Banking: Are the Profits Justified?
Séan Rickard
Steve Macaulay Banks are yet again in the spotlight. UK banks are declaring healthy profits
again. Now, we need to get behind the headlines, so to help us do so is
Séan Rickard.
Now, Séan, some people are saying we need healthy banks – they are good
for the economy, we need to get them back, so profits are good. Other
people are saying, hey, this is tax payer’s money at stake here and anyway
the banks aren’t doing a good job, they are undermining the whole future
of the economy by not giving out enough loans. Where do you stand on
this?
Séan Rickard
Well it is certainly the case that any economy needs efficient banks. We
certainly need retail banks in order to carry out our business, our everyday
moving of money around. So we need profitable, efficient banks. The
question, I think, raised here, is to what extent do these returns to
profitability – in fact rather large profits – reflect efficiency, doing a good job
for the economy and to what extent is it them taking advantage of their
power base and their ability to widen margins and to force small businesses
and individuals to pay higher charges? One rather suspects it is more of the
latter rather than the former.
Steve Macaulay So, you are not really an advocate for the banks saying look, we have really
got to get ourselves in a much stronger position because we are the
economy, we hold such a big position?
Séan Rickard
I think we have got to get a little realistic here. The banks brought this
economy to its knees. There is too much talk about how important the banks
are and, indeed, what a great contribution they make to the economy. It
needs to be said very clearly indeed that retail banking is probably on a par
with the people who produce electricity, who produce water. It is a utility.
It is not rocket science; it is something that must exist for the economy to
function. And if those banks are not providing the economy with the funding
– the liquidity – it needs in order to carry out its business – and there seems
to be some evidence that it is not doing that at the moment – then one has
to say, what are these profits for? What is it that they are delivery to the
economy at this time that justifies such high profits?
Steve Macaulay Now you are not alone in criticising the banks; there has been lots and lots of
talk about regulation, but not much action yet. Do you see that the way
forward is regulation?
Séan Rickard
I think we are going to have to have more regulation. I think it would be
politically unacceptable to have witnessed the events of the last three years
and to then say, well it is back to business as usual. That really cannot
happen; and it shouldn’t happen from either a political or an economic sense.
© Cranfield University
August 2010
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Séan Rickard
Why isn’t there so much action today? The banks are incredibly powerful.
Goodness me, they must be lobbying very hard behind the scenes and we
know that they have a great deal of influence. I only hope that politicians
retain their nerve, remember the abyss they looked into just three or four
years ago, and make it absolutely clear that in future we must never return to
that situation again. And indeed, we must not have a situation where banks
are too big to fail; they are taking no risks in that case because at the end of
the day we will always bail them out. And, therefore, there is no justification
for any profit.
We have got to get back to a realistic world where retail banks do what they
are meant to do and investment banks and people who want to speculate,
speculate with their money - not our money - or take risks that we are going
to have to pick up.
Steve Macaulay If we look at retail banking, one possibility is a new bank – Metro, Virgin.
These are setting up with a whole new agenda and a fresh face, if you like.
Should we all start voting with our feet?
Séan Rickard
Well we should really. Competition is the proven force for bringing about a
better service for us. Really the banks, at the moment, operate as an
oligopoly and they have become the masters rather than the servants of their
customers. The solution to that is more competition. One shouldn’t
underestimate the huge difficulties of getting a new bank, a branch of banks,
up and running. But powerful players like Tesco, Virgin Money, Australian
National Bank etc, they have perhaps the means to do it and it is in our
interests that such organisations are encouraged here to set up their own
networks.
And then to make it work, of course, we have got to become a little less
reticent about moving our accounts; if we don’t think we are getting a good
service, if we don’t think we are being treated as well as we should be, then
we should move.
Steve Macaulay Séan, some forthright opinions there; thank you very much.
© Cranfield University
August 2010
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