In white paper to be published next week the UK Government is reportedly going to announce new plans to regulate the banking sector. A key feature will be increasing the amount of capital banks are required to hold, in particular the minimum amount of liquid capital banks are required to hold will be increased.
From the point of view of banks, loans to consumers on credit cards and mortgages are capital assets on which they make money. There will be a need to ensure that banks do not respond to the new regulations, and do exactly what the rules are intended to stop, to ensure they don’t give out more risky loans to people who cannot afford to repay them. A Consumer White Paper, published today, approaches the problem from the other direction (it might be co-incidence, it might be joined up government); it includes plans to regulate consumer credit. That document reports:
UK consumers currently owe around £1.4 trillion to banks and other financial institutions. The vast majority of this borrowing is for mortgages on houses. However, £230 billion is consumer credit.
The £1.4 trillion number isn’t new, it was reported in the April 2009 budget. Other, perhaps clearer ways of putting it include £1,400,000,000,000 or £23,000 per person (including children) in the country.
I am relieved to hear dismantling “complex banks”, decoupling consumer banking from investment banking, is not now being proposed; these are not the banks which have needed rescuing. We have seen simple banks fail because they have taking too much risk. Northern Rock offered 125% mortgages; it did this because its board members were rewarded on the basis of the amount of money they lent, not on long term returns. While we are now seeing more long term incentives, we are still requiring the publicly owned banks to lend, and are judging their performance on the amount of money they are getting out. There is a potential for long term success here, if the money is targeted into businesses with potential to grow. We must ensure the nationalised banks are properly incentivised to act the national interest.
While decoupling is not looking likely in terms of the structure of banks, we are seeing the banking system lose touch with real people. If we are to isolate the general population from the banking collapse, which has, quite reasonably to a degree, been government policy then we will end up with tensions in the system waiting to be resolved.
Education
I think that one of the best ways to make the country stronger in the future is better education. That’s a general principle which does not only apply to finance and banking. The banks are not the only ones at fault, all those who took mortgages they could not afford, or ran up debt on credit cards which they could not afford share some of the blame. While we need regulation to protect vulnerable people we also need better education so that fewer people get themselves into difficulty. Personally I am a supporter of educating people in basic principles and letting them apply them for themselves, but that does not appear to work on its own.
One additional area we need to tackle is the fear, created by the credit industry, people have that if they don’t have loans it will be harder for them to get loans if they need them in the future. We need to open up the whole “credit ratings” industry and ensure that banks are incentivised to lend, not to people who they will be able to exploit in the short term, but to those who are genuinely the best risk in the long term.
In terms of education the boss of Barclays Matt Barrett did his bit when he told a subsequently well publicised public session of the Treasury select committee:
I don’t borrow on credit cards, they are too expensive. And I have four young people in my family who I have also advised not to borrow on credit cards.
House Prices
There is a feedback mechanism where by the availability of easy credit led to inflation in house prices. House prices were not kept in check by how much people could afford, but by how much the banks would lend. Higher house prices led to a demand for larger loans. Again we cannot just blame the banks, every individual who paid over the odds for a home is themselves partly at fault.
I believe another major driving force is people’s sense of entitlement. Many, particularly young, people want homes to live in, but find themselves unable to afford them. Accepting large loans was the easiest way to achieve this; what there was not, and still not has been enough of is efforts to make cheaper homes available. What is needed is not just more house building, but making homes available at an affordable price. There is a need to ensure that the beneficiaries of wealth created by giving permission for new building include those wanting to buy new homes and just not the developers and landowners. Perhaps if personal credit was harder to obtain we would have seen more political pressure to provide affordable homes and less house price inflation. I think it is an indictment of the lack of a sense of ownership and influence over the way the country is run that those taking loans have decided that taking large loans is an easier option than changing public policy.
