The Covid-19 pandemic that is gripping the nation has been frequently compared to the 2008 financial crisis, as both have had devastating impacts on our livelihoods, wellbeing and sense of security. On a global scale there have been many crises since 2008 that have had an equally destressing impact on certain groups, but most of us living in western, capitalist democracies have not had to personally face the horrors of the refugee crisis, civil wars or climate change (although 2020 has started to change that). Therefore, as a way of framing and understanding the current crisis we are dealing with, the comparison to 2008 seems apt. However, there is one crucial difference between the two – the role of the banks.
Much has been written on the role of the banks in the lead up to 2008 and the following years, which does not need to be rehashed here. The banks, having been (partly) responsible for the reckless lending practices that led to the 2008 crash and which were desperately overexposed to the credit market, came to the government for help. Northern Rock and RBS were nationalised, and the government spent £500 billion on preventing the wholescale collapse of the UK banking system. Much of the public anger and discourse directed towards them during and after the financial crisis seems to have been motivated by the idea that it was manifestly unjust for the UK taxpayer and economy to pay the cost of risky investment decisions made by a few individuals at private institutions
The treatment of the banks during this crisis could not be more different. Despite making high profits and having significant capital reserves, the large banks (Barclays, Lloyds, RBS, HSBC, Standard Chartered and others) agreed to scrap an £8 billion dividend on 31st March, only 3 days before Barclays was due to distribute over £1 billion to its shareholders. They also agreed to not paying any more cash bonuses for the remainder of 2020, lowering the levels of capital required for a loan guarantee and have appeared to be accommodating the government’s requests to support struggling businesses.
This represents a significant shift in the UK government’s attitude towards the banking sector. Even with the increased regulation since 2008, the language of the letter from the Prudential Regulatory Authority (PRA) to the banks shows the government expected them to comply or it would use its “supervisory powers should … [they] not agree”. These supervisory powers can prevent them trading, investing and lending – removing any ability to generate a profit. Given the size of the banks, it is highly likely that if the PRA were to investigate them, it would find something that breached regulations. This thinly veiled threat would have been unthinkable before 2008, which, made as an offer that can’t be refused, shows how the state views the banks as a separate type of company to the rest of the private sector. Whereas companies like Mercedes have been asked to help in producing ventilators, and most such companies have eagerly complied, the banks are expected to comply. In a time of crisis, they are now simply agents of state policy – they might not be nationalised, but they are certainly controlled by the government.
This is a coordinated approach from the top tiers of government – in a coordinated statement the Chancellor, the Bank of England and FCA wrote to the CEOs of UK banks to ensure the Covid business interruption loan scheme benefited the businesses and consumers it is targeted at. There is clearly a sense in government that a rescue package that directs most of the funds into supporting the profits of the banks is not acceptable. On 1st April the Business Secretary, Alok Sharma, hosted the governments daily press briefing and stated “It would be completely unacceptable if any banks were unfairly refusing funds to good businesses in financial difficulty: just as the taxpayer stepped in to help the banks back in 2008 we will work with the banks to do everything they can to repay that favour and support the businesses and the people of the United Kingdom in their time of need.” This language brooks no disagreement, there is an assumption that the banks will comply and pass on the help the state has given them by, for example, cutting the base rate to 0.1%.On the Bank of England’s website, they even state “We are letting firms focus on you by temporarily reducing the regulatory burden we place on them”. The implication here being that the Bank of England is using the banks as its tools, once again there is an assumption that by reducing the burden on banks, the benefits will be passed on to other businesses. When read in the context of the previous statements there is an “or else” lurking in the background – do as we say or we will investigate you, hardly a government requesting help from businesses with spare capacity but more a general ordering their troops.
The speed with which the banks agreed to the governments demands seems to be a recognition on their part that they have a duty to help the country through this crisis. Despite the massive fallout from 2008 the banks escaped with surprisingly little regulation, which is surprising when compared to regulation other companies have been subjected to in the wake of crises (consider the regulation on airlines post 9/11 or tobacco companies after cancer links were proven). Those working at the top tiers of the banks continued to earn staggeringly large sums of money (in 2017 the average compensation of the CEOs was £5 million) and dividends for shareholders have been reliable. It appears now that the price the banks have paid for high returns when all is going according to plan is their adoption by the state as yet another policy tool in crisis.
This may not seem that important at the moment, compared to the current scale of intervention by the government (effectively nationalising large sections of the workforce is an unprecedented move), but these measures are temporary. This change in attitude towards the banks is not. The government has recognised the truth: the banks play such a vital role in underpinning this country’s economy and way of life that they cannot be treated as private institutions and, due to this realisation, will not be considered as truly private companies for a long time. After 2008, this crisis shows us that the UK is not prepared to let the banks take their own risks and come to the rescue if there is a crisis, instead they are expected to be secure enough to come to the rescue of others in turbulent times like these.
The rest of the financial sector has not escaped this scrutiny, but it is not to the same extent. Despite pressure from the Bank of England, Legal and General announced they were going ahead with paying out £750 million in dividends. Legal & General have also not announced any changes to executive compensation. There was no implied threat to the insurers, simply a warning that they should consider cancelling their pay-outs. Other insurers, such as Aviva and Direct Line, have just announced they will suspend any further dividend payments. This gentler tone indicates the insurers and other financial service firms are not considered tools of the state in the same way, but nevertheless are expected to play their part in helping society through the crisis.
It is less clear is if this expectation will spread to other highly profitable businesses – the current discussion around the role of football clubs who have furloughed non-playing staff while announcing profits in excess of £100m hints that we are moving to a world where many profitable businesses are expected to play a far greater social role, even in the absence of legislation that would force this. The public may already have expected large businesses to behave as social actors, but this crisis is exposing it for everyone to see, something that legislators will find hard to ignore.
This new public attitude exposes another way in which the traditional left-right divide is outdated in the UK. Labour recently suffered one of their worst election defeats ever with policies that, among other things, proposed nationalising important parts of the British economy. The British electorate seem not to be comfortable with a government that buys and owns many large companies, and yet expects the government to take complete control of companies in times of crisis. The methods of the left have been rejected, however the ideas driving them – that there are areas of the economy that are too important to be left in private hands – are being adopted across the board. The direction of the country out of the crisis is not yet clear, but in the longer term, the boundaries between the public and private sector have become even more blurred.