Don't bank on it: The financialisation of the UK economy
This report weighs up the arguments put forward by the financial sector's supporters and detractors and analyses its role in the economy. The results of this analysis have some important implications for current debates about the future of the financial sector.
Since the 'big bang' in the City of London in 1986, there has been a large increase in the role of financial services in the UK economy. Lobbyists for the financial sector argue that Britain is good at finance and that we should exploit our comparative advantage in this area to the fullest extent. Before 2007, this view attracted wide support. The strength of the financial industry in the UK was seen as an important bulwark at a time when manufacturing was struggling to compete with low-cost production in emerging economies.
Today opinions are very different. The financial crisis of the last five years has revealed the significant risks associated with having a large financial sector. This has led to a more sympathetic hearing for those who criticise finance and financialisation: the increased role of financial institutions, markets and agents in the economy.
After the events of the last five years, finance - and investment banking in particular - are held in very low esteem in the UK, but a modern economy cannot function without a healthy financial sector. For historical reasons, the UK has a larger financial sector than other similar economies and this can be a source of strength. But the financial industry is an asset that comes with associated costs. The challenge for policymakers and customers of the financial sector is to reduce these costs without damaging the asset.
We recommend the following steps should be taken.
- Retail and investment banking activities should be split into separate organisations.
- Competition in retail banking should be increased, for example by reducing barriers to entry.
- Risk-taking in investment banking should be reduced, for example by making senior directors and managers liable for financial loss when things go wrong.
- A British Investment Bank should be set up to fill the financing gaps left by commercial banks.
- Investors should stop paying extremely high fees for what can only - on average - be investment performance in line with the market.
- More should be done to make the case for wide-ranging financial transaction taxes and to explore ways to minimise avoidance of them.
- The overall level of credit in the economy - in particular speculative credit - should be controlled.