The week that was: Banks’ rearguard action against reform appears to be working

2nd September 2011

Reports are now suggesting any substantial reform could be delayed until after the next election.

While some experts have suggested that the Chancellor George Osborne and Business Secretary Vince Cable are at loggerheads, reports that the banks actively sought the support of Prime Minister pressing their case that the proposed reforms put UK jobs in jeopardy.

And it seems to be working. The FT writes: "David Cameron is growing increasingly nervous about the impact of sweeping reforms of Britain's banks, raising fears among his coalition colleagues that he may seek to water down or further delay plans to split retail and investment banking operations."

Sir John Vickers, who heads the banking commission, published an interim report in the spring recommending increased capital requirements and the ringfencing of retail and investment banking arms. His full report is due on 12 September.

A lot of the argument has surrounded the details of exactly how ringfencing might work and whether it is the correct remedy. But any significant watering down or delay will definitely put pressure on relationships within the coalition.

The Independent reports that Deputy Prime Minister Nick Clegg has backed Cable against the PM.

But the paper does see one way out. It writes that: "Government insiders admit there will be a "haggle" between the two Coalition parties this autumn as ministers draw up their formal response to the Vickers report. One possible compromise is for legislation to be put on the statute book even though it would not take effect until after 2015. That might help to allay Liberal Democrat fears that a change of government could scupper the changes."

The markets seem sure the banks are winning. As The Yorkshire Post reports bank shares rose substantially yesterday.

Royal Bank of Scotland was up more than eight per cent to close at 26.25p, a rise of 1.98p; Lloyds Banking Group was ahead slightly more than six per cent to close at 35.67p, a rise of 2.07p; and Barclays was 5.62 per cent higher, closing at 180.35p, a rise of 9.6p.

Meanwhile the debate continues. On the Daily Telegraph's blog site economist Andrew Lilico suggests that events have moved beyond Vickers. He makes some very useful points such as the fact no one has demonstrated that retail banking is inherently safer than investment banking.  

But his main argument is that the Treasury may now have adopted a more radical solution ultimately allowing banks to fail safely. He writes "The Treasury (mercifully!) has no intention of accepting the principle that it will always bail out retail banks.  Indeed, earlier this summer a small bank called the Southsea Mortgage and Investment Bank, was not bailed out, and even some of its depositors (about five percent) were not bailed out by the government – specifically those depositors that had deposits above the government's formal £85,000 deposit insurance threshold."

City AM editor Allister Heath also believes Vickers has missed the target. In a typically thundering leader, he writes: "The real, truly big reform we now need – and this is in motion in the US, the Eurozone and the UK – is to finalise resolution procedures to allow banks to fail in an orderly, organised manner that doesn't cripple the entire economy, destroy innocent bystanders or trigger chaos. Even giants wouldn't be too big to fail under such a system. Such measures already exist with airports and nuclear power plants; they are well established with smaller US retail banks. We also need systems so that bail-ins become automatic, with debt turning into equity if things go wrong. The aim must be to banish taxpayer assistance, eliminate bail-outs and put in a place a structure that makes banks think and behave like all other firms, accounting properly for risk and reward."

However Independent Business Editor David Prosser warns against allowing banks to prevaricate.

"This is a dangerous moment. Despite their protestations to the contrary, there have long been suspicions that some Conservative members of the coalition Government are less minded to be tough on the banks than they claim publicly (those suspicions are held, not least, by their Lib Dem partners).

"It is possible, then, that the Government might be receptive to the case made by Ms Knight and the banks. The slowing in the pace of economic recovery so noticeable over the summer just might be the excuse ministers have needed to ease off the banks. If so, it would be a serious mistake," he says.

Earlier in the week, Yahoo Finance produced this useful Question and Answer article on the Vickers' banking commission. We'll get to hear the view of Vickers' himself in just over a week.  


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