University Tuition
A significant element of personal debt is that which arises from university tuition fees. I personally oppose the current system of tuition fees and believe that the state ought invest more in educating people where that is in the national interest. Public funds ought be more focused on the courses with the most significant impact, primarily purely economic, but with allowing for an assessment of cultural value element too. The government’s consumer report published today draws attention to the plight of students who have paid for expensive courses before finding out the facilities and education on offer are of poor quality. I have been suggesting for a number of years that the office of the adjudicator in higher education, or other regulators, ought take a much more pro-active role in regulating institutions rather than simply acting as a very inaccessible body for dealing with complaints, today’s white paper doesn’t promise anything but contains some hints in that direction – though it suggests the Office of Fair Trading, ought take the lead. While the government is currently getting more young people from poorer backgrounds into university, its statistics are less clear on if this is at the expense of well qualified youngsters from better off families who, in light of financial considerations, are deciding against university. I would like to see the accessibility of university education in this country be based on merit; I think the current government’s has been moving away from that while chasing their target of getting 50% of young people to attend university.
3 responses to “Commenting on Government Plans to Regulate Banks and Reign in Personal Debt”
On the question of house prices, what is needed is a fundamental shift in attitude so that a house is again regarded as something to live in, rather a real or potential source of wealth. House price inflation causes vast divisions in society, whereby those who own houses increase their wealth through no effort of their own, and those who do not own houses are more and more excluded from this increase in wealth (which is, of course, untaxed as well as unearned). This is what creates the sense of desperation that leads to people having to get on this “ladder” we keep hearing about, and the collusive and fraudulent applications for mortgages that fuelled the lending boom. Lying about your income to get a mortgage was one of those middle-class crimes to which one was expected to turn a blind eye (whereas lying about your income to get social security benefits is regarded as fraud and punishable by imprisonment). It is now quite clear that those who were making those fraudulent statements – and those who encouraged them to do so for the sake of commission – ended up costing the nation quite as much as any “scroungers”. I wish I thought that any government would ever introduce the necessary tax reforms to counter the obsession with owner-occupation (capital gains tax on sale of all homes – rather than just second homes – would be a start) and use that to fund the necessary social housing, but I suspect the vested interests of those who already own property will always counter any fundamental reform.
David,
I want to do all I can to make housing more affordable and I agree with much of what you have said.
I do not though see home-ownership as a problem. I do not think the state ought own more homes than it does now; I’m a supporter of a small state and giving people the freedom to make their own choices about how they spend as much of their money as possible.
I would also not like to see a position where more rich individuals or companies owned more homes, and profited from more people living as tenants.
The rental sector is a critical component of our housing stock; it provides flexibility allowing people to move and follow work for example, but I wouldn’t want to see any efforts to expand it beyond what the market demands.
It is best for the country as a whole to encourage innovation, entrepreneurship, and business, increasing capital gains tax or any other tax reduces the incentive to generate wealth. Taken to an extreme, and oversimplifying things – there is a balance to be struck between us all being equal but poor in this country and allowing people to make money at the expense of a more fragmented society.
I too want a revolution, I want fundamental reform, I want affordable housing. We need a flatter taxation system, it is awful that some of the lowest paid people pay the highest proportions of their income in tax at the moment, but we’ve got to be careful not to deter wealth creators from living in and contributing to the country.
Home ownership becomes a problem when it is seen as the first choice investment for generating personal wealth. Rampant house price inflation distorts any other investment decisions individuals might make, particularly if the profit is untaxed. I am all for encouraging “wealth creation”. Someone who buys a house and sits there simply waiting for it to increase in value is not a “wealth creator” in the sense you mean. I see no problem with taxing their profits and using that money to generate other forms of housing.
I am not sure how you estimate what “the market demands” in terms of a housing rental market, because there are so many factors that distort that market. At the moment, for example, housing developers are declining to build houses. This is not because there is no demand for them, it is because they cannot sell them for a high enough profit. The reason people are not buying houses is because people will not lend them money, not because they do not want (or need) houses. (As the old saying goes, a hungry man with no money has a “need” for food, but no “demand”). There are some 7000 households on the Council housing register, so there is clearly a demand for affordable social housing. I would be quite comfortable with a situation where less than half the households in the UK were owner-occupiers (a proportion that is common in other parts of Europe). My landlord of choice would be local authorities, because they are generally more reliable and more accountable than either private individuals or housing associations. Like you, I don’t really want rich landlords profiting from their tenants, although I do think as a rule that institutions make better landlords than individuals (the “mom and pop” end of the rental market).