Reshaping the banks. The missing issue in the economy debate
So the Tories want a "new economic model" and Labour want "radical change". Both say they want more manufacturing, higher exports and a less regionally uneven economy. But there is one, big unanswered question in all this: where do the banks fit in?
The banking issue tends to be discussed as a global problem - but if the banks really did distort and harm the rest of the UK economy under the old model then there have to be straight answers at a national level about what government thinks their future role should be.
The banks stood at the centre of the old economic model: Britain carved itself out a niche as the least regulated venue for international finance: it became Europe's financial centre; the world's foreign exchange trading depot and - despite not having a strong stable of domestically owned investment banks - managed to turn its biggest three high street banks into high -rolling losers in the global casino.
Eighteen months on from the banking collapse the debate has moved, quietly, away from the old orthodoxy. There's talk - among regulators, ministers and even in the boardrooms of the banks and big law firms - of a "new model" in banking as well. But there remain two big dividing lines: the heavy re-regulators and the softly-softlies; and the globalists versus the localists.
But, as Credit Suisse analysts pointed out yesterday, this does not map stereotypically onto the Labour-vs-Tory battle.
Thinking among regulators tends to focus on two problems: the first is how to force the banking system to pay for the implicit guarantee - what I call a generation of moral hazard - that the state extends to them.
Originally the bankers thought they were going to get away with a simple hike in "capital adequacy": there would be a Basel III treaty, with new tougher rules on how much capital you have to hold, and the lawyers would make a mint designing new ways to get around them. They thought this because that is what they had told the politicians to do: and the politicians had repeated it.
But a seminal paper by Bank of England executive Andy Haldane changed the game. Haldane's paper, Banking on the State, set the tone for a more vigorous pursuit of payback in the form of various bank levy and taxation proposals.
As early as the Pittsburgh G20 Summit you began to see this filter through into policy: Gordon Brown espoused then dropped the idea of a financial transaction tax; President Obama dumped the "capital adequacy only" approach and switched to a strategy designed by Paul Volcker, including a hefty levy on Wall Street.
Finally the onset of fiscal crisis brought the debate into the bread and butter world of avoiding riots on the streets: politicians realised that as well as deterring risky behaviour the levy proposals would actually raise money for cash-strapped governments.
But how to impose the levy? President Obama has gone for it unilaterally; the Conservatives propose a (smallish at around £1bn) unilateral levy. But Labour has stuck out for a global approach. It has accepted the argument put forward by the City of London that any levy that is not global - even an EU wide one - would disadvantage London. The City view is that both Wall Street and an unholy alliance of Paris and Frankfurt want to, as one well-heeled lady banker put it to me, "shaft London".
Naturally the banking industry is opposed to all forms of the levy. The British Bankers' Association have called it "populist, political and penal". But in so far as they are prepared to support it at all they prefer Labour's "global" version to the Swedish style flat tax on bank profits proposed by the Conservatives. The reason for this is a mixture of self-preservation (don't shaft London) and logic (it's a global system so you need global rules). However the implication of the "do it globally" argument - rarely spelled out - is if you can't do it globally you don't do it at all. Or, to put it another way, you only do what you can do globally, and therefore you accept a more timid reform at a slower pace.
This debate is set to develop quite rapidly before and immediately after the election.
The IMF is due imminently to issue a draft of the global banking levy. I understand Gordon Brown will immediately endorse it: handily arming himself with a bigger, more comprehensive banking measure than that proposed by the Conservatives, and challenge the opposition parties to match the commitment. Britain has a big voice in the IMF so this matters. There will be a G20 finance ministers meeting this Friday to hammer out a common EU position on the banking tax to take into the G20 Summit in Toronto in June. In both G20 and IMF what Britain says matters a lot, so if there is a change of government the rest of the world will want to know how George Osborne or Vince Cable actually plans to vote.
Now for the second big problem perplexing the bankers and their regulators: "too big to fail."
