Written by: Derek Campbell

The Archbishop of Canterbury, Justin Welby, has made a contribution to the issue of standards in the banking industry (see FT (£)). The publication of the cross party banking standards commission’s final report is due next month and is sure to result in further debate. Welby has voiced support for training and examinations for bankers and a professional body to sit alongside the regulator is reportedly worthy of “serious consideration”.

Given that the banking crisis has lead to a recession and huge tax-funded bailouts of banks, it is clear that Welby’s comments will have plenty of instinctive appeal. Moreover, for libertarians (but not exclusively), if better regulation and higher banking standards can reduce the exposure of bank customers and taxpayers to potential losses, then this surely is to be welcomed? Welby has referred to banking as “incredibly complicated” and that those holding responsible positions within banks without qualifications is quite surprising.

Indeed, whilst libertarians may have their differences of opinion over the precise limits of the state, this appears to be a matter of straightforward common sense. A professional body similar to the General Medical Council will surely raise standards and enforce a code of ethics. On what grounds could libertarians object? Welby’s suggestion is likely to garner broad support; even the British Bankers Association (BBA) has pledged full cooperation with the idea of establishing a professional standards body. It is this last element that should give cause for concern.

The first point to be made is that banking is not, (and need not be,) complicated. Keeping your clients’ money safe is about as simple as it gets. Part of the problem, however, is that depositors may not know the terms of the contract they have with the bank. Many may be unaware that they are lending money to the bank, not simply keeping their money in the bank for safekeeping. While it may be a fine distinction, it is, however, crucial; The aggregated deposits lent to the bank enable them to make loans to others as the they see fit. The ability of bankers to lend profitably, however, is arguably a separate consideration to being able to return money left in safekeeping by depositors on demand. The safe stewardship of depositors cash and lending money to those who have requirements for additional funds is at the heart of the banking model; that might be usefully re-examined.

Three aspects of Welby’s approach give cause for concern for libertarians. The first is that with more regulation there is a greater cost of compliance. This additional cost will either be borne by customers in the form of higher charges and an opportunity for additional profits. (I wonder why the BBA would be happy to support the measure?) Or also, by taxpayers as part of the costs of running the regulator. Quite why taxpayers should bear the costs of compliance is likely to be of interest to libertarians.

The second aspect is that examinations and qualifications raise barriers to entry to the “profession”, a sure fire way of reducing the labour available and therefore increasing costs. It is generous indeed for Welby to have made a suggestion that raises the cost of a service that is essential to life in the 21st century. Again, libertarians may wish to ponder the implications of this, especially as the state will presumably have a substantial say in how the qualifications work.(“Jobs for the boys” springs to mind.)

Third, there appears to be an increased opportunity that the liabilities arising from poor lending decisions, (or even bad luck,) can be transferred from the banks. Where the risk ends up is not of much interest to the person transferring. Consider this, if a bank that is unfortunate but has followed the regulations yet finds itself in difficulty, will the state in the guise of the government, the regulator or whatever step in with funds to rescue the bank? If the answer is no, then self interest alone should ensure that the bank is cautious; additional regulation should not be necessary. If the answer is yes, that the state will rescue distressed banks, then the libertarian would surely want to ask: Why are tax funds used towards a private enterprise risk?

In summary, Welby confuses the uncertainty of bank lending with complexity whilst overlooking the first element of banking: keeping depositors money safe. His suggestions in the long run appear to reduce options, introduce a monopoly and thereby increase costs and leave the state in the backstop position.

One final thought: what qualifications are necessary to be a member of the legislature, elected or appointed?