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George Osborne Backs Independent Banking Commission Report’s Call to Ring-fence the Banks. Is It Financial Folly?

Posted on the 12 September 2011 by Periscope @periscopepost
George Osborne backs Independent Banking Commission report’s call to ring-fence the banks. Is it financial folly?

Chancellor George Osborne. Photo credit: Paul Toeman

British banks should ring-fence their retail banking divisions to protect them from riskier investment banking arms, Sir John Vicker’s government-backed Independent Banking Commission (IBC) has said. Chancellor of the Exchequer George Osborne has immediately welcomed the report, and said he plans to stick to the timetable (full implementation by 2019) it recommends. The publication of the IBC report comes as the heated debate over ring-fencing approaches boiling point.

Under the IBC recommendations, all leading British banks will be required to put their retail banking operations behind a firewall. Outside the firewall would be what the Commission calls “global wholesale/investment banking”, such as trading in securities and derivatives. Others term these operations “casino” banking. The report also said that banks should keep at least 10 percent capital set aside to defend against future financial problems. It estimated that the cost to banks will be between £4 billion and £7 billion.

“This commission has tackled that big question that we face in Britain, which is how can we be a home to successful banks that compete around the world, but lend to British families and British businesses, but at the same time protecting us as taxpayers from the cost of them going wrong, and not ending up with a multi-million pound bill when the bank collapse”, said Osborne.

BBC Business Editor Robert Peston spelled out the thinking behind erecting a banking firewall: “The big idea behind the ring fence, the increase in capital requirements and the stipulation that providers of long-term unsecured loans should suffer losses when disaster strikes is to protect taxpayers. The hope is that the costs of rescuing banks would fall on investors and lenders – rather than on taxpayers, as happened to the tune of many tens of billions of pounds in the meltdown of 2008. The ring fence would also help regulators ensure that in another crisis, services deemed vital to the functioning of the economy, those inside the ring fence, could be lifted out and kept running”.

  • Most radical reform of British banking in decades. Peston said the banks now face their ”biggest shake-up in decades”, and said the ICB proposals represent the “most radical reform of British banks in a generation, and possibly ever.” Peston said the recommendations call for “as close to a formal break-up of Britain’s biggest banks as it is possible to get without obliging the likes of Barclays and Royal Bank of Scotland to physically separate their retail and investment banking operations.”

Gavin Hayes of the Compass pressure group told BBC Radio 4’s Today Programme that the IBC recommendations do not go far enough. He called for “complete separation” of retail and investment banking to safeguard people’s deposits.

  • Strike while the iron’s hot. Writing at The Independent, Mary Ann Sieghart insisted that “the time to act on banking is now.” Sieghart rejected the banks’ “toe-curling threats” about the cost to growths if they are obliged to execute the recommendations: “It’s not surprising that the bankers object to the ICB’s recommendations. They like the way they can keep their profits when times are good and make the taxpayer shoulder their losses when times are terrible.” She called on David Cameron to “govern in the national interest” and join Osborne and Buysiness Secretary Vince Cable in backing the ICB proposals: “it is hugely in the national interest that banks shouldn’t fail, or that if they fail, they do so in an orderly manner without incurring massive costs to the taxpayer. The ICB’s proposals go a long way towards ensuring that.”
  • Ring-fencing will inflict more financial pain. Writing at The Times (£), David Wighton argued that “ring-fencing now will strangle any recovery.” Wighton expressed great surprise that Osborne has backed the proposals given it “goes against a central tenet of the Government’s philosophy. This is that the British economy is hobbled by regulations.” Wighton insisted that the ring-fencing move is a “classic ‘something must be done’” measure. Wighton reported that some analysts suggest it could cost ring-fencing could cost the banks as much as £10 billion a year more and warned that a “part of that will come out of profits — perhaps, even, out of pay — but some will inevitably feed through into lower lending and higher interest charges.” It It would be “crazy” if the “understandable” desire to shackle the banks resulted in unnecessary pain for the rest of us, concluded Wighton.

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