Government runs out of credit with banks

The analogy is vivid enough: plonk a frog into a pan of water that is being heated one degree at a time and the cold-blooded amphibian will boil to death; drop the same frog into a pan of scalding hot water and it will jump right out again, largely unscathed.

It is recounted by one of Britain's top high street bankers as he seeks to explain how the banking establishment here feels it has been treated over recent years.

Ratcheting up the heat have been the Cruickshank report, the Competition Commission's findings on sector mergers, the mis-selling inquiries, the universal banking row, the ATM charges row, the bank closures row and, more recently, the fierce select committee debate over credit card charges that may yet mutate into a full-blown Competition Commission enquiry.

Rightly or wrongly, the big banks say they have had enough. While still insistent on anonymity, their language in private briefings to the media has become increasingly purple.

Were not the various mis-selling scandals a self-inflicted wound? No, they were a "miscarriage of justice" whereby the regulators have arbitrarily and retrospectively absolved the public of any responsibility for their own financial decisions.

How about the new Sandler regime for savings products? Pah! "That will fail under its own weight."

What does this banker make of John McFall, chairman of the Treasury select committee? "Too dim to understand the issues or the business."

Brown? "This government is trying to have it both ways: a strong social policy and a capitalist agenda. The accounts don't square."

This nameless banker at least says the high street banks are done with being "some sort of social service". He notes that Britain is a place where banking is seen to be a free service. When interest rates were sky high, the banks could make good money from current account deposits, but that is not the case any more. Yes, their profits now come from overdraft charges, sly penalties and other opaque charges - because the banks have been forced down that road in order to protect their returns.

Britain, he says, needs big, profitable banks that can compete and progress, paying taxes, employing thousands of people and protecting the nation's pensions through the steady appreciation of their equity.

But when the government starts talking about micro-regulation, about caps on charges and other direct interventions, then "the compact cannot continue". What we will get instead, the banker predicts, will be closures of unprofitable branches, the transfer of thousands of jobs to India, fees for using ATMs and an end to cross-subsidisation of banking products that tends to favour the less well off.

Now, it is the case that much of the angst being laid here at the door of officialdom is wholly unwarranted.

The fact that consumers view banking as a "free" service is a product of the market - British banks competing ruthlessly with one another to win customers who, all the numbers suggest, tend to be very profitable indeed. It is the banks that introduced the opacity which plagues the financial services industry at all levels, not the government and not John McFall.

But the simple fact that senior bankers are now talking in these terms, albeit privately, points to an important breakdown in the relationship between the financial industry and the government. We should watch carefully to see where it leads.

BT bust-up


There seem to be some real tensions at the top of BT. The Observer reported an apparent boardroom bust-up this weekend, hinting that Pierre Danon, chief executive of BT Retail, had threatened to resign after a row with Ben Verwaayen, group chief executive.

Then, yesterday, we had a brace of fresh stories. The first explained how BT will be introducing technology over the coming year that will enable users of new mobile handsets to use Wi-Fi hot spots in hotels and airports, sending voice traffic over the internet and potential producing huge savings for customers who travel a lot.

Then we had a tale suggesting BT might invest huge sums in unbundling its local loop so as to lower the regular running costs of Mr Danon's division, as he seeks to compete with the residential broadband suppliers who are finally taking advantage of regulatory reform to undercut BT.

Unbundling allows telecoms firms to bypass the £12 flat charge levied on each broadband connection by BT Wholesale. So, if Mr Verwaayen is ready to back Mr Danon, it means undermining one side of the business in favour of another.

As ever with BT, this is all about supporting revenues in the short term while making those structural reforms to protect the overall business in the longer term.

Making the resultant choice over asset allocation is is probably Mr Verwaayen's most important near-term decision.

It's very entertaining having the resultant fight among divisional bosses over resources played out in public. But goodness, it doesn't say much for BT's institutional discipline.