Update 37 – July 2012
The crisis in the city of london
The final chapter of the 2nd edition of Politics and Governance in the United Kingdom contained a discussion (pp. 460ff) of the impact of the great financial crisis that began in 2007 on the future of British politics. But it necessarily ended on an inconclusive note, because many of the attempted reforms had yet to be implemented. It is now clear that the management of the City, and of the financial system more generally, will be a major issue for policy makers for many years. There are three signs of this. First, we are now in a period of almost perpetual institutional change in the regulation of financial markets. The Independent Commission on Banking, which was established by the Coalition Government, produced its final proposals for reform in September 2011 (downloadable at: http://bankingcommission.independent.gov.uk/). It proposed major changes in the institutional structure of regulation, and, even more importantly, a partial separation of the retail (high street) operations of banks from their more risky operations in the financial markets. The government is presently putting these proposals through Parliament. But the issue of the government of the financial markets remains central to British politics for three reasons. There are many who argue that the partial separation of the two areas of banking does not go far enough: that the ordinary high street operations need to be completely separated from the ‘casino banking’ of trading in risky financial instruments. These arguments for more radical change have been strengthened by a second development: by the emergence of a great scandal involving Barclays (and many other leading banks – only their identity presently is uncertain) ‘fixing’ the London Interbank Lending Rate (LIBOR) a major ‘benchmark’ for lending throughout the economy. Barclays has been fined over £300 million pounds by regulators on both sides of the Atlantic and it is now certain that other leading banks will be subject to penalties. This scandal broke in a week when the banks were already under pressure on two other fronts: from a breakdown of IT systems in some banks, which resulted in the suspension of normal retail banking services; and a scandal involving mis-selling of insurance protection policies to small businesses – one of many such scandals involving banks in recent years. The combination of these events has led to a third development: a public outcry from regulators, from politicians, and from a wide range of opinion formers like the clergy, demanding a change in the moral values of banks. The impact on public opinion is charted by the periodic surveys of the British Social Attitudes Surveys: they show that in the 1980s banks were among the most trusted institutions in Britain; by 2010 they were among the least trusted – and that was before the impact of most recent developments. Thus it is likely that banks, and financiers generally, will be at the centre of political argument, and policy initiative, in the coming years.