Lehman Bros, ten years on: searching for a more equitable financial services sector
While there have been shifts in attitudes and measures taken to prevent the exploitative and risky nature of banking, Labour must now look to make the system more equitable through encouraging alternative forms of banking.
It’s been 10 years since the Lehman crash marked the beginning of the height (or depths) of the financial crisis, triggered by the sub-prime mortgage failures in the US. But that was only the symptom of a much larger ailment: complex and unchecked financial derivatives (namely mortgage-backed securities and collateralised debt obligations) designed to wrap bad assets with good ones, making them look more valuable than they were worth. Essentially unaccountable, clever people were using clever tools to mask the poor creditworthiness of the assets being traded over and over again.
Since then (and largely thanks to the EU and the previous Labour Government’s intervention) we avoided a full-on depression through various quantitative easing measures, and long-term strengthening of the regulatory sphere. Thanks to the EU, we’ve also had scores of pieces of legislation aimed at protecting consumers from both the conduct of banks and the way in which banks are structured. For example, banks are required to hold more money on deposit (under the CRD and Basel capital adequacy regimes). This means that financial institutions have to take a second look at how they view risk and reward when selling products. The Guaranteed Deposit Scheme led to the creation of the Financial Services Compensation Scheme in Britain, which guarantees your savings of up to £75,000. If a bank with which you held an account collapsed, you can rest assured that a lot of it would be absolutely safe. From 1 January 2019, the largest UK banks must separate core retail banking from investment banking. This means that if one part of the bank fails, it will be easier to manage the failure in an orderly way without the need for a government bail-out. These measures ensure financial stability for consumers. They go towards ensuring a necessary system of our society isn’t being exploited for relentless profit. That is a good thing.
An effective law doesn’t just regulate, it engenders normative shifts in behaviour. The question of whether these interventionist laws have turned the Barbarians at the Gates into Monks is harder to evaluate. Anecdotal supporting evidence exists: professional service firms are now rife with enormous financial regulation teams; at every meeting I attend at work, we apportion time to thinking about regulatory impact; the ‘cultural shift’ is often highlighted in interviews with grandees such as Lord Mervyn King, former Governor of the Bank of England.
Let’s take a left-leaning position on all of these circumstances. We see that the weaknesses were exploited in a financial system for egregious profit, but the state regulated and mitigated those risks to protect all those who use financial services in society, and behaviours have changed to think more about customers and not solely about consequence-free profit. In other words, so far so good.
So the rules and the players have changed, but what about the game itself? Critics of the western financial system will be quick to point out that despite increased capital requirements, banks are bigger now than they were ten years ago. Household debt for low income families is both disproportionately high and disproportionately damaging to the long term stability of those households reflected with the huge increase in high interest payday lenders in the past decade. Just over half a million people are unable to access to basic bank accounts because of their circumstances whether they be on low income jobs, single pensioners, long term disable or new migrants. Together, this means that those in our society who would benefit most from saving, building up capital for their own home or business, have least access to financial services. This creates a vicious cycle of over-reliance on high-interest payday lenders, reducing the ability to save longer term. Campaigners such as Stella Creasy MP have over the years ardently fought for clamping down on the most egregious and exploitative elements of payday lenders.
While we can say we have a safer and less exploitative banking system, we should now be making the case for a more equitable banking sector that assists in a wider economy, accessible and for the benefit of all. We do this by improving the accessibility to financial services, and widening the types of financial institutions to include more community based and co-operative models of banking. It is now therefore time to invest in a community-based alternative: the Credit Union.
Credit Unions are a co-operative form of financial institution, where customers own part of the business, and have say at meetings about the direction and services they provide. Unlike a bank, there is a focus on the cohesive nature of the membership, whether it be community or belief-based. This ensures that members share in a common endeavour and are empowered in the direction of business. Conversely, the values of a Credit Union focus not just on profit, but on accessibility and improving the conditions of local communities, providing fair financial services and helping encouraging low income families to start savings for their children. This model has a wide reach in countries such as the United States and Ireland.
Credit Unions have deficiencies. England’s Credit Unions are low in membership with only one million members across 290 credit unions. They are largely managed by volunteer-directors, who while committed often lack the necessary skills to expand the industry. They are often seen as a substitute for a bank rather than an alternative as they lack wide publicity or house-hold names.
There is potential to expand this equitable form of financial institution that brings not just a fairer form of banking, but engenders community values in the way we think about capital to be more than a zero sum measure. Instead, we can start thinking about capital and community enhancement in the same vein. The Labour Party can support this by committing to a commission on financial inclusion and credit unions in their next manifesto. As part of their review of the financial services, the Labour Party can look at new ways to inhibit Credit Unions to access fintech applications and modes of business to enable them to have a wider reach. Encouraging and upskilling board members ensures better run and more reliable organisations. It also allows local community members to volunteer to upskill and assist with their job prospects. Longer term, the Labour Party can look at ideas and proposals for incentivising Credit Unions to be a source of local financing for small businesses. This enables the UK as a whole to rely less on capital for property and move more to a business-based economy. This diversity in the base of the UK’s economy increases financial inclusion and empowers local communities to have a say in how their money is managed. These ideals of equity, community and financial empowerment are at the very heart of our values. Credit Unions should therefore be taken a lot more seriously in the future.