Brits Soft on Bank Reform
May 17, 2010
By Harry Wilson and Philip Aldrick
In a marked change in tone, the Conservatives and Liberal Democrats have taken a far more conciliatory approach on banking reforms since coming to power last week.
New guidelines to govern the interplay between retail banking and investment banking are now more likely than an outright split, according to senior advisers.
Vince Cable, the new Business Secretary and an outspoken critic of the current banking system, has tempered his rhetoric. Speaking to The Daily Telegraph Mr Cable said he recognised “the seriousness of the problem and the danger of unintended consequences” of draconian measures.
Mr Cable acknowledged that introducing new capital and liquidity rules too early would “reinforce lending problems in the economy”.
“There is an inherent dilemma in making the banks more safe and in getting lending to support the real economy,” he said.
In its policy document last week, the coalition government pledged to “establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way”. But now instead of splitting retail and investment banking activities, advisers are discussing rules on cross-subsidies between the businesses, which would ensure that depositors are protected if the “casino banking” side of a bank gets into trouble.
The restrictions being discussed would mean banks being limited in how much money their retail arms could lend to their investment banking divisions, which in the past have taken advantage of the cheap money to fund their riskier activities.
One adviser described the fear created by last week’s announcement of the establishment of a commission as “unhelpful”. The prospect of the forced break-up of banks, including Barclays and Royal Bank of Scotland, caused shares in RBS to lose nearly 9pc of their value last week.
“The taxpayer is a large investor in the banking industry and if we are to get that money back, this type of news is not helpful,” said one senior insider.
Privately, sources close to the Government admit that the commission is unlikely to be that important to the future shape of the UK banking industry, with Britain unlikely to go it alone on new regulations and likely to follow in large part the lead taken by the US authorities.
Chancellor George Osborne has been in regular conduct with senior US administration officials, including Paul Volcker, the former Federal Reserve chief, Timothy Geithner, the Treasury Secretary, and Larry Summers, director of the National Economic Council.
“The commission is likely to be overtaken by what we see coming out of the US, as well as any EU initiatives, and once the US has decided on something it will be very difficult to go and do something entirely different,” said one senior adviser.
Bonuses will be another area in which the Government will be looking for international agreement. Recent reports have indicated that several major City investment banks are looking at ways to circumvent regulations on multi-million pound payouts to staff.