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Tuesday, September 13, 2011

Reforming the banks - A Liberal Democrat success

This morning's Independent reports that Britain's banks will be given until 2019 to implement sweeping reforms designed to ensure taxpayers never have to bail them out again.

The paper says that the Chancellor has promised that all the legislation to bring in the changes will be on the statute book before the next general election in 2015 and that he has welcomed in principle the blueprint from the Independent Commission on Banking (ICB), that called for firewalls to be built between the banks' high street and riskier investment operations. The Commission also recommended that the large retail banks should have bigger "cushions" so they can absorb losses or survive a future financial crisis:

The commission, chaired by Sir John Vickers, called for a new system to help customers to switch current accounts through a free redirection service to be formed by September 2013 and said the sell-off of hundreds of Lloyds branches should be used to bring in a competitor. The cost of the changes was estimated at between £4bn and £7bn.

In a Commons statement, Mr Osborne pledged that some changes would be included in a Financial Services Bill, which will put the Bank of England in charge of regulating the banks, due to become law by the end of next year.

But he hinted that the proposal on ring-fencing the retail and investments arms would require a separate Bill at a later stage because it would be too complex to include in an already weighty measure. This could provoke a battle with the Liberal Democrats, who are keen to see swift progress and may table amendments to the Financial Services Bill to implement ring-fencing more quickly.

Vince Cable, the Liberal Democrat Business Secretary, who has led calls for a shake-up of the banks, welcomed yesterday's report and the timetable set out by Mr Osborne. Government insiders said Mr Cable and Mr Osborne, who had previously clashed over the reforms, joined forces last week to persuade David Cameron to back the Vickers report when he had a "wobble" after being lobbied by the banks, who said the changes could harm the fragile recovery.

Lord Oakeshott, a Liberal Democrat peer and close ally of Mr Cable, said: "Doctor Vickers has issued a strong prescription and the banks have got to take their medicine."

As Dick Newby argues on Liberal Democrat Voice this is a complete victory for the Liberal Democrats. He says that when the banking crisis broke, the Liberal Democrats argued that the state could not be put in the position again where it had to bail out the totality of what the major banks did:

We accepted that, in order to maintain confidence in the system, the Government would always have to stand behind individual bank account holders, but we could see no reason why we should all have to guarantee the more risky “casino” activities of the big banks.

We agued that a British version of the US Glass-Steagall Act should be introduced to restrict how banks could use depositors funds and to ringfence the Government’s liabilities in the case of a crisis.

At the time we were in a small minority. In the Lords, when I advocated splitting the banks on the lines which Vickers is now suggesting, the Labour front bench responded with withering scorn. Today, in response to a Parliamentary statement on Vickers, they have had the brass neck to say that the Government hasn’t acted with enough urgency to make this change!

Initially, with the exception of a few independent-minded Tory peers, the official Conservative position was, at best lukewarm. And as we’ve seen, as the banks have , in a display of brazen self-interest, sought to argue that the sky would fall in if these reforms were made, there has been considerable nervousness amongst some Conservative cabinet members about which way to jump.

They have now jumped – into the Lib Dem camp.

This is an achievement that the Liberal Democrats need to trumpet. We have made a difference and hopefully helped to avoid a repeat of the irresponsibility that helped to fuel the banking crisis of a few years ago.
Indeed. Vickers was very clear about the timing of primary legislation and it is good that Osborne has not hedged on this. However, there will inevitably be much secondary legislation and the parliamentary party will need to make sure that the banks do not contrive to hold up the introduction of the SIs.
Imho it's a brilliant paper - UK banks should be split from highstreet banking and "riskier investment operations".

Banks have been reckless - and will be again. So there be "firewalls built between the banks' high street and riskier investment operations."
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