Adam Smith Institute

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Bashing banks

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bashing-banks

I was meant to go on Radio 4 on Friday to talk about whether the government should force banks to pass on interest rate cuts to customers. In the end another story took its place, but here's what I would have said.

The banks are being pulled in two ways by the government. They've been told they have to become financially stronger and rebuild their asset sheets, and that's what they're doing.  But now the government wants them to lend more too – which it's doing for popular consumption rather than any business reason.

The government shouldn't be micromanaging banks. Bankers know they have to consolidate their businesses, so that we can trust them in the future, and that's what they're doing.

Plus, the banks probably figure more people are going to default on their mortgages, but now the government is forcing them, effectively, not to foreclose. So they need some padding to get through that. It may be bad for borrowers now, but it is good for the financial sector in the long term.

One big problem is that there's now much less competition in banking because recent forced mergers and acquisitions has reduced it. In the long run, we'll need much more competition in the sector because that will put more pressure on banks to operate efficiently and give customers the very best deal. A few well-managed banks have already passed on the cut. It's the others who have to rebuild themselves that haven't.

Ultimately, it's just not for the media or politicians to tell people how to run their businesses. If there is proper competition, customers will be protected. In a free market, you can choose a different institution that doesn't charge so much.