Our banking system in the UK is still dangerously dysfunctional. Post-crisis reforms failed to fully address the risks posed by the City of London, and with banks back in the driving seat, these reforms are already being rolled back. We cannot afford a return to business as usual.
The UK has one of the biggest, most concentrated, risky, complex, and interconnected banking systems in the developed world. It leaves us uniquely exposed to global financial turmoil.
If post-2008 promises to reform our financial system had been kept, the dangers we face now would not be so acute. Instead, UK banks have fast-tracked a return to business as usual. Contrary to recent claims by policymakers, post-crisis reforms did not fix the structural problems with our banks. Recent concessions to the City are already rolling back the limited progress made:
Banks are still at risk of failing. Measures to increase banks’ capital do not go far enough, and in any case they misdiagnose the problem: financial crises are created within the financial system. More must be done to change the business models behind our banks’ risky behaviour.
UK taxpayers remain on the hook. Banks remain too big to fail, and as a result, continue to receive £5.8bn a year in implicit government subsidies. The ring fence between retail and investment banking – intended to insulate the taxpayer from losses caused by risky activities – is also being rolled back.
The UK banking sector still lacks competition and diversity. The UK has the second most concentrated banking sector in the G7 – its top 3 banks own over half of all bank assets – and is uniquely dependent on shareholder-owned banks. Recent changes to the bank levy actually undermine competition, as they benefit big, international banks like HSBC at the expense of smaller challengers.
Recent concessions to big banks have been justified by claims that international investment banking is vital to our economy. These claims are grossly exaggerated: our status as an international banking hub is as much of a liability as an asset.