2011 was a year of constraint and contrition for the banking sector. Bonus pools were reduced, balance sheets slimmed down and high profile bankers heroically waived their bonuses.
Or so the banks’ PR machines would have had us believe. Last Friday, as analysts trawled through Barclays and RBS’s annual report and Lloyds’ pay statement, a very different picture emerged from that painted by the banks.
Bob Diamond’s pay packet for 2011 could be as much as £17.7 million. The head of state-backed RBS’ investment banking division, John Hourican, was handed a package worth £7.4 million. And the Chief Executive of Lloyds netted £3.5 million. All in all Barclays, Lloyds and RBS paid out in excess of £90 million to top executives in 2011.
There is a clear injustice in a sector which is implicitly and explicitly subsidised by the taxpayer awarding itself bloated rewards at a time when the public are enduring austerity cuts, a squeeze on real incomes, and rising unemployment.
But the public outrage taps into something deeper. After all, the British sense of fair play has always been premised on there being haves and have-nots.
Public anger taps into the stark fact that the banking system is failing to fulfil some of its basic functions because the industry is grotesquely skewed towards socially unproductive activities that allow a small elite to extract vast wealth to the detriment of the many.
Despite a financial crisis, a £1.2 trillion bailout and ongoing public outcry, it can still seem like there is no viable alternative to business as usual. But it is worth reminding ourselves that this is not universal: the British banking system stands out from its US and European counterparts.
Firstly, the UK banking sector is one of the most concentrated in the world. In the retail sector six large national banks account for 92 per cent of personal current accounts, 85 per cent of mortgages, and 88 per cent of small business accounts .
Secondly, it is one of the least diverse in terms of the types and functions of financial providers. Whereas in the UK, the big four dominate the high street, in Germany a wide range of local and mutually owned banks have a 70 per cent share of the market for loans and deposits.
Thirdly, it is the largest in size relative to our economy. Assets of UK banks are almost six times GDP, compared to the US where they are roughly equal.
These features enabled the City to generate huge profits in the boom years, but they are also root causes of its inability to serve the needs of households and businesses.
The financial crisis exploded the myth that profits booked in the financial sector means wealth for the UK. Figures from the IMF show that despite the fact that, in relative terms, the UK banking sector is six times the size of its US equivalent, it generates the same amount of total tax revenue — less than a paltry 2 per cent.
Now the long-term effects this British exceptionalism are clear for all to see. We have a banking system unable to allocate credit to viable businesses, provide bank accounts to low-income households, or even keep our money safe.
According to the New Economics Foundation, the UK lags other countries in achieving universal access to financial products and services, with 1.5m adults still lacking a current account. The branch network continues to shrink with a 44 per cent reduction since 1990 leaving more communities unbanked.
And Britain’s small businesses struggle more than their European and American counterparts to access credit, with some 370,000 SMEs failing to secure loan finance from mainstream financial institutions in 2011 alone.
But what comes next?
Martin Kettle recently argued that the mood of the nation is to muddle along. The public just want to get back to normal with as little fuss as possible. Whilst it may be true that there is little appetite for a revolutionary overthrow of liberal capitalism, there is clear evidence that there is growing interest in a different way of doing things.
The alternative financial sector has flourished in the aftermath of the financial crisis — filling the gaps where the big banks are simply unable to provide.
Households and businesses are becoming increasingly dependent on these alternatives. Unfortunately their rise is paralleled — in fact dwarfed by the increase in doorstop and payday lenders which only goes to demonstrate the size of the unmet market demand.
These alternative institutions are still a tiny part of the financial ecosystem. But the sector is at a tipping point. It now needs to work together to create a narrative which takes it beyond a niche industry. It needs to the let the public know that there is alternative out there, and why its better for them.
That’s why we have launched Move Your Money UK, a campaign encouraging people to move their money to ethical, local or mutual financial providers. There is appetite for change. We may not be in a revolutionary moment, but the public are no longer willing to accept business as usual from our banking sector and are looking for something better.