By Andrew Saunders Friday, 21 December 2012

Bank break ups back on agenda as MP's flex their muscles

The report of the Parliamentary Comission on Banking Standards is out today - it won't be spreading much Christmas cheer in the City...

The Commission - chaired by Andrew ‘Tiresome’ Tyrie, the Conservative MP for Chichester - was asked by George Osborne to look over the draft Banking Reform Bill, itself based on a number of previous reports most notably last year’s weighty Vickers’ Report. If there’s one the British legislature is good at in a crisis, it’s going off and conducting long and learned investigations. 

So what has this fearless gang of Westminster’s finest made of it all? Its key point is the perhaps surprisingly sensible sounding idea that the so-called ‘ringfence’ might need beefing up a bit. "The proposals . . . fall well short of what is required," the report says. "Over time, the ringfence will be tested and challenged by the banks . . . For the ringfence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to."

The ringfence you will recall is the device suggested by Vickers to separate the ‘socially useful’ activities of banks like lending to business and consumers, currency hedging and so on, from the ‘casino’ side speculation that some reckon got us into all our financial troubles in the first place. If banks want to speculate, let them do so with their own money rather than that of the nation’s savers and pension funds, in other words.  

Vickers stopped short of recommending full-blown separation of retail and investment banks, suggesting instead a heavily regulated artificial barrier - the ring-fence. (We think this is what they used to call a Chinese Wall in the City, a nomenclature which was dropped back in the 90s after a spot of bother with insider trading demonstrated that it takes more than a paper barrier to stop the flow of dodgy-but-lucrative information in the Square Mile).  

Vickers met with a good deal of tacit approval within the banks themselves, as it seemed to meet the requirement for serious public action without imposing a major structural reform which might cramp their money-making style. But now Tyrie and his committee have set the break up hare running again but suggesting that any new rules will simply be gamed by the banks unless supported by the threat of a very big stick - the threat of break up. The Parliamentary Commission calls this an ‘electrified’ ringfence, presumably the idea being that one is less likely to attempt to poke holes in an electrified fence. 

One the face of it this seems like a sensible suggestion - whatever the system, banks will try to game it. But there are problems - for starters it was arguably not ‘universal’ banks that caused the financial crash of 2008. Northern Rock and Bradford & Bingley were both pure retail banks, Bear Stearns and Lehmans were pure investment banks, so you could say that a ringfence, electrified or not, isn’t going to help prevent a repeat performance. And there is also of course a cost, in that more heavily regulated banks will have to charge more and lend less to punters.  

But will it result in any changes to the draft legislation? Given that both St Vince and the Treasury have already rejected it, probably not. That’s a lot of hard work for nothing by Tyrie et al...

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