We need to shake up consumer banking
YESTERDAY was the 80th anniversary of the Great Crash of 1929. Like the present crisis, which has fortunately turned out to be much less severe, the bubble of the 1920s was caused primarily by errors in monetary policy and a misunderstanding of the way the economy works. There was too much cheap money sloshing around the system, which bid up the price of assets to unsustainable levels.
That is why I’m nervous about the cheers that have surrounded the decision to allow Northern Rock to start lending billions of pounds into the mortgage market again.
Of course, it is important that we get more competition in the banking market, which has become horribly concentrated as a result of the financial collapse. And it is also good that the reformed, broken-up Rock is returning to some semblance of normality and being allowed to lend and collect more deposits. My problem is the ridiculous obsession we have in this country with returning to bubble-era levels of lending, an absurd goal which many seem to believe the news on the Rock will help to bring another step closer.
The truth is that we need to see two changes to the consumer banking sector. Our economy will only ever be sustainable again if we can adjust to permanently lower levels of consumer debt as a share of GDP. So consumers need to use spare cash to pay off credit card loans and mortgages; this deleveraging process has much further to go and should not be undermined by the authorities. The second change is that new firms need to enter the market to provide greater choice for consumers and hopefully to trigger serious changes to how the industry operates.
It would be great if National Australia Bank – which already operates Clydesdale in the UK and would therefore become a strongish player – were to buy the good parts of the Rock. And over the next 10 years, the most powerful force to keep the big banks on their toes will not be European or UK regulators – it will be the wholesale entry of supermarkets into many basic banking functions. It is unforgivable that most banks still only open 9-5, Monday to Friday, albeit with some token weekend availability. Of course, there is internet banking – but branches still matter. No other private industry has got away with this sort of archaic offering. I can’t wait for proper opening hours, seven days a week, at the finance counter of my local Tesco hypermarket.
I am no bank-basher, as readers of this column may have gathered. Banks have behaved more rationally over the past year than in the recession of the early 1990s. At the time, they repossessed properties or called in loans at the first sign of trouble, a counter-productive policy which forced them to report massive write-downs. This time around, they have realised that it is in their interest to be more flexible, not least because it prevents them from booking even larger losses. Interest rates have surged, of course, but that is partly due to much higher capital requirements and also to pay for the vast defaults on unsecured loans.
But all of the High Street banks still let themselves down every single day with the quality of their customer service. That must change; they must also make sure that their existing customers feel that they are valued as new ones, unlike in recent years. And last but not least, the industry needs to accept that consumer credit growth is unlikely to grow any faster than nominal GDP in the years ahead. It will be tough but the only way forward.
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