Miliband and the 25% Cap on Bank Market Share

18 01 2014

So, it looks as if Labour leader Ed Miliband has gone in for banker-bashing populism. With Labour stalled in the polls, Miliband is attempting to tap into latent public anger about the implicit subsidies given to the financial sector. He has promised a “day of reckoning.” His speech on the subject of banking reform given three days indulged in anti-banking populism of the sort that would have done Huey Long or William Jennings Bryan quite proud.

According to a senior Labour source, Miliband’s stance on the banks is explicitly modelled on that of early 20th century U.S. Progressives such as Teddy Roosevelt.

Miliband’s plan takes inspiration from the American progressive tradition, including Teddy Roosevelt, the Republican president who challenged the power of the US banking industry at the turn of the 20th Century. A senior Labour source said: “We are channeling [Roosevelt] quite heavily here.”

In a speech, Miliband explicitly praised the US tradition of trying to keep banks small. As readers of this blog will know, the US has many small banks, in part because of a series of law that prevented banks from branching and expanding across state lines. There is a lot of historical evidence to suggest that this approach has made the US banking system less stable than the more oligopolistic banking systems of the UK and Canada. (See here).  Alas, Miliband seems to think that small banks of the sort one finds in one-horse towns in the US are the way to go. In his own words:

“In America, by law, they have a test so that no bank can get too big and dominate the market. We will follow the same principle for Britain and establish for the first time a threshold for the market share any one bank can have of personal accounts and small business lending. After decades of banking becoming more and more concentrated, Labour will turn the tide.”

 

The centrepiece of Miliband’s new policy is a vague promise to cap the market share of any particular bank at 25%. However, when pressed for details about how this cap would work,  Labour distanced itself from suggestions that it would impose a cap on bank size set at 25% of market share, describing the figure as wide of the mark. A 25% cap would probably only require the break-up of Royal Bank of Scotland, but there are issues about definition of market, including whether mortgages, branch size, or number of personal accounts are included when judging market share. But industry sources said they had been briefed that Labour would impose a cap of some sort.

Read more here.

Here are some questions Millband needs to answer before embarking on banking reform.

1) Would a 25% cap really deal with the problem of Too Big To Fail? Couldn’t a bank with 24% market share be systemically important enough to be TBTF? If so, wouldn’t such a bank continue to enjoy an implicit subsidy from the taxpayer and all of the moral hazard that implies?

2) Will Miliband consider increasing the capital requirements for banks? Or has he bought into banker propaganda that funding banks through capital, as opposed to debt, is simply “too expensive”?

3) The existing corporate tax regime encourages banks to fund their operations through borrowing rather than debt. It does so by taxing profits on capital and allowing banks to claim interest payments on debt servicing as a deductible expense? Will Labour change this perverse incentive structure?

4) Does Miliband have any plans to reform the incentive structure for bankers? The current system of compensation in the current year incentivizes bankers to make risky investments. If an investment goes sour, say, four years after it is made, the banker responsible is never required to pay back the bonus he or she received in the investment’s first year. This way of structuring bonuses needs to be changed through regulation. Does Miliband have any  plans to deal with this?

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