Banking reform: should we ringfence the banks or break them up? | Nils Pratley

Give ringfencing a chance, but make parliament assess its success after a few years

Is ringfencing sufficient to make the UK banking system safe? Or should parliament, even at this late stage, prefer full separation of retail and investment banking activities – in effect, a break-up of universal banks?

There are no prizes for guessing where the sympathies of the parliamentary commission on banking standards lie. When it hasn’t been making former HBOS directors Lord Stevenson and Sir James Crosby squirm (rightly so since the incompetence and arrogance at the failed bank is still under-appreciated), the commission has been drawn time and again to examine the break-up option.

Big-name witnesses – such as Paul Volcker, the former Federal Reserve chairman who became economic adviser to President Obama – were questioned in detail on the subject. George Osborne, an advocate of ringfencing, was so concerned that he appealed to the panel not to “unpick a consensus”. On that score, commission chairman Andrew Tyrie firmly responded that there was little point in the chancellor establishing a commission if he didn’t want it to exercise its independent judgment and roam over territory, such as the culture of banking, that was placed beyond the scope of Sir John Vickers’ panel, which produced the ringfencing proposals.

Well said, Tyrie. But is your commission really about to call for a break-up? We’ll find out this week, but it looks as if sympathy for separation will not extend to an actual recommendation for its adoption. Instead, the commission may take a weaker position: if banks don’t implement ringfencing then parliament should be able to insist on a break-up at a later date.

Wishy-washy? Maybe, but it’s good that somebody in this debate is still making the case that ringfencing, however forcefully it is implemented, is untested and that greater radicalism may yet be required.

For their part, bankers tend to roll their eyes when it is suggested that the banking reform bill might not be the end of the matter. They argue that if legislators are seriously worried about ringfences being “burrowed under” they should order sturdier constructions. It is time, they assert, to settle the rules of the game and let banks get on with lending.

Well, yes and no. It is clearly important that the Vickers ringfencing reforms, which have broad support, are implemented. But it would also be foolish to assume they can never be revisited. They are an experiment, and it is already alarming that Osborne has been bounced into diluting Vickers’ recommendations on banks’ leverage.

The best pragmatic solution would be to give ringfencing a chance to work but to make parliament assess its success after a few years, as Bank of England governor Sir Mervyn King has suggested. The commission, let’s hope, will take a similar line. It is too soon to conclude that full separation will never be needed. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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