14 October 2015

Stop squeezing Britain’s financial heart


Occasionally, a statement by somebody catches the spirit of the times and sets tongues wagging. Such is the case in the City of London this week with the call by John McFarlane, the chairman of Barclays, for banks to pull their socks up, challenge politicians, and to create a European investment banking giant. He followed this message of defiance by indicating that he intends to hire Jes Staley, a JP Morgan veteran, as the bank’s new CEO.

Frédéric Oudéa, chairman of SocGen, joined in, writing in the Financial Times, joined in. He said that excessive regulation and the new financial transaction tax to be imposed by some EU countries means Europe is being squeezed by a competitive onslaught from the giant American banks of Wall Street. For Europe, read London, the principle financial centre in this part of the world.

It suddenly feels a little bit like the First World War, when capital markets upped sticks from London to New York. “It is brutal out there,” one experienced player told me. “If we aren’t careful we are going to be squeezed between the Americans and the Chinese. In fact, it is already happening.”

Things are, of course, a long way off an infamous episode in 1931, when the Labour government was unable to raise money in London and turned to Wall Street, from where additional demands for spending cuts were cabled. This was the so-called “bankers ramp” and caused the government to collapse.

But according to Mr Oudéa, Europe’s market share in wholesale markets has dropped precipitously. The top five US banks accounted for 59 per cent of the global wholesale market in 2014, compared with only 48 per cent in 2009. The share of the top five European investment banks dropped from 35 to 31 per cent over the same period. US banks are stealing a march over here too, arranging 22 per cent of the euro-denominated bonds issued this year, up from about 8 per cent in 2010.

Contrary to what you may hear in some quarters, the City is not booming. It is enjoying a cyclical upturn, in line with the UK economy, but the quality of the recovery is mediocre. Some people, such as hedge funds, are doing well, but even they had a difficult third quarter. The quality of companies listing on the London Stock Exchange, which remains overweight banks, miners and second-rate oil companies, is rather low-tech and uninspiring. A steady stream of dividend cuts is expected from resource companies and the FTSE 100 is substantially below its 1999 peak.

This is reflected in our economic performance. The biggest reason for the record current account deficits of recent years has been a decline in income and receipts from overseas investments as UK banks and institutions have shrunk their balance sheets and their portfolios.

Up and down the country and in Westminster, I doubt anybody has noticed and those who have probably don’t care very much. But they should. The anti-City tendencies of the Corbyn Labour party are well understood. But the anti-City tendencies of the modern Conservative Party, less so. For entirely good reasons in the wake of the financial crisis – the bailouts, the payment protection scandal, the Libor scandal, excessive pay – the average Conservative politician who might ordinarily have given the City support, now sees it as a source of aggravation and trouble.

The Treasury is currently slapping an eight per cent corporation tax surcharge not just on the big banks but on all securities companies, challenger banks and some asset managers. Yet more additional capital requirements, under the guise of ring-fencing retail banking from investment banking, are being published this week by the Bank of England. In times past, you might have expected an outcry from Tory backbenchers and the press, but now there is hardly a squeak. Nor does the City help itself, it is terrible at maintaining good relations with politicians and the country at large.

It is time, however, that we all confront some hard truths. The City and the banks might have behaved incompetently and badly in the 1990s and early 2000s, but they provide a useful function upon which we all depend, by matching those with capital seeking a return, such as savers, rich people and institutions, with those who don’t have capital, but need it, such as homebuyers, new businesses, companies, and governments. Deep and liquid capital markets are indeed socially useful, as Lord Turner might say, and we are jolly lucky they are based here and not somewhere else.

This function has been an historic advantage to Britain. According to CityUK some 2m people work in financial services across the country, contributing £65bn in taxes and a positive trade surplus. The idea this is going to be entirely replaced by some sort of manufacturing revival is sadly fanciful and takes no account of where the UK’s competitive advantages lie.

We may not be exactly killing the goose, but we are plucking the feathers with excessive and debilitating zeal. There is rightly much excitement about so-called FinTech companies, like TransferWise, Ratesetter and Funding Circle popping up, but they remain tiny in comparison to the massive wholesale markets of the City. If we, and the Conservative party, are not careful we will get to the stage when some future chancellor will again wonder where all the tax revenue has gone and if he or she tries to borrow some money, will be entirely in hock to the white shoe guys of Wall Street, as we were in 1931. We don’t want that, do we?

George Trefgarne is founder of Boscobel & Partners, a communications firm.