Time to Stop Bashing the Banks. Time to Reform them properly.
Last year the Mega-Banks - freshly bailed out by you and me - signed a tax code which demanded that they comply with the "spirit and the letter" of the law.
A year on and people are asking whether the banks are indeed doing just that after it became clear that Barclays paid a paltry Â£113 million in corporation tax in 2009, on a whopping pre-profit of Â£11.6 billion.
That works out at an effective corporation tax rate of around 1%. The rate of corporation tax in the UK is 28%.
Barclays, remember, said "we have signed up to the UK government's code of practice on taxation, which is very clear on the obligations it places on banks to ensure they manage their tax affairs properly."
Fast forward to right now, and Barclays reckons that we can't compare the Â£113m paid in corporation tax with its headline pre-tax profit of Â£11.6bn as it's a highly complex business with hundreds of subsidiaries and operations in some fifty countries (including in tax havens).
Indeed, Barclays global structure is indeed highly complex - and I would argue deliberately so, in order to minimise its tax bill - in perfectly legal ways of course.
The firm also argues that the Â£113 million corporation tax figure was affected by the losses it had incurred from write-downs caused by the credit crunch.
In 2008, with the financial crisis in full flow, Barclays booked losses and bad debt provisions of some Â£8 billion. "That'll do nicely" they probably said at the time.
Other banks enjoy similar huge benefits. RBS-Nat West, for example, paid no corporation tax at all in 2009. By the third quarter of 2010 it admitted that it still had Â£5.9 billion of tax credits stacked up, of which Â£3.7 billion were related to the UK.
In a hard-hitting report for the TUC last year, Richard Murphy highlighted that the megabanks will avoid some paying Â£19 billion of tax on future profits by offsetting such losses; that equates to some Â£1,100 for every household in the UK.
Before the banks inflicted the financial crisis on us, they paid the UK government around Â£10 billion in corporation tax each year. This had halved by 2009 and owing to the banks' ability to keep writing off the huge losses suffered in the crisis (which by the way we effectively underwrote), will carry on for some time.
What we are effectively seeing is the bailed out and state supported banking system using - as Lord Myners has noted - a combination of tax avoidance strategies and a complex system of subsidiary companies together with losses brought forward, all of which means they will be not be making a meaningful contribution to corporate tax for some years.
And banks - and firms in general - keep up the pretence of saying that they pay huge taxes when in fact much of it is paid by their employees.
So when first asked how much tax had been paid, Diamond told the House of Commons Treasury Select Committee that Barclays paid Â£2 billion in taxes to HMRC.
But we can now see most of this is in fact payroll taxes for employees, in other words national insurance and income tax paid by Barclays' employees NOT by Barclays plc.
All of this comes despite George Osborne having floated the idea in opposition of preventing banks from offsetting all their losses from the financial crisis against tax. This would have forced the banks to pay billions more in tax over the next few years. He now appears to have dropped that idea.
The chancellor instead introduced a Â£2.5 billion-a-year bank levy which he claimed is harder to avoid and in effect won't penalise the likes of RBS-Nat West which will report losses for 2010 of Â£700 million later this week.
Osborne claimed at the time that banks would pay "more tax, less bonuses and lend more this year than they otherwise would have done". Sadly that doesn't seem the case. Osborne was right in opposition and wrong now.
When he appeared before the Select Committee, Diamond had argued that the period of "remorse and apology" for banks was over. He's right.
Let's stop bashing the banks and let's start reforming, regulating and controlling them properly, especially given the abject failure of Project Merlin to do anything to really get banks lending to business.
For starters, that should comprise the following performance regulations and wider structural reforms:
The ability of banks to offset past losses against corporation tax needs to be removed immediately, so that banks pay their fair share of corporation tax.
To make up the shortfall for 2009 and 2010, an immediate retrospective windfall tax on the banks should be used to help get the government deficit down. That would be in addition to the government's rather pathetic bank levy.
Replace the vague gross targets in Project Merlin with a net lending target. And if the banks 'pledge' to lend Â£x billion and fall short, then they should be taxed on that shortfall. That would focus the minds of bankers and make them consider business loan applications more seriously, using experts who can evaluate loans properly.
Undertake fundamental reform of the banking system, with a UK version of the Glass-Steegall Act, to strip out the utility or 'narrow' banking that is essential to all of us. We need to regulate and control thus utility banking like we do with a utility, or if regulation fails, then the state should run it.
Inject some competition into the system, preferably with a bigger mutual sector that could genuinely compete with the banking PLCs, starting with the remutualisation of Northern Rock. Mutuals have a different appetite to risk and bring greater stability to the system. Cooperative lending to business via organisations like the Black Country Reinvestment Society could also be encouraged, and there could be reforms to credit unions to encourage expansion.
What we want to see is greater 'econo diversity' in the financial system that both gives consumers and businesses greater choice and also helps reduce future risks from a system dominated by banking PLCs.
Alternatively, don't be afraid of state ownership. Why privatise Northern Rock; why not run it as a state bank if not a mutual, providing competition to the plcs which jacked up mortgage rates in the absence of competition from Northern Rock and foreign banks? The government could sell Rock current accounts and savings accounts through the Post Office branch network, as in the days of Girobank before that was sold off. This might also help some Post Offices stay open.
Re-regulate the financial system, implementing in full the Basle-based Financial Stability Forum's 2008 ideas that include: (i) banks fully and promptly disclosing their exposure to risk and write-downs, and giving a fair value for complicated and illiquid products; (ii) the need for better accounting standards and a strengthening of risk-management processes, backed up by tougher supervision by regulators; (iii) more stringent capital requirements to limit reckless lending when credit bubbles may be blowing up.
Find ways of providing alternative long-term investment for local economic development and social-housing. Maybe we could learn from the United States and their municipal bond schemes which have financed housing building outside the crazy sub-prime fiasco? As fellow Birmingham Post blogger John Clancy has said repeatedly, we need 'Brummie Bonds to fund long term investment in Brummie industry and business' as well as our infrastructure.
Set up a national infrastructure bank and a national investment bank as previously suggested by the Labour government under Gordon Brown, but which was never followed up on.
Of course, the government is a major shareholder in both Lloyds-HBOS and RBS-Nat West, and it faces a major conflict of interest in that its shareholdings will be worth more if the mega-banks - with their ability to stack up huge profits which they don't have to pay tax on, are left pretty much untouched.
But that's not in the public interest in terms of getting the banks to behave in more socially responsible ways, notably in terms of paying their faire share of tax, lending at reasonable rates and at appropriate levels to businesses, and in avoiding excessively risky behaviour that could imperil the wider economy.
It's time for the government to show which side it's really on: the banking system or the wider economy?
Professor David Bailey works at Coventry University Business School