Monday, 20 January 2014

Being right for the wrong reasons

I find it hard to disagree with Ed Miliband’s assertion that banks have become too large and financial power too concentrated in the hands of a few.  That alone is reason enough to want to see some of them broken up into smaller banks.
I’m far less convinced about his apparent belief that the additional competition which he expects to result will bring benefits to businesses, such as more lending.  The faith in “competition” as the answer to just about everything is what gave us the marketization of the health service – perhaps he isn’t so far away from Thatcher and Blair as he’d like us to believe.
Certainly, having more and smaller banks will lead to more competition; it’s the leap beyond that to the conclusions about who would benefit that I would doubt.  Smaller banks are likely to take less risk rather than more; they’ll be competing for the safest, most profitable, customers, not the riskiest ones.  And if banks aren’t lending to businesses at the moment, it isn’t because they can’t – it’s because of their assessment of the likely levels of risk and return.
Paradoxically, Miliband’s advocacy of breaking up the banks may actually have the opposite effect of that he claims.  Insofar as breaking up the banks is one of his better ideas, it’s for completely different reasons than those he gives.

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