Why ‘competitive’ banking policies mean Too-Big-To-Fail banks

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TBTFThis month the New York Times republished a press release from discussed a recent report by the British Bankers’ Association, a lobby group. The NY Times article was entitled Britain Losing Its Competitive Edge in Banking, Trade Group Warns, and it began like this.

“The British government needs to take “urgent action” to address concerns about its regulatory and tax environment if London is to remain a global financial center and if lenders based in Britain are to remain competitive internationally, according to a banking trade group.”

The BBA report is entitled, predictably enough, Winning the Global Race. The point of this blog is to explain how and why seeking ‘competitiveness’ for the City of London financial centre is points towards bigger “Too Big To Fail” banks.

We have already noted how ‘competitive’ trends are likely to harm small banks and help big banks, from a tax perspective. The point of this post is to give examples to show how this is also likely to be true from a financial regulatory perspective, where similar processes are at play.

It seems that these kinds of kick-down, kiss-up processes — both from a tax perspective and a finanical regulatory perspective — flow from the same deep generic logic: that the bigger players tend to be more international and internationally mobile than the smaller players, and so are able to use the threat of relocation more effectively, in order to secure subsidies from other parts of the economy, including from the smaller players.

Does history repeat itself?

It’s hard to know where to start on this report, other than to note that the NY Times story didn’t carry a single critical voice about the report. It might as well have been written at BBA headquarters.

Before taking a hatchet to the BBA report, however, it’s worth going back to a deliciously timed report for the Conservative Party from August 2007, entitled Freeing Britain to Compete: Equipping the UK for Globalisation. Its authors, John Redwood and Simon Wolfson, seem to have taken this report down (perhaps out of embarrassment) but the left-leaning Guardian has (perhaps gleefully) made it permanently available. That report, which emerged a few weeks before Northern Rock begged the Bank of England for emergency assistance, at the leading edge of the global financial crisis, gushes about the many joys that financial innovation (and financial liberalisation) had brought:


We all know how that ended up. In fact, there’s plenty of fun to be had with this report: particularly in Section 6, for instance:

“Many in the City say openly that they launch their best new financial products offshore, because it is just too slow and expensive to get approval for them at home. “

Which, as has been noted of tax havens, is a feature which sounds nice but, once you think about it, isn’t: their attraction is that they provide escape routes from democratic controls like transparency, tax, financial regulation — and consequently they pose severe financial stability risks.

The new BBA report: an ominous start

Now back to this month’s BBA report, entitled Winning the Global Race: the competitiveness of the UK as a centre for international banking. The banks want financial deregulation but they can’t shout this stuff from the rooftops: memories of the crisis are still far too raw. So the report is subtly put, and you have to parse the paragraphs closely to see what they’re getting at.

It carries an ominous section in its introduction:

“Many of our contributors welcomed the change in tone from the new government. In particular we note the “new settlement” and raised ambition to “ensure we have the best, and most competitive financial services in the world” outlined in the Chancellor’s Mansion House speech on 10 June 2015 , which sent a positive message of support to the industry.”

Many would read that as a signal that after a prolonged period of democractic intrusion into the privileges of finance, post-crisis, things are starting to go back to what the City of London regards as normal ‘competitive’ behaviour. Fewer questions asked, and less regulation. The period of remorse and recrimination seems to be over.

And the BBA document is indeed a clear case of what we call the Competitiveness Agenda: whose purpose is to push for goodies and subsidies and advantages to be showered on capital and the owners of capital, with everyone else picking up the tab at some point.

Behind this push is also the threat: that the ‘wealth creators’ will flee if they don’t get what they want. And the BBA report contains one of those threatening old chestnuts that seems to work every time: that we are at some kind of ‘tipping point’ and everything will collapse unless we do something urgently, now, NOW, I tell you. More precisely, in the words of the BBA’s Anthony Browne,

“We have now reached a watershed moment in Britain’s competitiveness as an international banking center.”

For good measure, the New York Times helpfully chimes in to bolster the BBA’s case:

“In April, HSBC announced that it would conduct a formal review of whether to keep its headquarters in Britain, citing concerns about the regulatory environment and the bank tax.”

So, on this logic, Britain would be crazy to insist on continuing to pursue things like a bank tax or stronger regulation: it will lose HSBC!


The BBA seems to be wielding the ‘competitive’ threat in several areas. Here are three important one.

The first involves “ring-fencing.”

Put simply, banks got into trouble in the crisis via their casino-like wholesale operations, whose losses then dragged their ‘utility’ operations (most notably customers’ deposits) into the abyss too. When the losses became just too great, taxpayers had to step in. This was a form of time-delayed wealth extraction: during the party times the winnings were available immediately to the bankers; and the the bill sent to taxpayers showed up only much later.

