Banking shake up: Osborne to endorse ‘ring fencing’ of retail and investment operations

15th June 2011

The BBC News website reported that the Chancellor is due to make the announcement in his Mansion House speech on Wednesday evening.

He will say banks must be set up so that their branches and public savings and loans would not be damaged if their investment trading arms ran into trouble.

The BBC also reports that Osborne will announce the privatisation of Northern Rock; the bank was nationalised in February 2008.

The Financial Times (paywall) reports that George Osborne's plans will herald a revolution in British banking (paywall).

By doing so the chancellor is accept the central recommendation of Sir John Vickers' Independent Commission on Banking.

Sir John’s final report is not due until September 12, Mr Osborne will use his Mansion House speech to warn Britain’s bankers to stop wasting time opposing the proposal and to start engaging with the complex detail of how the new system will work in practice.

The Telegraph speculates that public support from Mr Osborne for the proposal will lead to heavy trading in the shares of big diverse banks such as Barclays and Royal Bank of Scotland. These are expected to be hardest hit by the changes.

A Treasury source told the Telegraph: "This is a far-reaching shake-up to make high street banks safer for the taxpayer. The Government set up the banking commission to ask the difficult questions that were not asked before the crisis and this is right at the heart of their answer."

On the comment boards, the plans had plenty of support, although some questioned how the ringfencing would be enacted.

On the BBC angry_of_garston wrote: "Let me get this right. They have to hold 10% so if I deposit £10K they can lend out £100k on the strength of it and charge interest on that imaginary cash whilst paying me a tiny fraction of that interest rate on my savings? Sound like some form of Alchemy."

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18 thoughts on “Banking shake up: Osborne to endorse ‘ring fencing’ of retail and investment operations”

  1. JW says:

    Since 2008, over 70% of US requirements have been met by QE; nearly 100% in UK, and the Japanese have been doing this for years. Unsurprising yields are so low as that is exactly where the govts want them.
    Question is where has all the cash gone? Not in the ‘real’ economies thats for sure. I would contend that a large amount is used by the banksters to bet on commodities and more recently the ‘sub-prime’ EZ bonds and associated CDSs. For the reasons you eloquently explain the EZ has created a ‘gold standard’ system which allows speculators to play the repo game just like they did with US sub-prime mortgages.
    All this demonstrates how completely the whole system has been captured by the banksters.

    1. Anonymous says:

      Spot on JW, and all in the name of “maximising investor returns”….. (“and my pocket”!)

  2. Bkester says:

    Shaun, I absolutely agree with the last sentence of your blog.  Why invest in a bond yielding less than 2%? It reminds me of that quote from the late and great soccer player George Best. “I spent a lot of my money on booze, women and fast cars. The rest I just wasted”. 

    1. Anonymous says:

      Hi Bkester

      There is also the apochryphal story where a waiter brings a bottle of champagne to George Best’s hotel room. On the bed lies lots of £5 and £10 notes ( this was years ago) and the current Miss World (Mary Stavin I believe).

      The waiter then asks “Mr.Best where did it all go wrong?….”

  3. Rob Silver says:

    I have been reading Shaun’s blog from the nearly the beginning, and one thing that I can’t grasp is, how does buying your own Government debt work?  First off, let me say that I’m in no shape or form, an economist, and I’ve hesitated for a long time to ask this question, not wanting to look foolish, but curiosty has gotten the better of me!

    As far as I understand things, Governments need to borrow money (probably because they make too many promises to the electorate!).  Therefore they issue IOUs, via the Treasury, which the banks and individuals can then buy.  Then along comes the financial crisis and central banks decide to start QE.  This is where my understanding becomes fuzzy: surely the Treasury and BoE and one and the same, so if they ‘print’ money and buy the IOUs back from the banks, surely they’re bying there own debt?  What happens when they mature?  Does the BoE pay the Treasury, or itself?  If, as Shaun’s article states, that, “…it has bought so much of the UK gilt market it is facing problems in buying more.”, surely there is no market for gilts, as they’re in the hands on one organisation, i.e. the BoE.  And if you’ve bought your own debt then surely you’re more in debt?  And by printing more money you’re debasing your own currency, so how do you get of the mess?  Sorry if it’s a stupid question.

    Finally, did anyone read overnight that the IMF will allow countries to borrow from them, up to 10 times there contributions to the IMF, but only to select countries that are, essentially, fiscally sound, but for only, something like, 3 months?  This, in my mind, begs more quesions that it answers.  If you’re fiscally sound, then why would you want to borrow from the IMF?  Why only 3 months, surely if you’re in need of a loan, you need it longer than 3 months?  And if you can borrow 10 times your contributions, and you need the loan, how do you think you’re going to repay within 3 months?  Answers on a postcard.  Or am I missing the point, again?!

