Ignore the Banks (And Vince Cable) - They Are Lying

26/07/2013 16:45 | Updated 25 September 2013

The banks are lying. This may come as little surprise to most of us, given their appalling record of not taking responsibility for their behaviour both during and after the 2008 crisis. However it now seems that even Vince Cable, the business secretary, appears to have swallowed their most insidious lie.

The British Bankers' Association stated in 2010 that new regulations would force their members to "hold an extra £600 billion of capital that might otherwise have been deployed as loans to businesses or households". Excuse my French, but this is utter crap. Translated into normal English, this simply means that new requirements for banks to keep more dosh on hand to avoid another financial collapse means they will have less money to lend to businesses and consumers. Seductive and eye-catching an argument this may be. It is in fact crap.

Banks fund themselves either by borrowing money or by raising money from shareholders, the former being debt, the latter being capital. The regulations the banks are criticising are designed to reduce the amount of debt the banks have (i.e. how leveraged they are) and strengthen them by increasing the amount of capital they have. Leveraged banks just means indebted banks. The more indebted, the more unstable, so the logic goes. It's the same as me using a dozen credit cards without having a stable income.

Unsurprisingly, they don't like this because it's expensive to increase capital levels. Amounts of capital can be increased in a number of ways, none of which the plutocracy in the City of London likes very much. Rather than pay their staff such vast bonuses, they can pay them less and keep the savings as capital. They can reduce dividend payments, which is when bank profits are dispersed around shareholders. Retaining those profits would count towards capital. They can issue new shares, but that means diluting the existing ones, making it harder work for the bank to prove it's not a dud investment.

The notion that "a dollar in capital is one less dollar working in the economy" is an outright lie. Unfortunately the vast majority of the media, and even politicians, it now seems, believe it. Vince's latest attack on the Bank of England, quite distastefully referring to them as the 'capital Taliban', is a shocking illustration at how poorly understood the financial system is and reflects the success that banks have had in misrepresenting why the crisis continues to grind on and on.

It is horrifying to witness. Since 2008, not much has really been achieved in ensuring banks do not blow up again. Banks are still too big to fail and benefit from massive subsidies from taxpayers. Your tax money is still being funnelled into the bottomless pits (and wallets) of the likes of Barclays (indirectly via deposit guarantee schemes) and RBS (directly via goverment shareholdings). Despite welcome reforms being introduced, such as the ringfencing of retail from investment banking, the banks have done a fantastic job of watering them down, using the line that the tougher the regulation, the less money they have to lend.

When a bank makes the argument that overly strict regulation will undermine jobs and growth, and damage the real economy, I feel like punching a wall. How dare these monstrous oligopolies claim to care about the economy. Even more obnoxious is the line that 'regulation will reduce the money pensioners get'. Are they seriously claiming that they have suddenly see the light, repented of their sins and now regard themselves as selfless utilities underpinning the infrastructure of British economy?

They are, as private companies, motivated purely by the pursuit of profit. In a functioning market economy, this would be fine. In such circumstances, a company, bank or otherwise, that has misbehaving, breaking the law or investing in dodgy financial products would fail, a process known as creative destruction. However in our non-functioning market economy, where banks know that they are too big to fail thanks to state guarantees, they can do what the hell the like, pay their staff what the hell they like and bully regulators into submission.

The banks got us into the worst crisis since the Great Depression by benefiting from being too big to fail. There may well have been cosmetic changes, but in reality, the biggest banks remain too big. The regulation that has been introduced does not go far enough. They must be cut down to size otherwise the market will remain distorted by state subsidies.

The biggest banks argue that the fact they survived crisis intact proves that it's not size that matters. More crap. They are misrepresenting reality. Size does matter. It was thanks to the likes of RBS, Barclays and JPMorgan that the smaller banks, such as Northern Rock, were encouraged to get into such dodgy business lines in the first place. The big cancerous entities of the City and Wall Street had an entire ecosystem of smaller tumours linked to them. And those entites only became malignant because of an absence of effective regulation and the existence of massive state guarantees.

So when the banks bleat on about regulation reducing lending to the 'real' economy, ignore them. The simple truth is that they are the reason the economy remains mired in debt in the first place. The modern financial system does not serve the real world, remaining an opaque jungle of interconnected casinos. If I had a Barclays-sized chainsaw, I would hack it apart, including the department that actually did help out jihadists and terrorists until it was found out by American authorities.