Post-crisis, one way to mitigate the risk of this happening again would be to break up the big banks: let retail ‘utility’ banks deal with real customers in traditional ways – and let someone else go off and do the casino stuff and lose their shirts when things go wrong.

But of course the politicians were too timid to do this, and instead they came up with ‘ring fencing’, where banks are supposed to build internal walls so that the losses of the casino can’t damage the utility in a crisis, and it’s their investors, not the taxpayer, who’s ultimately on the hook. (That’s the theory: whether these internal walls could survive the tsunami of another financial crisis, or the steady lobbying to weaken the walls, is another matter.)

Apparently even this weaker concept was too much for some of these bankers. The BBA:

“Threats to the UK’s position as a leading international banking centre remain. For example, unilateral UK regulation, such as ring-fencing, entails significant cost to some UK-based banks and extraterritorial regulation, such as EMIR, makes it harder for UK-headquartered banks to compete abroad.”

We’ll get to EMIR in a second. But first, the BBA doesn’t like this ring-fencing because their members like having taxpayers backstop their risky and profitable activities, and pesky ‘ring fences’ get in the way. To insist on ring fencing is, they say, ‘uncompetitive:’ London will be less attractive to those bent on this particular form of wealth extraction, and this will threaten ‘the UK’s position as a leading international banking centre’.

In other words a more ‘competitive’ banking sector points towards weak or absent ring-fencing, and thus more of the Too Big To Fail problem.

Central Clearing and ‘extraterritorial’ regulation

This is where we talk briefly about EMIR, the EU’s Market Infrastructure Regulation, and the global derivatives market: what Warren Buffett once called “Financial Weapons of Mass Destruction.” Currently there are an estimated $550 trillion of the riskiest “Over the Counter” (OTC) derivatives out there in notional terms: equivalent to eight times the world’s annual output of around $75 trillion.

There is vast systemic risk here: risk which is as ever immediately profitable for too big to fail banks, while (again) ultimately putting taxpayers on the hook for eventual losses if and when the next crisis hits.

An antidote to this risk is so-called centralised clearing. In essence, trades are handled centrally, with a Central Clearing Counterparty inserting itself between trading partners and stepping in when one of them fails – and asks participants to put up margin up front to build a sufficient default fund. This, of course, is expensive for the big banks and they don’t like it: but in light of the crisis, this is what regulators are requiring them to do (and presumably this is a big part of the reason why the size of the OTC market has shrunk from over $700 trillion in 2013.)  And the big banks particularly don’t like central clearing requirements to be applied in an ‘extraterritorial’ fashion – that is, overseas. As the BBA put it:

“The application of more stringent rules to banks’ global operations disadvantages them in countries with lower requirements where the domestic competitors face lighter regulatory burdens.”

Enforcing essential clearing requirements internationally, then, makes the too big to fail banks less ‘competitive’ internationally, and they’ll be less likely to choose London as a base: weakening these requirements in the name of ‘competitiveness’ will thus help the too big to fail banks become more profitable, and thus bigger and more threatening.

So in both cases here – ring-fencing and derivatives clearing, the Competitiveness Agenda points towards bigger Too Big To Fail banks.

And in fact, one can make analogous arguments with respect to other areas of financial regulation: bank capital requirements, for instance. (Banks like low capital requirements since they allow them to take more immediately profitable risks, so regulation to rein this in thus makes the sector less ‘competitive,’ in the bankers’ eyes. Systemic safety and the Competitiveness Agenda point in opposite directions.)

Endnote: what should a competitive banking sector be?

We generally hate using c-words like ‘competitiveness’ or ‘compete’ when talking about things like financial regulation or corporate tax. John Christensen, Director of the Tax Justice Network, puts a particular spin on the BBA report.

As he says:

“The City of London, far from being incredibly competent, is largely incompetent: it is a high-risk place. Worse still, they have very, very high fee rates. Call me old-fashioned, but when I studied economics I was told that if you want to compete, you compete by lowering your prices and being more productive and producing a better product.  Well, that doesn’t seem to be on the BBA’s agenda.

The crisis and post-crisis have disclosed how unfit for business they are. We haven’t seen any improvement in the quality of lending to British or other businesses: they don’t do their job properly.”

As John Kay noted recently the total assets of British banks are around £7 trillion – five times the liabilities of the British government:

“Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total.”

Now fixing that would be a step forwards.

Endnote: a reminder that this too big to fail problem is just one of a whole range of generic harms that flow from the Competitiveness Agenda for the countries that follow it.

With thanks to Markus Henn


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