Vested interests stand in way of bank reforms

Has Government’s banking policy created a reformed regulatory system captive of banks vested interests? 

With its focus on just two dominant commercial banks, not only has its pillar banking strategy amplified the too- big- to- fail dilemma, it has also created an uncompetitive, anti-consumer banking environment.

If major banks are far too important to be allowed to fail, then is it not the case that executive government, public servants and the central bank become captive of banks vested interests? If so then we may have shifted from one form of political and regulatory capture to another.

The boom-time relationship between central banking, commercial banking, civil service bureaucracy and executive government was partially addressed in reports into the banking crisis. At best the reports hint at how mutually reinforcing vested interests literally brought the house down. Politician’s economic policy, public servants ideology and banking’s vested interest combined with regulatory captivity to cause both the banking and economic crisis.

In theory, banks should be regulated by independent authorities whose governing technocrats, guided by public interest considerations, should act free from political interference. While the reformed Central Bank addresses what was wrong with the previous regulatory system through its new structures and risk control approach, just who defines what’s in the public interest?

It appears at one level the bank’s new approach to banking regulation and supervision should act as an early warning system, allowing it to take prompt corrective action to head off problems. But it could be the case that intrusive engagement could result in even greater captivity as both banker and central banker focus on building functioning banks. Both will want to see a return to sustainable profitability. 

If the central bank’s consumer protection activity does not include product level regulation or price controls then how will banker’s marketplace behaviours be controlled for?

Is it in the public interest that banks exploit competition dynamics and engage in anti-consumer loan pricing behaviours? Is it in the public interest that so many people in debt are left on their own to negotiate with powerful institutions without any financial safety net?

Yet it could be the case that current banking policy may be embedding a different form of political and regulatory capture of vested interests. It’s clearly in the public interest that commercial banking functions again. But there’s a conflict within the wider public interest, as consumers are being asked to pay for banking rehabilitation costs in two ways. The first is explicit within the enormity of the taxpayer bail-out funding of banks. Billions in consumer derived tax revenues are being used to pay the interest cost of bank bail-out funding. The second is implicit within higher rates and fees being charged by banks. Not only have banks increased loan rates, they are also increasing fees on their utility banking services.

It’s fair to say that Government’s response has fallen well short of appreciating and responding to the impact of its own policy. It seems that it has quite deliberately rendered consumer protection absolutely subservient to banking profitability. In effect its banking policy is a shield protecting banks from competition and consumer interests. As the banking system has shrunk, consumers have become captive of remaining bank’s pricing behaviours. 

For example consumer mortgage captivity is particularly acute. People can no longer shop around as no one is open for business. Those that are open are rationing credit and cherry picking.

As Government has done nothing to balance vested interests, its banking policy is inherently anti-consumer by design. For example both the Cooney and Keane expert groups comprised bankers, regulators and public servants – three sets of vested interests. The groups did not include for consumer advocates with the reputational standing and professional competence to insist the consumer interest be accommodated.

Is it the case that both political and regulatory system capture has become more and not less embedded in the post-boom environment?

The evidence so far compels a closer examination and understanding of the relationship between banks, regulatory and executive government vested interests which have become a mutual re-enforcing survival compact. Insisting banks pass on interest rate reductions is simply a political reaction to public concern. 

All too often politician’s focus on near term gains comes at the expense of longer term sustainability of their social and economic policies. Recognising how large, dominant banks operating in an anti-competitive environment can exploit their “too big to fail status” will take more that political insistence on rate reductions.

How can a central bank technocracy effectively balance bankers and consumers vested interests when there is no consumer protection representation? 

A version of this article appeared in the Irish Examiner, Business Section, Monday 12th December2011