And he wrote this 25 years after the act was passed. I fear we are still, barely five years after the bubble burst, in that early phase of post-crisis clean-up - it is too early to tell.
During the last five years, roughly half new European bank capital (over €350bn) has come from the public sector, most of which (unlike TARP in the US) has yet to be paid back. Over 60 banks are in receipt of state support, and the list is growing. Central bank liquidity support also is still near historic highs. Also, parts of the industry remain reliant on making money from customer inertia and over complex products, and public anger towards banks in many countries remains unabated.
State intervention is certainly here to stay for the medium term, and it may seem somewhat early to be wondering if it has gone too far. Indeed, banks and their states are now fundamentally linked. Oliver Wyman analysis suggests that for investors, the fortunes of individual banks have never been more tightly connected to their sovereigns.
I think we should be very concerned about the unintended consequences of the state and regulatory intervention so far which affect different groups in diverse ways.
For individual customers, a focus on improved conduct, easier bank switching, seeding of new funding sources (e.g. peer-to-peer lending) and taking the rough edges off innovation all seem beneficial. But in exchange, access to products will decline due to conduct regulation, sales and servicing processes may become even more unwieldy, lending is harder to come by given capital regulation and, as they become more segmented, I fear that service levels will only improve for those customers able to pay for it.
For the market as a whole, there are benefits in tightening solvency, liquidity and conduct and requiring firms to scrutinise business models. But competitiveness has dropped as fewer institutions choose to maintain foreign footprints and as regulatory hurdles make new entry harder and harder.
For taxpayers, many positive steps have been taken, but some steps were taken that do nothing to reduce taxpayer risk, yet reduce tax revenue by alienating foreign financial institutions from setting up capabilities.
For shareholders, depressed returns are an issue, but stable bond-like revenue streams can attract shareholder interest. The challenge is the uncertainty of future potentially punitive regulatory or state intervention that further depresses future returns.
For employees, it’s been five years of hard slog. Public opprobrium means many are nervous of sharing their profession with friends. There’s been some shallow political and media coverage of issues – and many false controversies whipped up among the real problems. Evolving businesses to fit new regulations is now an industry in itself within banks, and a hard one in a fluid and often conflicting regulatory environment, where different regulatory bodies are not always speaking with one voice. But most employees understand the vital importance of state support, and of reforming the industry
In short, state involvement in banking is here to stay but more care is required to avoid the worst unintended consequences.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
