Is the banking sector preventing recovery?

Figures from the ONS show the sector is responsible for a third of the UK's economic decline. Which arguably makes it a bad time to introduce stringent new measures...

by Emma Haslett
Last Updated: 31 Oct 2011
Much has been made of the retail sector’s troubles over the past few months, but banking is apparently also having a devastating effect on UK growth. According to figures from the Office for National Statistics, the economy is currently 2.8% smaller than it was in September 2008, just before the collapse of Lehman Brothers sparked a global downturn. But what’s interesting is that the fall in banking activity is responsible for one percentage point of that contraction: in other words, 35% of Britain’s economic decline can be attributed to the banking sector. Considering it’s only responsible for 5.1% of national output, some might argue that’s altogether too much.

So far this year, the banking industry has shrunk by 2.6%, after a 5.1% contraction in 2010, and another of 7% in 2009 (at least the trend is upwards, eh?). And in the last quarter, the sector shrank by a not inconsiderable 1.1% – which, according to the ONS, pulled the economy as a whole down by 0.05%. That’s rather a lot: in fact, if you take the banking sector out of the equation entirely, economic growth has been above its average growth rate for the last two decades. And that’s not even including the knock-on effects of reduced lending.

So chances are banking won’t be contributing quite as much to the economy as it has in the past. That’s reflected in the thousands of job cuts the industry made last month: while HSBC cut 25,000 jobs, Lloyds is planning to shed 15,000 jobs, UBS is cutting 35,000 jobs and Barclays is shedding 3,000 jobs. In fact, according to the ONS, the number of jobs in the industry has dropped by 50,000 since September 2008. And, although the Government insists it’s pinned its hopes of recovery on manufacturing, that’s still bad news.

With all that in mind, does it make sense that CBI head honcho John Cridland reckons the Government would be ‘barking mad’ to ringfence British banks’ retail arms from their other banking operations? In an interview with the Financial Times, Cridland says plans to force banks to separate their operations could put the UK’s economic recovery at risk. ‘Taking action at this moment – this moment of growth peril, which weakens the ability of banks in Britain to provide the finance that businesses need to grow – is just to me barking mad,’ he said.

Cridland reckons the reason the Government is thinking of introducing the measures (which will be set out as part of the final report by the Independent Commission on Banking, led by Sir John Vickers, later this month), is because it wants to be seen to be taking action. ‘I get a sense that there’s a little bit of ‘we’ll do this because of political reasons,’ he said.

That argument may well have an element of truth in it (after all, George Osborne has hinted that if the measures are introduced, he may give them until 2019 to comply. Not exactly fast action), but some CBI members are nonetheless keen for it to happen sooner , rather than later. ‘SMEs simply can’t wait for radical bank reform to make them lend,’ said Lib Dem peer Lord Oakeshott. So it looks like this isn’t going to be a simple process….

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