    1. High Rise says:

      To answer your QE question, first HM Treasury and the BoE are not “one and the same”. The former is a government department whilst the latter is formally independent from goverment. It is the BoE that is buying long-term UK bonds from the Treasury, and yes this has at least an indirect effect on the value of Sterling (downwards) and inflation (upwards). But some Keynesians like Paul Krugman would say this is just what the Doctor ordered (and Shaun Richards would strongly disagree). The Treasury is certainly increasing debts by selling bonds (to the BoE or any other buyer), but the expectation is of course that they will repay with interest when the bonds mature.

      1. Anonymous says:

        Hi High Rise and welcome to my part of the blogosphere…

    2. JW says:

      QE is a method whereby the Central Bank swops less liquid assets ( usually not always) government treasuries ( bonds) with short term liquid assets ( ie cash). It can be argued ( and is by the MMT crew) that this does not create new money, it just tweaks the interest rates. It can further be argued that because the Central Bank can create ‘money’ by clicking a mouse and creating credits in commercial banks, a government does not need to issue treasuries at all, it is just a hang-over from gold standard thinking. The same logic states that taxation is just the destruction of the same ‘money’ . This is the fiat money system in action. As Shaun describes, if a country has control over its own currency , the risk to this system is devaluation of its currency and internal inflation; it can never become ‘bankrupt’ unless it chooses to ( Russia in the late 90s) because it can always create fiat money.

    3. Critic Al Rick says:

      In a nutshell:

      Q: How does buying your own Govt debt work?

      A: Effectively by robbing savers.

      Q: Why the IMF anomalies?

      A: Corrupt manipulation.

    4. Anonymous says:

      Hi Rob

      I can see that High Rise,JW and Al have made a good shots at your QE question so I will address the IMF one.

      You are entirely correct to question phrases such as “fiscally sound” because if you are then you do probably not need the IMF’s money! Every now and then someone goes to the IMF for balance of payments help and not all of them will be fiscally unsound.

      The IMF’s new arrangements are both too small and too short-term to actually help anybody in trouble in the Euro zone. I can only think that they are deliberately drawing attention to that ( in the hope of getting more funds..)

      So no rather than missing the point you are making valid ones.

  4. MajorFrustration says:

    OMG – is anybody in Government following this Blog or do we have the cretins we deserve.

    1. Anonymous says:

      Major, the fact is they would like to read it but at the moment a Special Select Committee is evaluating the many ways in which they might turn on the computer! Their report is due in 2014…….need we say more?

    2. Anonymous says:

      Hi Major

      I contacted my MP Jane Ellison who spent over a year losing the emails and phone messages I had left for her before finally passing on my suggestion for reform of the Bank of England. She has told me that she has passed them onto HM Treasury but with a record like hers so far….

  5. Anonymous says:

    Hi Shaun
    Isnt there another issue to add to safe haven factors – proportion of government debt held by overseas investors. If this was high, would not the lack of credit risk in dollars, sterling and yen be matched by concerns of depreciated currency and inflation?

    1. Anonymous says:

      Hi Shire

      You make a valid and good point. If pressed I would say that there is a middle range where it does not matter but towards the extremes it definitely does. And it also influences the rate at which yields change as in the higher the % of foreign holdings of your debt the faster a “sovereign debt crisis” is likely to envelope a nation.

  6. Critic Al Rick says:

    Hi Shaun

    Japan: Gross naional debt 250% GDP; 10 year bond yield 0.97%

    Greece:  ———– ” ———  192% GDP;  ——— ” ———-   28.80%

    Possible explanation, remembering my comments to yesterday’s article: the powers-that-be aren’t interested in ‘coaxing’ Japan anywhere at the moment, let alone into the ‘German Empire’. 

  7. tony graham says:

    Dear Shaun,
    I mentioned the other day about the Telegraphs Ambrose Evans-Pritchard,and that some years ago I asked him what his view was as to what was going to happen in Britain..and the response was ‘ten years of a Japanese style stagflation’
    To be honest I’m just about to trust my gut reaction as to what’s going to happen to Britain in the next thirty years, and make some serious life changing decisions,about selling my house,emigrating…….. frankly its all got me pretty spooked.
    I still maintain that it is easier to sort out a country with about eleven million people in it, than one like this with about seventy six million (did you catch the supermarkets own census?)
    I would really appreciate your synopsis as to what you think is going to happen here,as I value greatly your opinion.

    1. Anonymous says:

      Hi Tony

      Thanks for the compliment and I will give it some thought. My initial thoughts are that we are rather unlikely to have Japanese style disinflation so I would tend to disagree there…..

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