A Bad Mix — Banking and Politics

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

These days, if anyone thinks that bankers are worrying about the dreadful state of their balance sheets, about risk management or about how to pocket fat bonuses despite public abhorrence, you got it wrong. These days, bankers worry more about politics than anything else. And not even office politics, but politics such as appeasing the rights of Canadian aborigines, about corporate drain from the U.K., and the sorry state of the labor market during the Great Recession. I suppose there had to be a price to pay for all that government help. In other words, welcome to political banking!

As 2008 drew to a close, governments around the world had to step in and bail out the financial sector, particularly the banks, stacked like dominos, the fear being that, if one fell, so would the others. Only, these bailouts very much resembled takeovers, and now there is more than bills to pay.

Being on the government dole has its consequences, such as various pressure groups deciding that, if banks had the audacity to take the money, even after it became clear they were among the main culprits responsible for the Great Depression, they should have to answer to the people and be subject to the same scrutiny, if not worse, as the government.

I understand the reasoning, or, rather, I understand the frustration driving such views. However, political banking in my books is synonymous with lousy banking. When banks have to negotiate with activists, unions and lobbyists, their focus switches to other agendas, and away from the banking business and greasing the wheels of the economy.

For example, Royal Bank of Scotland (RBS) is fighting on two fronts that have little to do with banking and everything to do with politics. On one side, RBS is under attack by Canada’s indigenous groups and satellite activists fighting to prevent the bank from lending money to companies exploring and drilling in Alberta’s oil sands. And, on the other side, RBS has been identified as one of the culprits supporting the dismemberment of one of the U.K.’s oldest and finest companies, chocolatier Cadbury PLC, by lending money to the U.S. incorporated Kraft Foods to pay for the former’s hostile takeover. Similarly, Lloyds Banking Group has to deal with trade unions, following its takeover of HBOS PLC and its plan to trim the workforce of the taken-over entity significantly.

Since this is only the beginning, bankers in the rest of Europe and U.S. had better get used to it because, chances are, things are only going to get worse. Any bank that had received even a penny of taxpayers’ money can expect this year to deal with a blitzkrieg from pressure groups that have quite a mouthful of valid demands to make.

I say “valid demands” because, in the case of RBC, the crux of the problem revolves around the question: why does this bank deserve more protection than Cadbury? It is not as if RBC is responding to market demands in financing this takeover. If it had been operating in a truly free market, and not the one financed by trillions of dollars in government budget deficits, RBC would not even exist. In all honesty, none of the government-sponsored banks can make any sort of rebuttals to pressure groups; their negotiating power being castrated the moment they took the government handouts.

Simply, political banking doesn’t work in the long run. Anger governs most of what is going on now in the financial sector. Nevertheless, banks have to be able to make independent lending decisions based solely on commercial criteria. If not, they would have to lend their money to someone and, in the absence of legitimate borrowers, banks may end up lending again to those who cannot pay them back.

It is irrational to expect any government to remain a major shareholder of any bank for any length of time, because that would mean relentless political meddling and loss of time and focus away from the business of making money. While I reluctantly acknowledge there may have been a legitimate case for banks’ bailouts, I firmly believe there is no case for governments owning banks for eternity.

The fair solution to all would be to identify weak banks with little to no chance of paying their government back, break them down into units and sell off those units to private entities as soon as practicable. If banks cannot be saved, even as parts of their sums, they should be left to fall. Otherwise, we’ll end up with banks too busy trying to please everyone to make profits and move the global economy forward. Banks should be privately owned, not government-owned, and we just need to make sure they are on a much tighter leash going forward.