At the G8 and G20 meeting this weekend – in Muskoka and Toronto respectively – all the talk is likely to be of banks and banking once again. And not much of it complementary. No change there you might think, except that this time the talk may be converted into action – the kind of action that the banks are obviously keen to avoid.
For starters, Wee Georgie Osborne’s banking levy, announced by the youthful but nonetheless convincing chancellor at his emergency budget earlier this week. Who would have predicted a couple of years ago that one of the first actions of the first Tory chancellor in a generation would be to bring in a banking tax?
He hopes that imposing a tax of 0.05% (rising to 0.07% in 2012) will raise £2.5bn and encourage bankers to be more responsible and take fewer, or at any rate better understood, risks. Because the levy applies effectively only to banks’ perceived ‘high risk’ assets – funds provided wholesale by other banks and financial institutions – the theory is that they will focus more on nice safe sensible stuff like looking after our savings and pensions better.
What’s more – and this is important – he seems to have secured the agreement of France and Germany to introduce a similar regime, too. Which will make it that much more difficult for banks to skip off to another jurisdiction to avoid the tax. Although Asia will likely beckon for some, all the same.
None of which is likely to go down well with banks themselves. But the biggest of all the proposed shake-ups to face them is still being wrangled over across the pond in New York. Obama’s proposed package of reforms could include a different kind of levy (capped at $100bn revenue), and a $19bn restructuring charge, plus the newly agree Volcker Rule which bans banks trading with their own money and limits investment in hedge funds to 3% of banks’ core or tier one capital. Still to be decided is the question of whether swaps desks will have to be spun off into separately capitalised operations.
Pretty far-reaching stuff. But there is some good news for banks today, in the unpromising sounding form of limits to Basel III. Exciting eh? The Basel III rules will determine how much cash banks have to set aside in future in order to cope with unforeseen events – another financial crisis for example.
Banks have been lobbying hard for reductions to proposals which they claimed could cut the return on equity for a typical bank from 20% to 5%, and it seems to have worked. New lower limits will be presented to the G20 this weekend.
But tempting though it may be to enjoy the sight of bankers having their licenses to print money partially revoked, making life more difficult and more expensive for banks also makes life difficult and more expensive for everyone else. Without those risky wholesale funds, credit for individuals and businesses will be harder to come by. Making banks hold more capital against a rainy day pretty much guarantees that they will make up the drop in their returns in other ways - like charging their customers more. What is the ‘right’ level of availability for cheap debt anyway?
These are critical decisions to be made about what kind of a society we want to create, and what a healthy and sustainable attitude to financial risk is. Banker bashing may be fun, but it won’t help any of the G20 crowd reach a wiser or more beneficial conclusion.
In today's bulletin:
Banker bashing back on the menu at G8?
Sex, drugs - and pre-loaded credit cards
Editor's blog: why content creators shouldn't lose out
Never mind Oxbridge - go to Harrods
The Parent Project: What not to do when you're pregnant