Capital adequacy could never address the "too big to fail" problem; nor can a straight levy on bank profits - because it does not weigh differentially on high risk activities nor deter the creation of entities whose collapse can bring down states.
Here again some tough thinking has been done at the Bank of England. Governor Mervyn King is on record as saying that if a bank is too big to fail then it is too big to exist. The position on this, originally, was the so-called "living will" for major banks. A giant, complex, cross-border bank like Barclays or HSBC would be required to specify which bits of its operation would be bailed out by which government in the event of collapse. But again it became clear that this early panacea was not going to be enough.
Politicians and regulators are now looking at ways to prevent or downscale the creation of giant, high-risk, cross-border banking empires. The IMF version of the banking tax is said to do just this. It will be designed to penalise systemic risk: so that - unlike the Tory/Swedish version of the tax - if your mere existence poses a risk to the system, no matter how risky or profitable your activities per se, you will be made to pay more.
But again there is another, simpler, national-level solution: forcibly break up the big banks. This is what Mervyn King advocates. I understand it will be high on the agenda of the cross-party commission on the Future of Banking. And of course the Conservatives intend to give Mervyn King regulatory oversight of the banking system, abolishing the FSA.
[UPDATE 1142: As I was writing this the Libdem Manifesto came out. I should add therefore that of the three main UK-wide parties the Libdems are the only ones to issue a crystal clear pledge to break up the banks - not just to avoid complexity but to create, effectively, a Glass-Steagall style wall between savings and speculation. Read it here.]
Hence, politically, this curious situation has emerged: on both the bank tax and on breakup the Conservatives and Libdems have either announced or signalled early, national-level intervention while Labour is reliant on the emergence of global consensus and new global rules. And on breaking up the banks, the perception of the City at least is that the Conservatives could be harder than Labour. The Libdems certainly would be.
If you add to that City disquiet over Tory immigration cap policy (a number of City folk were put up to the media to oppose this by Labour HQ yesterday) that explains why big City voices are not yet queuing up to endorse the Conservatives. Indeed there is a strong Labour lobby in the City with ex Standard Chartered boss Lord (Mervyn) Davies at its centre.
All of this puts into context Gordon Brown's admission to ITV today that he listened too much to the bankers during the boom and did not consider sufficiently what was in the public interest.
Even now, when it comes to the chosen path of regulation, Gordon Brown's path at present coincides with the one favoured by the big cheeses Canary Wharf: global or nothing. (Just to validate that I phoned the Treasury. Question: What is the UK government's fallback plan if there is no global agreement on banking regulation? Answer: The UK is working towards a global agreement).
Both the Conservatives and the Lib Dems have said they will act in advance of any global deal: the Lib Dems with a 10% tax on banking profits, the Tories with their banking levy.
Labour has never spelled out precisely what it would do if the global banking tax, the living will rules and even the Basel III negotiations themselves all come to nothing. "What do you do if there is no global agreement on re-regulation?" should be high on the list of the questions for the leaders in the economy debate.
Here's why it's an important question: the world has laboured for a decade on the Doha trade round, yet there is no global treaty on trade. We had the farce of Copenhagen - so there is no global treaty on climate change. Healthy cynicism would suggest that it is at least a possibility that we never get the global banking tax, or the new tough rules to penalise systemic risk, and that therefore governments have to act at national and continental-wide level to re-regulate banking.
And the imperatives to reshape banking are not just global: they are national. If you want a new economic model for Britain, and if you want to begin building it pronto as both parties say they do, then you have to make some signal to the banking system of what its new role is to be.
If you think, as Adair Turner implied, large parts of what Canary Wharf does are "socially useless" and actually crowd out innovation in the rest of the UK economy, that is an issue for Westminster, not Basel.
Basically the issue of global banking could take years to solve but the issue of rebalancing the UK economy is - as all parties now say - urgent.