Now isn’t this fascinating about Ed Miliband and the banks

A billion pounds was wiped off the value of taxpayer-owned banks on Friday after Ed Miliband promised to bring “reckoning” upon the industry.

Business leaders warned Labour’s flagship economic plan to break up the major banks’ dominance of the high street could end in disaster, while the party’s own shadow business secretary admitted taxpayers would lose out.

Shares in the Royal Bank of Scotland and Lloyds dived as the Labour leader promised to force the big five high street lenders to shed branches.

Experts warned it could trigger a repeat of the doomed attempt by the Co-op to take over hundreds of Lloyds branches. The bid, overseen by the disgraced Methodist minister Paul Flowers, pushed the bank to the brink of collapse.

Well, we shouldn’t allow that last part of the story to stand. It wasn’t trying to take over the branches that busted the Co Op Bank. It was trying to do so that revealed the information that it was busted.

But think about what the market reaction to the plan is. There are two possible stories to tell here.

One is simply that the markets (and we must be careful not to reify them too much) think that any sector which the government decides to “manage” is going to be irretrievably fucked up and therefore to mark down any sector that gets that attention. I tend to like that explanation myself.

However, there’s a more logical story to tell. Which is that the market believes that those incumbent banks are indeed earning economic rents, excessive profits, as a result of the lack of competition. Thus the introduction of more competition will lead to the absence of those economic rents and thus the companies are worth less.

If we are to have the courage of our own opinions, believe that markets do indeed with their prices tell us things, this should at least be something we consider. And I’d guess that there’s a certain amount of truth to this story.

I think the lack of competition comes from the fact that we all tend to change our banks less often than we change our mortgages: it’s not that there isn’t competition, it’s that we’re unusually deaf to its siren songs. Quite how to change that I’m not really sure.

But, back to the main story: Miliboy says banks are an oligolpoly/cartel, he’s going to do something about it and bank shares fall. This is the market conceding that Miliboy does actually have a point. And the deliciousness of this argument is that those who are anti-market can only use it if they do indeed agree that market signals do in fact means something…..therefore, that they’re not really anti-market.

33 thoughts on “Now isn’t this fascinating about Ed Miliband and the banks”

  1. Owain Shave (@OwainShave)

    Do you think the reported difficulty in getting banking licenses hurts the competition too? Maybe a review of that could encourage some more players to enter the sector.

  2. I’m all for competition and more players in the market should drive this, at least in theory. However it’s all very well forcing a bank to divest itself of branches and customers but who is going to buy?

  3. Surely in terms of retail banking the banks make most money from mortgages and credit cards. These are items that consumers always check out on price comparison sites and shop around for best deal.

    So that part of banking is already pretty competitive. Your actual bank account may be a hassle to change but I suspect is not a big profit earner, if at all, for the banks.

    Clearly the “problem” is in SME loans but the reason banks aren’t lending here is largely, not entirely, down to fact that many SMEs in need of cash are bad credit risks and the good credit risks don’t need bank financing.

  4. But… the election is more than 15 months away… and there’s no guarantee that Labour will even win.. and politicians don’t always do what they say they’ll do.. so why the panic now?..

  5. Kj
    Markets discount the future.

    Whether Milliband is an idiot or a fearless trust buster iis irrelevant. We now have two stock markets: one (banks) as a political bet, the other (the rest) as an economic bet.

    How’s that efficient markets theory workin’ out fer ya?

  6. Miliband has a point.

    When Thatcher was in power the Tories, as usual, sucked up to their friends in the City.

    They were responsible for the merger of Lloyds and HBOS to create one enormous bank. They did it through cronyism with no reference to the monitoring bodies and with no due diligence.

    It’s time for Ed to put right all the wrongs perpetrated by that evil monstrosity, Thatcher.

    N.B. Some parts of this comment may have been edited for party political purposes.

  7. Seems to be a vague and probably damaging solution to a problem that doesn’t exist.

    How many times have you heard people complain they don’t have enough high street banks to choose from?

    How is Ed going to implement a cap on market share? Will the bank I’ve been using for 20 years be forced to transfer my savings to the Co-op?

    Ed says we need to rethink our approach to capitalism. I wonder what makes the boy Miliband, who has never started or run a business in his life, who has only brief experience of being gainfully employed, think he’s qualified to decide how our entire economy should be structured?

  8. Shinsei1967 is correct to say that SMEs are bad credit risks. That’s actually recognised in the Basel rules: under those rules, banks have to count SME loans as being twice as risky as mortgages.

  9. John Miller, Tories left power in 1997, Lloyds and HBOS link was considerably later. And Thatcher left power a generation before that merger. While I agree she was a powerful PM the idea that ever since then politicians haven’t made decisions is a tad daft.

  10. “How many times have you heard people complain they don’t have enough high street banks to choose from?”

    But you do hear lefties complain about too many choices of coffee – remember Eoin Clarke?

  11. Ralph, as a business owner I won’t approach my bank for a loan. There have been too many stories over the years of banks pulling credit for companies to trust banks. Far more likely to get credit from other companies, 30 day and 90 day accounts are common. Who wants a bank loan with its associated risks?

  12. Considering that the banking cartel is a matter of deep public policy- we even appoint a specific bureaucrat to run it, from the Bank Of England, the whole complaint is rather ludicrous.

  13. @ kj
    The reason why bank prices fell is that Miliband has promised to interfere and there is a non-zero possibility of him becoming prime minister. Any interference by him is almost certain to be bad – his colossal ignorance is shown by his promise to create two new banks in 2015 one of which already exists and will shortly be IPO’d and the other of which has been mandated and planned but not yet launched. So the value of banks is reduced by the discounted present value of the damage he will do multiplied by the probability that Labour wins in 2015.

