Move Your Money
May 18, 2015
A modern society cannot function without banks. Whether it’s to provide a place to store your money, create payments between people and businesses, or to provide credit to those who need it, banks perform essential services without which modern life would not be possible.
These services represent the social function of banks, and developed historically from the move away from feudal power relations towards a more independent, interconnected and empowered civil society.
But with the rise of finance capitalism and the ever-increasing pressure to make larger profits for their shareholder owners, the biggest banks have become more and more distant from the social functions that led to their establishment in the first place.
Take 2008, for example, where dodgy loans on houses were grouped together and traded within and between banks, creating ever increasing “value” whilst adding nothing to people or the real world. In the end, the value of these products turned out to be worthless, and as the house of cards came tumbling down the global financial crisis was ushered in with it – sweeping away hard-won social security to pay for bank bail-outs in the process.
Politicians act like banking reform is a mission accomplished, but for as long as big banks are divorced from their social functions, such abuses are bound to occur again.
Only this week, further revelations in The Times showed how the Royal Bank of Scotland, for example, has been driving small and medium sized enterprises into the ground for it’s own benefit. It bears repeating that RBS was bailed out with taxpayers’ money specifically so it could be put to use helping these sorts of businesses, rather than driving them to bankruptcy.
Common sense suggests that a bank would lose money by driving its borrowers into bankruptcy, and would have nothing to gain from such practices. But perverse incentives within the banking system have made common sense an unreliable guide.
As part of the Basel III reforms, a set of voluntary agreements created by the big banks themselves in the aftermath of the financial crisis, banks must hold more capital against their riskier loans in case those loans go bad. The riskier the loan the more likely the borrower to default, and therefore the more money should be stashed away to cover that loss should it occur, went the thinking. So far, so good.
The problem with this thinking, however, is that banks want to hold as little capital as possible. Because the more money they have deployed in the financial markets, the more money they can make, which is the primary objective of the shareholders in whose interests these banks operate.
So instead of the Basel III requirements encouraging big banks to hold more capital against risky loans, they have often encouraged big banks to hold fewer loans instead. And that means banks like RBS have an incentive to encourage businesses in debt to fold, rather than helping nurse them back to health and to continue to provide jobs, trade and productivity in the mean time. In other words, the banks have an incentive to help themselves before their customers – even though the social function of banks is to help their customers and society first.
Take the case of C May Brickworks Ltd, a construction company in the North-West that at its peak employed over 100 staff and had a turnover above £3m – a productive and valuable business, in other words.
Suffering from the downturn in construction following the bank-caused financial crisis, the company began to make a loss and was dipping into a business overdraft provided by RBS that was secured against personal liability of the business owner.
Under significant pressure from RBS, C May Brickworks converted the majority of its overdraft into a government-provided business loan – a loan that the business was not eligible for, but which it received thanks to alleged fraud to the government from RBS. The bank then dramatically reduced the remaining overdraft to such an extent that C May Brickworks was unable to operate, and the company was forced into liquidation.
Thus in one fell swoop RBS had both reduced its exposure to the loan, by transferring it to the government via allegedly fraudulent means, whilst also driving the company to bankruptcy in order to write off the rest of the remaining debt (and its associated capital requirements).
The bank’s Chairman, Sir Philip Hampton, claims that independent lawyers found “no evidence’ of wrong doing by the bank in such cases – even though Move Your Money has seen transcripts of conversations those lawyers had with businesses including C May Brickworks Ltd, where evidence of such wrongdoing was presented. Far from there being ‘no evidence found’ of the banks impropriety, it seems apparent that such evidence was merely ignored.
Indeed, legal advice seen by Move Your Money shows that RBS has serious, widespread and evidenced allegations of criminal fraud to answer to – so much so, in fact, that it is also under investigation from a number of police forces to this effect.
This is in addition to the evidence published in The Times, showing that RBS staff were systematically trained in how to restructure debt with a view to boosting the bank’s balance sheet in the way described above – the core allegations that RBS Chairman Sir Hampton attempts to refute.
For as long as banks like RBS work in the interests of their shareholders and not the customers or society they are supposed to serve, such conflicts of interest will always arise. Yet despite this, the government seems intent on returning RBS to private hands without considering alternative ways of making the bank serve its social functions, such as advancing not withdrawing credit, and supporting the real economy.
If the financial crisis and its subsequent aftermath have shown us one thing, it’s that bank behaviour and activities must be more closely aligned with their social function, not less. And to make this happen banks must have their social function hard-coded into their DNA, in the same way that building societies and credit unions do. Until that happens, monolithic mega-banks are doomed to repeat the mistakes of the past, and it will be people and society left to pay the price – just like we were the last time around.