If the City has truly found humility, it can still be useful to Britain

If the City has truly found humility, it can still be useful to Britain

The City is in a panic. Executives at the big banks, insurers and consultancies are stressing over the implications of something they never expected to happen.

There is a frayed anxiety underlying all their conversations, even though they talk about the trapdoor marked Brexit not opening for at least two years and possibly longer (some still believe it will never happen).

Brexit gives Europe a chance to wrest away some of the financial functions provided by London. Worse, outside the EU, London could face extra competition from centres closer to the global centre of economic gravity, like Singapore and Hong Kong.

At an event last week staged by the lobbying organisation TheCityUK, senior figures in the industry attempted to help their peers figure out what they might do next. Douglas Flint, the chairman of HSBC, had a warning for his colleagues: refrain from lobbying for the industry’s sectional interests; be very discreet; and be seen to be batting for Britain, not the City.

David Sproul, boss of the accountancy firm Deloitte’s, went further. He said the City had overplayed its hand during the recovery, leaving behind people in towns like Sunderland and Hartlepool. Deloitte has apprentices with A-levels from some of the poorest districts in the country, he said, but the firm’s welcoming hand stretches only as far as London boroughs like Newham. The north-east was, he confessed, off its radar.

Flint made a further stab at appearing contrite. Voters, he said, had rejected what he termed the “expert class”, referring to the widely reported jibe made by Tory leadership candidate Michael Gove. And bankers should welcome the stringent regulations of the post-crash world, drop their objections and accept it as the price of stability and citizen consent.

Does that mean he told his pub mates the price of remaining in the EU was keeping the 50p tax rate, embracing the Vickers review and living a less ostentatious life? Possibly. He certainly said City folk needed to pay themselves less and workers more to assuage the resentment that he failed to recognise, but which was obvious for all to see before the referendum vote.

And that must be the question for the City and to a great extent the nation, which has come to depend heavily on the financial services industry for jobs, tax revenue and especially foreign income. How can it prosper, moderate its risky behaviour and keep people in Stoke-on-Trent from using their democratic vote to poison the well, killing the banks and themselves at the same time?

Painful though it is to think of, for the time being the economy needs the financial services industry. Some of the figures that illustrate its importance to Britain are startling. Together with the professional services firms that feed off the banks and insurers, the industry employs more than 7% of the UK workforce, producing nearly 12% of total economic output, and contributing 11% of tax revenues. Most importantly, the industry generates a trade surplus of £72bn a year.

This surplus goes to close the gap created by an enormous deficit in imported goods, and a steep decline in Britain’s investment income from abroad in the last few years.

Bank of England governor Mark Carney constantly battles those who believe the banks will cost more to save than they will ever generate for the economy. He was at pains last week to reassure the nation that the current swings in financial markets and the tumbling value of the pound were within the limits of the regulators’ capabilities. His backstop of £250bn, which he stands ready to pump into the markets if suddenly everyone wants to sell and nobody wants to buy, would be enough, along with all the capital reserves available to banks, to protect us from another crash, he said.

Everyone wants to believe he is right. However, it’s just a tactical issue when the real problem is a strategic one – a problem that relates to Flint’s thoughts on finding a way to a more profitable but safer banking system.

It is, of course, a circle that cannot be squared in Flint’s myopic worldview. Banks need to take risks if they are to recapture even half the 25% return on equity they enjoyed before 2008. At the moment it is 9%. But that’s impossible when there are trillions of dollars of savings chasing only a handful of investment opportunities. Tougher regulation of banks has only pushed the risky behaviour into other areas of the financial system.

The Bank for International Settlements – known as the central bank of central bankers – has warned that a “risky trinity” of threats hangs over the financial system, including the huge amount of debt taken on by asset managers, pension funds and others away from the banking system.

Anastasia Nesvetailova, the director of the Political Economy Research Centre at City University, argues this debt mountain is so large that if it collapses, engulfing the financial system, it will cause a depression worse than the one experienced in 2008.

George Osborne’s decision to relax his fiscal rules could allow for higher government borrowing and greater public investment. This is a policy that Flint and his City colleagues must embrace. Unfortunately, the logic of safer borrowing by governments, as we move to a more sustainable balance of debt to spending, is at odds with their neoliberal ideology.