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Hugo Radice: Politicians must get off the fence and rein in banks sooner rather than later
THE final report of Sir John Vickers’ Independent Commission on Banking brought few surprises. As their interim report last April heralded, the ICB recommends the “ring-fencing” of the banks’ UK retail activities from their investment banking operations; they also recommend a significant increase in the capital cushion that banks hold against potential losses, and measures to improve competitiveness within their retail markets.
What is more, the report has been broadly accepted by both the coalition Government and the Labour opposition, although divisions remain about the speed with which the proposals should be implemented.
Our politicians will have noted the continuing public resentment at the bankers, seen to be continuing to enjoy massive bonuses despite their culpability in the 2007-8 crisis. If they needed any further encouragement, it was provided by the crass lobbying efforts of the British Bankers Association, headed by Angela Knight who hails from Sheffield, and by the ill-timed proposal last week from 20 economists in a letter to the Financial Times calling for the abolition of the 50 per cent tax band.
What are the key recommendations for us as both taxpayers and bank customers?
First, the Commission has spelled out how the ring-fencing would operate: any bank engaging in both types of activity would have to establish a separate subsidiary for retail activities, meeting regulatory requirements on a “stand-alone” basis and having its own board of directors. They argue that this would provide the same protection as a full separation, but at lower cost.
They also offer some flexibility regarding the exact location of the fence; mindful of the fact that large companies typically require both retail and investment banking services, they suggest that their routine deposits and loans could be held on either side of the fence.
Second, the Commission has politely dismissed the threat from the big banks that higher capital requirements would lead them to either wind down or relocate abroad their risky investment banking operations. Those operations must be made to take full account of risk, something they signally failed to do before the crisis, and this means holding more capital and limiting the extent of their reliance on borrowing. As to moving abroad, the City of London remains the largest centre of the global financial services sector, and there is little sign of that changing. For the British economy as a whole, the Commission says firmly that the cost of tighter regulation will be more than outweighed by the benefits of a more secure and stable financial sector.
Third, with regard to competitiveness, the Commission’s recommendations include a mandatory low-cost system for retail customers to change their bank, and greater transparency in providing information about the real cost of services, under the supervision of the new Financial Conduct Authority.
They also recommend that Lloyds TSB’s sale of more than 600 branches, required by the European Commission as a condition for their state bailout, must lead to the creation of a large enough new retail bank to provide effective competition; in return, they have decided not to require the further divestiture signalled in their interim report.
Taking a broader view, what are the main issues affecting the implementation of the Commission’s recommendations?
First, despite the apparent political consensus, there is disagreement, not least between the Conservatives and their Lib Dem partners, over the speed of change.
Many Lib Dems want a first round of legislation to be included in the upcoming Financial Services Bill, which will consider the establishment of new regulatory authorities for the financial sector.
However, Conservatives will point to the Commission’s concern that such major changes, especially ring-fencing, need to be implemented with great care and consideration, and they will welcome the proposed target of 2019 for full implementation.
In the context of other areas of continuing policy dispute, such as the 50 per cent tax rate and the NHS reforms, there will be a golden opportunity for Labour to take advantage of the popular mood by urging that the reform process should start right away.
Perhaps more important still is the global economic context. The eurozone debt crisis continues, global growth has slowed further, and there is no sign of the sort of collective response by the leading economic powers that headed off financial meltdown in 2008.
If the British economy slides back into recession, and global prospects worsen as well, banks may be hard-pressed to raise the new capital required; the share prices of UK banks have tumbled in recent months, and the Confederation of British Industry’s chief John Cridland has said that it would be “barking mad” to impose ring-fencing in the current uncertain climate.
But surely if there is once again an increased prospect of financial turbulence, reforms that would limit systemic risk and taxpayer exposure need to be implemented as soon as possible?
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