Last week it was reported that a rogue trader cost UBS $2 billion as a result of “unauthorised trading”. One wonders why unauthorised trades which yield a profit are never reported. Putting this aside, it emerged at a bad time for the sector. Earlier last week Sir John Vickers released a report into UK banking, which called for a strict separation between retail banking and capital markets operations. Vickers is attempting to “ring-fence” the government insured retail banking activities which are of systemic importance, and support them with higher mandatory capital requirements, in an attempt to minimise the risk of another banking crisis, caused by capital markets problems. If Vickers proposals are implemented the cost to UK banks is estimated at £6-£7 billion.
Some bankers squeal at the extent of this pain. Warnings about the disastrous impact on the cost of credit for borrowers, the undermining of UK competitiveness or threats to leave the UK in pursuit of a more welcoming regulatory climate have come in a torrent. On the other hand, politicians and other pundits have piled into the sector, heaping abuse on its leaders, their greedy and overpaid staff and their irresponsible practices.
What relevance does this have to the world of social enterprise and the social economy? Plenty. There is not sufficient money available in government grants or foundation endowments to support social enterprises to the extent necessary. Thus the banking system and the clients they represent are of vital importance to the creation of a social economy. Yet there is distrust and anger. Some sector colleagues view the financial sector as inherently evil, which ought not to be touched with a barge pole. But such thinking is short-sighted. Mainstream financial firms have a great deal to offer social enterprises in terms of capital, access and expertise. On the other hand one cannot deny the damage done by the banks during the recent crisis. Our sector must have some answers. Disengagement is a bad answer—what are the good ones?
- The emergence of social banks. Firms like VanCity (Canada), the Coop (UK) and Triodos (Netherlands) are emerging as competitors. What are their competitive advantages? Should social enterprises feel obliged to bank with them?
- “Crowdfunding” offers an alternative to financial institutions in general. Is this disintermediation healthy? Should consumer protection rules be waived to facilitate this?
But we also need to have a more articulate critique of the banking sector. What would we really suggest be done to minimise risks going forward?
- Is tougher regulation the best answer? I am not sure—Regulators seem forever five years behind the banks.
- Should we push the banks to lend more? Too much borrowing is what put us in this mess—can more lending really be the answer?
- Is boosting capital requirements the best answer? Does this not raise the cost of borrowing and reduce the supply of loans?
Our narrative of complaint is not consistent. We need to develop one.
First published in The Social Edge in September 2009