You might think the British government was just about broke. The budget deficit is still among the largest in Europe. Tax revenues are spluttering even as the economy recovers. The pressure on spending grows all the time. Fortunately, however, Chancellor George Osborne managed to find a couple of billion stuffed behind the Treasury sofa just before the Autumn Statement to spend on the NHS.
Where did it come from? It turns out that half of it came from all the money the government has been collecting in fines from the banks. The misdemeanours of the City boys have turned into a lucrative source of extra funds for the state. This month, six banks were fined £2.6bn by American and British regulators for their role in rigging the foreign-exchange markets. That came after fines running into billions for the Libor-fixing scandal. In total, Britain's four main banks set aside £21.5bn during 2013 to cover the costs of penalties, according to research by the London School of Economics. That was on top of £25bn they had set aside since the crash of 2008.
In America the fines are even bigger. Citigroup had to pay $7bn this year for its role in selling mortgage-backed securities. Bank of America forked out over $11bn for its role in mortgage foreclosures. These are genuinely extraordinary sums of money. Never mind a school or a hospital, they could pay for a small war. The New York state government, which collects much of the Wall Street money, is so overflowing with cash from bank fines that there has even been a debate about a tax refund.
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A dangerous path
True, there are some good reasonsfor imposing huge fines on the banks. Firstly, a lot of them behave very badly. The mega-banks have allowed an arrogant culture to develop, in which immediate profits are put before anything else. The result is that rules get broken. Regulators need to make sure that is punished otherwise it will never stop. And there's no question that the fines have to be big. There is no point in slapping a penalty of a few grand on the likes of Barclays or HSBC. That will just be treated as a cost of doing business. If it doesn't run into billions it will not have any impact.
There is a problem, however. Bank fines risk becoming part of the government's revenues and that could be very dangerous. To start with, they will not be stable. It may not look like it at the moment, but just as even the wildest dog is capable of learning to behave eventually, so is the most ruthless bank.
It will take time, because big organisations don't change quickly. But gradually the banks will start to clean up their act, simply because they cannot afford not to. The billions raised by the fines will start to dry up. But what happens to spending then? Osborne won't want to cut the funding he has promised to the NHS not if he wants to get re-elected anyway. New York State won't want to leave the bridges and highways it has started half-built. The revenues will have to be found from somewhere else but government finances are already under huge pressure.
Regulating for revenue
The trouble is that councils very quickly became dependent on the money raised from doing this. As we all know, parking wardens come in for criticism for the ridiculous harshness with which they enforced the rules. An inch over a white line, and you got a ticket. Speeding cameras were hidden behind signposts to catch unsuspecting motorists. It was no longer about enforcing the rules instead, it was all about keeping the cash flowing into the councils.
Bank fines could quickly go the same way. Before long, regulators may wellbe issuing them because they have been set a target for the money they need to raise. No doubt they can always find some trader who has said something stupid, just as you can usually find some motorist who has slightly infringed the rules. But that will destroy the banking industry very quickly the fines will put banks out of business. The problem is treating the revenue as current income, as councils did with motoring fines. Instead, governments should treat the bank fines as a one-off windfall. They should use them to pay off the national debt, or else to give us all a one-off tax break. Anything else risks making the state addicted to fining banks and in the long-run that will be catastrophic.