  14. To be honest, Miliband worries me less than Blair. I’d rather the PM be an incompetent fool than a messianic sociopath.

  15. I’ll make a prediction – if this comes to pass and 2 new banks are created, then the terms available from them for savings, loans and current accounts will be identical to within a gnats whisker of the existing ones, and no-one will be any better off, except the corporate restructuring guys who must be licking their lips and speed-dialling their yacht brokers as we speak.

  16. I can’t help but feel that the talk of limiting the size of UK retail banks is meant to allow for the carving up of Lloyds Banking Group and possibly RBS without automatically handing the top spot to HSBC.

  17. @IanB – on a trite level, for me the worst thing brown achieved was to make Blair not look that bad after all.. but then I had been several years out of the UK by that point, so it was more academic than practical.

    My worry with Milliband is that he’ll listen to that prat Murphy and try to instigate some kind of diaspora tax, which would beggar me and millions of other UK citizens abroad.

  18. So we have some major banks, plus banks owned by supermarkets, plus building societies that for all intents and purposes offer most or all the same services as a bank.
    And we apparently need two more to increase competition.

    Does Labour not consider personal choice? That people may be with their current bank because they choose their current bank?

  19. abacab-

    I was hoping for a Brown win at the election. Seriously. Labour should have been left wallowing in the mess created by Blair’n’Brown, not safely in opposition sniping while “the right wing” got the blame for “austerity”; especially when the Tories are virtually indistinguishable from the Labours anyway.

    I suspect that Teflon Tony got the result he wanted, as he always did. His own “legacy” intact, Brown’s reputation ruined, Tories stuck with the mess. Total disaster in my opinion.

  20. MD, I think what Shinsei is trying to convey is that John Miller’s comment may have been laced with just a pinch of irony 😉

  21. “However, there’s a more logical story to tell. Which is that the market believes that those incumbent banks are indeed earning economic rents, excessive profits, as a result of the lack of competition. Thus the introduction of more competition will lead to the absence of those economic rents and thus the companies are worth less.”

    An interesting proposition to post. However, if Miliband genuinely believes he is doing this to destroy economic rents then I would have expected him to refer to them; he didn’t.

    I think you’re right Tim, we really should be careful not to reify markets, especially not their short-term reactions. The share price fall was just too quick to have been the result of any detailed analysis. I am much more inclined to think Marxiband just spooked them; nothing more.

  22. By the way, Menger showed a century ago that monopolists (even true, 100% of the market ones) don’t earn excess profits i.e. economic rents. Any number of competitors are all punting at the same point where the supply curve meets the demand curve. Makes no difference.

    The benefit of competition is that it encourages everyone to seek productive efficiency improvements which shift that sweet spot. But that’s a different thing to the claim of “excess profits”.

  23. Putting irony aside in JM’s comment, the real Thatcher legacy was in fact to break the cartel of investment banks by deregulating the industry, perhaps Ed sees himself as the new Thatcher, now that is irony.

  24. Milliband says refer banks to competition authorities because they are rent obtaining oligopolists. Bank share prices fall. Milliband is right (or markets who agree with him are wrong). What is the story?

  25. @ Luke
    Good question from someone who, like Ed Millionaireband, doesn’t know.
    Firstly the banks cannot meet the demands of the regulators without extracting extraordinary profits from customers or drastically reducing lending. Sir John Vickers wants banks to increase their equity capital from 3% to 4% of gross lending; that doesn’t sound much until you say that means that they have to make quick profits equal to one-third of their capital.
    Secondly everyone with a skill or asset is rent-seeking.
    Thirdly Miliband is, as I pointed out earlier, merely trying to duplicate competition already mandated by the EU and, in Lloyds case, already created to offset the concentration that he and his pals created.
    The story is that Miliband is blind to the existence of TSB and the planned creation of Williams & Glyns and he is trying to generate popularity by blaming the Tories for what his boss did saying he will recreate the competition that Brown destroyed when it is already being done.

  26. He hasn’t got the faintest idea what he is talking about. Indeed I have reached the conclusion that no-one who talks about “breaking up banks” has the faintest idea what they are talking about. However many branches these banks shed, the fact will remain that they control access to the payments network and provide clearing services to smaller banks.

    Unless Miliband expects these new “challenger” banks to invest in the very expensive IT systems required to become clearing banks in their own right, those new banks will simply be agents for the old banks – selling products under a different brand name to create the illusion that customers have a real choice, while placing funds in the big banks and clearing transactions through the big banks. Just as credit unions and building societies do.

    How many people know that when they “Move Their Money”, all they are doing is switching from one brand to another – their money still stays in the big banks?

  27. Also, I think there is a third explanation for the market reaction to Miliband’s silly idea. Breaking up the big UK banks would be very expensive and very disruptive, leaving them wounded and ineffective for quite some time. And there is no certainty that the carved-out bleeding chunks would be viable as separate businesses. The end result could well be serious destruction of value. Markets know this probably far better than the damn politicians who keep suggesting it. Hence the share price fall.

  28. Whether or not Labour win the next election, the fact that they attacking banks makes it more likely that the current government does something stupid to counter a political argument. It is all political risk – something that the markets cannot price particularly well, so generally run away from.

    As to the specific idea of forcing the sale of bank branches. How many of us use our ‘High Street Branch’? I have never been to my branch. I cannot see anyone younger than 40 caring about how nice a branch is – only how good the website is.

    It is not as if there were a queue of people wanting to buy the Lloyds & RBS branches the EU is forcing them to sell.

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