Queue here for the next banking crisis

Jesus Christ referred to moneylenders as “a den of thieves”. Shylock, in The Merchant of Venice, said “If you repay me not on such a day, let the forfeit be..of your fair flesh.” David Cameron said “We will jail reckless bankers.”

The Secondary Banking Crisis (1973 – 75) was caused by a realisation that there was no statutory definition of a banker. This led to a proliferation of ‘new kids on the block’ who borrowed short, lent long and went bust. This led to the Banking Act 1979 but nobody told Fred Goodwin and the Board of the Royal Bank of Scotland.

The Chancellor of the Exchequer is keen that the Bank of England should regulate the banking sector and has applied a draconian approach. The European Union wants to pass directive after directive to add to the controls on banks. The Financial Conduct Authority seems to want prosecute any banker who has said “boo to a goose”,

Why, therefore, would anyone want to set up a new bank in this country?

In the last twelve months there have been seventeen new applications to set up banks in the UK. These include the proposed separation of Williams & Glyn from the Royal Bank of Scotland: this is backed financially by the Church of England. Paragon, the buy-to-let mortgage specialist, is applying for a banking licence as are a number of other consumer credit companies.

The applicants have been encouraged by the streamlining of the application process from up to a year and a half to six months.

The answer to the above question is that the banking licence gives a unique right to attract deposits at lower rates of interest. If you are a consumer loans business attracting money at (say) 6% – 7% and lending out at (say) 21% and you can improve on that margin by (say) 2%, it will make a golden difference to the bottom line.

Despite all the vitriol from the Coalition Government the general public still trust banks and so they, in turn, can sell their customers other products.

However, the majority of the newcomers will borrow short and lend long. As they fight for market share they will compromise their standards which they will then hide from their regulators until it is too late.

There will be another banking crisis within to next 5 – 7 years and, ironically, it’s the Coalition Government that is sowing the seeds of self-destruction.

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