The future of the UK financial sector is up in the air again today, after it emerged that a report from parliament’s Banking Commission – due on Friday – will call for laws which would allow banks to be broken up. The Parliamentary Commission on Banking Standards (if you wanted the name in full) is expected to back the main proposals from the Vickers Report, which include ring-fencing of retail and investment banking operations.
But the new report is also expected to throw some of its weight behind total separation of the two functions, to avoid situations where banks are not fully implementing their ring-fencing. Andrew Tyrie, the chairman of the Treasury Select Committee, has voiced fears that ‘the effect of the Vickers proposals could be diluted over time’ if some kind of statutory framework is not imposed. The upcoming report's recommendations might mean that retail and investment operations would have to become legally distinct entities and that the transfer of cash between them would be severely limited.
The proposals could be a spanner in the works for chancellor George Osborne, who last month warned the commission to avoid ‘unpicking the consensus’ that had settled around ring-fencing laws. The main point of the original proposals was to help protect consumers/savers’ money in the retail operation from ever being lost in the much more volatile and risky investment banking operations.
But the Banking Commission is no doubt feeling pressure to appear tough on banks after a string of further fines and rebukes in recent months. UBS is about to be fined more than $1bn over the Libor rate-fixing scandal; RBS may face a fine of £350m over the same issue; Barclays is trying to defend against a fine of £291m over accusations that it had manipulated electricity markets in the US; and mere months ago HSBC was fined $1.9bn after a money-laundering investigation by US authorities.
Whilst these fines have little bearing on the debate about whether banks should be broken up, they do add to the general clamour for radical action. It’s hard to know whether a forced break-up of the two functions would be desirable for the UK in the long-term however. Competitors overseas, especially those in New York, will see it as an opportunity to draw some business out of London…