Flipside of political banking

You might think bankers worry only about balance sheets, risk assessment and bonuses. Think again. Now a banker needs to take a stance on the rights of Canadian aboriginals, foreign control of UK industry, and the plight of jobless people during a recession.

Welcome to political banking.

A year ago, governments stepped in to rescue banks that were teetering on the edge of bankruptcy. Recently we have seen some of the consequences. Pressure groups have decided that if banks are an arm of the state, they should be subject to the same scrutiny as the government.

This will be catastrophic because political banking is always bad banking. Nationalised lenders should be sold back to private owners as fast as possible.

Over the past few weeks, it has become clear that the banks will have to negotiate with more and more lobbyists, unions and campaign groups as government-owned companies are forced to become more responsive to issues in the public interest.

Royal Bank of Scotland Plc, for example, has been targeted by indigenous groups from Alberta and Saskatchewan, Canada. They aim to stop RBS from lending money to companies that invest in oil sand extraction in northern Canada.

Bid for Cadbury

When RBS isn't being hammered over its oil investments, it is criticised over its role in the food industry. The bank is one of the lenders to Kraft Foods Inc. in the US food company's hostile bid for UK chocolate maker Cadbury Plc Trade unionists and Labour Party politicians have demanded to know why a bank that is majority-owned by the UK people is helping out with the dismemberment of a fine old local company.

Likewise, Lloyds Banking Group Plc is fending off trade unions for its plans to cut jobs after the takeover of HBOS Plc.

In France, BNP Paribas SA agreed to close its branches in the "gray list" of tax havens compiled by the Organization for Economic Cooperation and Development at the behest of the French government, which owns 13.1 per cent of BNP and has been leading a fight against offshore centres.

There was no suggestion the bank had done anything wrong, but French President Nicolas Sarkozy would have found it politically embarrassing for bailed out companies to operate in tax havens.

The bankers had better get used to it. This is only going to escalate. Over the next year, expect the state-rescued banks in the UK, US, Germany, France and the Netherlands to be subjected to an increasing barrage of demands, protests and lobbying campaigns.

The average bank annual general meeting will attract more protesters than a Group of 20 summit.

Why aren't they lending more money to gay people? Or helping minority-group entrepreneurs? Why are they lending to companies that do business with brutal dictators? Or companies that test products on animals? The list of issues is endless.

And, in fairness, many of the protesters and pressure groups have a valid point to make.

After all, it is hard to figure out why RBS should be helping Kraft take control of one of Britain's most successful companies. If the banks get protected by the government, why not the chocolate makers?

It can hardly say it is just following the market demands. In a free market, RBS wouldn't exist anymore. In reality, none of the state-supported banks can really rebut the arguments of protest groups anymore.

The trouble is that political banking doesn't work.

Banks must be able to make lending decisions based on commercial criteria. Otherwise, they will just end up lending money to people who can't pay it back.

Job cuts

And they have to be allowed to make efficiency savings even if it means cutting jobs. If they don't, what was the point of those mergers? How do they claw their way back to profitability?

Pretty soon, the main objective of the state-supported banks will be to avoid offending powerful political interest groups — not making money.

There has to be a better way.

It is nonsensical to imagine that banks can have the state as a major shareholder for many years. They will be forced to deal with constant political interference. As a result, they will decline as businesses.

There was a good case for the state intervening to rescue banks during the financial crisis. There is no case for the state owning them in perpetuity.

It would be far better to break them up into those units that can be rescued and transfer them back into private hands as quickly as possible. The rest should be shuttered.

Political banks are badly run and will incur huge losses as they try to please everyone. Give them back to private owners and put a stronger leash on them next time.