The Independent Commission on Banking released their final report this morning. Our analysis is below.

Imagine that the government establishes a Commission to report on measures to reduce traffic accidents and deaths on the road, giving them a staff of 15 civil servants, a budget of millions, the opportunity to consult the public and a year to develop some radical reforms. Twelve months later the Commission reports back, but rather than suggesting measures to reduce traffic accidents, the Commission simply proposes that the crash site is cleaned up slightly more effectively, the bodies are removed more discretely, and post-crisis counselling is provided for the victims families. No mention of traffic calming, traffic lights or fundamentally re-designing the roads to make them safer; just an assumption that fatal accidents are inevitable and the best we can do is focus on the post-crash clean up. This has been the approach of the Banking Commission. Rather than looking at fundamentally changing the nature or structure of banking, they have focussed on what to do after the fatally-flawed banking system inevitably implodes. So before we even get into the detail, we need to point out something fundamental: >> Nothing has changed << The Banking Commission is not a response to the financial crisis and has done nothing to fundamentally change the likelihood of future crises. It has done nothing to reduce the harm that banks can inflict on the rest of the economy, or to look at the impact that the banking system has on poverty, debt and inequality. Rather than getting caught in the detail of what the Commission has proposed, lets look at what they ignored. The Commission Ignores the Fact that Banks Create 97% of the Nations Money:

In the entire 363 page report, there is only one mention - in banking jargon - of the fact that banks can create money, where this process is referred to as credit creation (p166). There is no mention of this fact in the rest of the report, despite that fact that the most significant role of banks in their current form is the creation of money. In other places the Banking Commission refers to the massive creation of money by banks in the run up to the crisis in very indirect terms, saying things such as Leverage ratios of assets to equity capital had ballooned to around forty times twice historically normal levels, rather than simply stating that banks doubled the money supply in the space of 8 years. Towards the end of the Final Report, the Commission states that Banks with more robust capital, together with the creation of the ring-fence, would provide a secure and stable framework for the supply of credit to businesses and households in the UK economy. (P19). This again overlooks the fundamental point - that we are dependent on the 'supply of credit' from the banks simply because this is the only source of money into the economy. If banks do not lend, then we as the public have no access to money, and the economy grinds to a halt. The Commission Believes a Fairytale Story about Banking The Commission still believes that modern banking is about a system efficiently channelling savings to productive investments (p10) despite the fact that only a quarter of bank lending actually goes to productive investments, with the rest going into speculation and property bubbles. A more accurate description would be that modern banking allocates almost all lending into the economy in a way that suits their short-term profit-seeking objectives rather than the productive needs of the economy. By definition, much of this investment is actually unproductive, or even counter-productive. The Commission Does Not Understand How the Banking System Works The Commission does not realise that the morphing nature of the banking system now means that the level of bank lending depends more on the confidence of the banks than any level of regulation. As the New Economics Foundations guide 'How Money is Created in the UK' (to be published at the end of this month) will make clear, if bank are confident then they can make loans by typing numbers into a borrowers account, and worry about getting the real money to back up that loan after the event. They do not sit around waiting for customers to bring money in through the front door before they start making loans to borrowers. Yet the Commission makes schoolboy errors on this subject, saying: Separation has costs howeverThe economy would suffer if separation prevented retail deposits from financing household mortgages and some business investment. (p13) Unfortunately the analysis is still based on a textbook model of banking that believes that banks simply take money from savers and lend this money to borrowers. That textbook model hasn't been accurate for over 20 years. The Alignment of Risk and Reward: The Commission does make a good point with regards to pushing the risk back to the dodgy banks that benefit from risk-taking:

In addition, the cost of capital and funding for banks might increase. But insofar as this resulted from separation curtailing the implicit subsidy caused by the prospect of taxpayer support in the event of trouble, that would not be a cost to the economy. Rather, it would be a consequence of risk returning to where it should be with bank investors, not taxpayers and so would reflect the aim of removing government support and risk to the public finances. [Our emphasis, p13]. However, if the Commission really wanted to limit the risk to the public finances, then they should have spent more time looking at full-reserve banking, which allows a complete alignment of risk and reward (in other words, if you want the reward, then you take the risk as well). Instead, they allowed a junior civil servant who struggled to understand the basics of money creation to dismiss the proposal on the basis of his own ignorance. The Commission Ignores More Problems than it Addresses: The Commissions report is noteworthy more for what it ignores than what it actually recommends. It completely ignores the most fundamental problems with the modern banking system, such as the fact that:

When all money is created by banks as debt, this forces the bulk of the population into debt, permanently The interest that has to be paid to the banks on the entire money supply results in money and income being redistributed from the poor to the rich, from the real productive economy to the financial sector, and from the rest of the UK back to the City of London That banks must always be rescued by the taxpayer simply because the 85k government guarantee on bank accounts ensures that it will be more expensive to allow a bank to fail than to rescue it That the structure of the banking system results in banks being subsidised by the taxpayer between 30bn and 100bn a year (depending on what you include in the analysis)

Plans Going Forward The Commissions report is a distraction from the real changes that need to be made to the modern banking system. Its not enough to simply worrying about making banks safer - we need banks that are socially useful, rather than socially harmful. As long as we retain a system of allowing banks to create money and forcing the public to go into debt just to have money in the economy, then problems like poverty, debt and inequality will continue, as will economic chaos. Banks will continue to take power away from our democratic system (well have a full report on this shortly) and will continue to destabilise the economy and fund the destruction of the environment. In short, the Independent Commission on Banking has not addressed a fraction of the fundamental problems with the modern banking system. We dont intend to spend much more time discussing the Commission. We went to considerable effort to help them to understand the fundamental problems and the benefits of

implementing real reforms. In return, one of their junior civil servants wrote a technically inaccurate and very misleading account of our proposals, and passed this on to the Commissioners rather than actually allowing them to read our original report. If the same kind of sloppiness has occurred throughout the last 12 months of the Commission's work, then it is hardly surprising that they have taken what is technically known as a monumental cop-out. Nothing the Commission has suggested will fundamental change the economically harmful and parasitic nature of the big banks, and there are much deeper issues that still need to be addressed. Well be continuing with our work getting people to understand that our debtbased monetary system is at the root of poverty, debt, inequality and economic chaos, and that only fundamental reform will make any significant difference to the people who are paying the costs of the banking crisis. In the meantime, we strongly recommend removing your funding from the big (and most socially harmful) banks. We made not have the critical mass to pressure for fundamental reform of the system yet, but as individuals we can all ensure we're not funding the shortterm speculation, unethical investments and socially-damaging activities of the biggest banks.