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Banking fees represent ‘large-scale rent extraction’ from rest of economy

Govt urged to split retail & investment banking, rather than ring-fencing

Banks are charging their clients unjustified ‘rents’ which do not reflect the level of service and performance that they deliver, according to a major new report on the ‘financialisation’ of the UK economy published today by the think tank IPPR. The Independent Commission on Banking Standards, chaired by Treasury Select Committee Chairman Andrew Tyrie publish an interim report just before Christmas and is due to publish their final report later this month.

IPPR’s report shows banks’ customers are paying substantial fees and charges because banking is a sector of the economy in which competition is severely distorted and regulation has been historically ineffective. The same is true of other parts of the finance sector too. These excess fees – or rents – harm the rest of the economy.

IPPR’s report agrees with the Vickers Commission that ring-fencing banks’ retail activities will reduce the risk of future bail-outs by the taxpayer, but argues that this will do little to reduce rent extraction. So report says the Government should go further than Tyrie’s interim report and force a split of retail and investment banks.

The report says that the best way to tackle ‘rent seeking’ in retail banking would be through greater competition and it urges the government to do more to reduce barriers to new entrants. In the more complex world of investment banking, better regulation and greater transparency is the answer.

The report recommends:

  • Retail and investment banking activities should be split into separate organisations
  • Competition in retail banking should be increased, for example by reducing barriers to entry
  • Risk-taking in investment banking should be reduced, for example by enforcing greater transparency of fees and practices and by making senior directors and managers liable for financial loss when things go wrong
  • A British Investment Bank should be set up to fill the financing gaps left by commercial banks
  • Investors should stop paying extremely high fees for what can only – on average – be investment performance in line with the market
  • More should be done to make the case for wide-ranging financial transactions taxes and to explore ways to minimise avoidance of them
  • The overall level of credit in the economy – in particular speculative credit – should be controlled

Tony Dolphin, Chief Economist at IPPR, said:

“The government is making some progress on tackling the implicit subsidies the rest of the economy provides for the financial sector and on reducing future liabilities for UK taxpayers in the event of a financial crisis. It has also taken steps to better protect stakeholders, such as depositors, borrowers, investors and shareholders. But more action is needed in both areas.

“Where very little has been done is on the difficult issue of rent extraction. The culture of the City, its governance and compensation practices, all need to change. This is unlikely to happen without government intervention and as a first step the government should establish an independent commission to focus on ways to reduce rent extraction by the financial services industry from the rest of the economy.”

Notes to Editors

IPPR’s new report – Don’t bank on it: financialisation in the UK economy – will be available from: http://bit.ly/IPPR10058

Contact

Richard Darlington, 07525 481 602, r.darlington@ippr.org
Tim Finch, 07595 920899,
t.finch@ippr.org


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