The debate has raged on for months about whether banks should be broken up or retail operations ring-fenced to protect the economy from another major financial meltdown. But at last, on Monday, Chancellor George Osborne will nail his colours to the mast, saying that he favours ring-fencing and if banks fail to comply with the new legislation to enforce it, the new Banking Reform Bill would break them up.
The bill comes in after the Parliamentary Commission on Banking Standards, which was set up after the Libor scandal (learn more about that, here) called for government powers to break banks up if they did not put reforms into action.
George Osborne will say in a speech to City boys at JP Morgan today: ‘When the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out. The British people need to know that lessons have been learnt. And they have.’
So what exactly does ‘ring-fencing’ mean? Well, one of the reasons why the banks had to be bailed out by the government is that they were exposing cash from their high street operations (in other words, people’s personal savings) to their risky investment banking operations. When the bubble burst and the banks’ investments came tumbling down, the government had to step in to prevent the general public losing all their money.
The new bill will also include requirements that investment and retail banking operations have different top dogs (instead of CEOs overseeing the lot) and a new banking watchdog to keep tabs on banks’ activities.
Understandably, the British Banker’s Association is not happy with the proposals. Anthony Browne, its chief executive, said: ‘This will create uncertainty for investors, making it more difficult for banks to raise capital which will ultimately mean that banks will have less money to lend to businesses.’ (Not that they've been doing a great of this recently, anyway).
Still, the political wind is definitely blowing in the direction of reform: the public is unlikely to sympathise with the British Bankers’ Association when scandal after scandal keeps on leaking out of the sector. We’ll have to wait and see just how stringent the reforms end up being and if the fence ends up being electrified by legislation...