Bernard Ginns: Cable right to call banking lobby to account over reforms

That’s how Business Secretary Vince Cable described efforts by the banking lobby to frighten politicians away from tackling banks that are too big to fail.

The Liberal Democrat slammed bankers for “trying to create a panic around something which they know has to happen”.

He was spot on.

The attack came after warnings from the CBI that moves to reform the sector now would be “barking mad” and the British Bankers’ Association, which claimed that forcing measures on lenders risked denting confidence and cutting the supply of credit to the real economy.

This war of words heightens the sense of anticipation before next week’s long-awaited report from the Independent Commission on Banking.

The commission, headed by Sir John Vickers, is expected to recommend increased capital requirements and a ring-fencing of banks’ retail operations from their investment arms.

Research out yesterday from the Ernst & Young Item Club suggests that the Business Secretary might have been right when he accused bankers of “special pleading”.

The independent forecaster played down the effects of ring-fencing, claiming that the proposals would reduce GDP by 0.3 per cent and only marginally increase the cost of borrowing for large corporates.

“The impact on the economy isn’t that great,” Lloyd Barton, economist at Ernst & Young, told reporters.

britain’s second biggest mutual, and Yorkshire’s biggest lender, echoed the views of the Business Secretary.

Iain Cornish, chief executive of Bradford-based Yorkshire Building Society, told me he had “a bit of sympathy” with Vince Cable, (in an apolitical way, he added).

“On the one hand, if you look at aspects of regulation around toughening up the liquidity and capital requirements, they do dampen banks’ ability to lend,” said Mr Cornish.

“But on the other hand, you have seen what happens in the last few weeks if banks are not perceived to be strong; people start to worry about French banks, Bank of America and Greek banks.”

He was referring to the massive sell-offs as investors deserted bank shares in Europe and America.

Mr Cornish went further: “Simply to delay putting in place a regime which ultimately banks do need to get to does seem to me to be something that we might potentially live to regret. That would be a mistake to me.

“It has to be at a sensible timeframe. But you have to grasp the nettle.”

while economic impact of the reforms might be marginal, if the Item Club is correct, there are always the unintended consequences to be wary of.

I hope the Vickers Commission has considered how reforms impact on the small but important building society sector.

By and large, mutuals negotiated their way safely throughout the financial crisis without needing taxpayer support, unlike their shareholder-owned banking cousins, who are lobbying hard to avoid reforms that threaten future profitability.

Building societies are owned by their members, which means they are under less pressure to deliver massive profits to external shareholders.

Kim Rebecchi, the sales and marketing director at Leeds Building Society, said she supported the aim of the commission to improve stability in the banking system, but warned that “any reforms must be proportionate to the size and complexity of the provider as it is the large complex banks that could pose more risks”.

She added: “One advantage of separating the retail and investment operations is that at times of high profits, the market can be distorted by banks offering heavily subsidised products through its retail operation, which is unsustainable and not in the long-term interest of customers.

“Building societies, as mutual organisations, are primarily retail operations and it is important that the proposed reforms do not affect our sector in a disproportionate way.”

At Skipton Building Society, chief executive David Cutter said that “if the ring-fencing results in parts of banks effectively mimicking traditional building societies, one of our key desires is that we are assured a level playing field and don’t end up competing with organisations which have an unfair advantage due to their continued implicit or explicit Government guarantees”.

Mutuals were treated badly when they had to contribute a disproportionate amount to the Financial Services Compensation Scheme. They have had to compete for customers against taxpayer-owned lenders.

I do hope that the commission has taken their interests into account.