Has Ring-Fencing Caused an Irreparable Separation in the Coalition?

The full report by the Independent Commission on Banking (ICB), which was published on September 12th, recommended a separation of retail and investment banking; this meant that if there was ever an economic crisis caused by the losses incurred by investment bankers, the accounts of millions of ordinary customers would be protected. The ICB was set up to ensure that the state never again bails out a failing bank.

Ideological divisions

Originally, the Liberal Democrats called for a complete separation of retail and investment banking; this would inevitably mean the break-up of the big British banks. Chancellor George Osborn, supported by the Prime minister, prefers the subsidised model known as ring-fencing, regulations put in place protecting the retail side from investment losses but would not lead to the break-up of the banks. This, obviously, is the banks’ preferred option.

Although the Lib Dems have acquiesced and are now supporting the ring-fencing proposal, they would like it put in place immediately, writing it into the Financial Services Bill which is presently before Parliament. Mr Osborne and Mr Cameron are recommending that the regulations ease through incrementally over the next few years, something the banks have been lobbying for. Their view is that with what’s been happening in the Eurozone, bank regulation could cause economic growth to falter. Angela Knight, chief executive of The British Bankers’ Association called this week for changes in the industry to be delayed until the economic recovery is underway; imposing the measures on lenders risked denting confidence and cutting the supply of credit to the economy.

Don’t panic

At a time when the banks are reaping around £10 billion per year from the taxpayer, Business Secretary Vince Cable, in an interview with The Times, accused the banks of using the economic crisis in Europe as a bargaining chip to force a delay of any kind of reform of the financial sector, and in particular investment banking; the Business Secretary said, “It is disingenuous in the extreme to use the current context to argue against reform. Banks are in a way trying to create a panic around something which they know has got to happen. We can’t have big global banks with balance sheets bigger than British GDP underwritten by the taxpayer; this can’t go on and it has got to be dealt with.”

The fear for British banks is that too much regulation will stifle economic growth and restrictions on earnings will drive top investment bankers out of Europe to pastures new in the US or Asian banks, with Wall Street on a recruitment drive for the first time since 2008. Yet there is no fear of likely candidates being put off investment banking jobs as finance is still attractive for those wanting to earn big rewards.