK’s employment and economic output arises from the financial services industry. It may be some time before the next knighthood is bestowed for services to banking, but despite its present position in public esteem banking does perform a service to the country.

Unfortunately the British government’s record in rescuing financial institutions compares poorly to that of the USA, for example, where the subprime mortgage market kicked things off back in 2007. In another piece of news earlier this month we saw Mr Osborne raise £500m from selling the latest slice of the UK’s stake in Lloyds. The total raised from such sales to date now amounts to £8.5bn, which may seem impressive. But the size of the Lloyds bailout was £20bn. The government still owns 23% of the bank, a stake worth about £13.2bn at the time of writing. Over the Atlantic, the US Treasury had got out of its $45bn bailout of Citigroup entirely by mid-2011, making a $13bn profit on the original amount and further gains on charging for a default protection facility which was never used. Similarly, while the US government still owns mortgage securitization behemoths Fannie Mae and Freddie Mac, which received a combined bailout of over $187bn in 2008 and still face problems, it has received back more than this amount in dividends from both companies. The UK government still owns 62% of RBS, has not sold any shares and has not received a penny back from its £46bn bailout.

RBS, of course, was not assisted by its various financial and managerial idiosyncrasies in the years preceding the crisis. But policies such as the bank levy have not helped. The great purchase protection insurance compensation bonanza – which has seen RBS alone pay out billions over the last four years – has not helped either. And the crisis-period support afforded by the Bank of England lacked the breadth and scale of the several emergency lending programmes of the Federal Reserve and slew of measures taken by the US Treasury under its Troubled Asset Relief Program.

Predictably, all this has reflected poorly on the very balance sheets whose tax rate the Chancellor has just raised. While the Big Four US banks have seen their provisions for losses on loans fall steadily since mid-2010 to about a third of their peak level, combined loss reserves at Barclays, Lloyds and RBS only started to fall a year later and are still at almost 60% of their peak.

The share of the UK’s economic activity accounted for by financial services remains relatively high, at 8%. But it has been falling slightly over the past five years. It is unfortunate, to say the least, that public policy has contributed to this effect.

There is of course an election looming. But it looks as though whatever government takes charge the banking sector can expect more of the same. That is bad for the UK economy. And even in the aftermath of the crash bank shares still make up 12.6% of the value of the FTSE 100. The American approach certainly had its flaws but it has indisputably produced a better outcome and outlook for the financial sector and for US taxpayers than our own.

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