Ring-fencing expected today must be done at a sensible pace, says City of London Corporation chairman
Stuart Fraser is the chairman of policy and resources at the City of London Corporation
The imminent publication of the Independent Commission on Banking’s final report promises to be a watershed moment for the industry.
Proposals outlined by Sir John Vickers and his colleagues on 12 September could, potentially, play a huge role in shaping the future of banking in London and the UK. This issue provokes strong emotions on both sides, as demonstrated by recent heated interventions from Vince Cable and senior industry figures.
Contrary to public perception, significant reforms to banking regulation have already taken place since the financial crisis. Many of these have been positive and necessary
The Independent Commission on Banking is, quite rightly, investigating various options to promote both greater stability and increased competition in UK banking in the wake of the financial crisis. That is laudable, but we must guard against measures which have unintended consequences for the industry’s competitiveness, lending capacity and the UK’s future prosperity.
That is not to say the City is opposed to all reform – far from it. Contrary to public perception, significant reforms to banking regulation have already taken place since the financial crisis. Many of these have been positive and necessary. Others, such as changes to pay structures to reduce bonuses and promote more deferred pay, have been far less so.
As the policy chairman at the City of London Corporation, I am not a mouthpiece for the banks. I do, however, have a responsibility to speak out against any moves that could undermine the City’s competitive position.
The financial services industry is integral to the UK economy, accounting for a total tax contribution of £53.4bn or 11.2 per cent of total government tax receipts. The banks are a key component of this, not just through their direct contributions, but also their huge and varied customer base and the number of ancillary services they use.
This makes it all the more important that the ICB’s recommendations are considered through the lens of a rigorous cost-benefit analysis.
The most contentious proposal trailed in early reports is the suggestion that banks should “ring fence” their retail and investment operations with separate capital structures.This, it is argued, could help solve the “too-big-to-fail” problem by reducing the likelihood of taxpayers being asked to underwrite future bank bailouts for “casino” operations.
It is important to note, first of all, that ring-fencing would not have stopped pure investment and retail banks, such as Lehman Brothers or Northern Rock respectively, from failing. Universal banking did not cause the crisis and, indeed, institutions conforming to this model can be more financially efficient.
Universal banks also enjoy a unique relationship with their customers, acting as a “one-stop shop” that can service a wide array of their business needs. Remove this link and these institutions will forfeit an important advantage in what is a highly competitive international marketplace.
It is vital that we reconcile political imperatives with what is practical for banks to minimise transitional risks
There will be significant costs incurred by the banks for erecting these separate capital structures. One report has already indicated that it could reduce economic growth by 0.3 per cent owing to higher wholesale lending costs for large corporates. It is difficult to assess whether this will be a price worth paying until there is more clarity on how tightly the limits will be defined and the pace at which they will be implemented.
Nonetheless, it is vital that we reconcile political imperatives with what is practical for banks to minimise transitional risks. There is only a finite amount of capital available and, if banks are compelled to raise more in a rush, it could worsen credit conditions for businesses by limiting lending capacity.
- Read Stuart Fraser’s first column: “British jobs for British workers is a fundamentally flawed concept”
Much progress on reform has been made at a global level, through institutions such as the Basel Committee on Banking Supervision and G20, and the UK has a leading role to play in this process. Given the international nature of the financial marketplace, this is exactly the approach we should be taking if we are not to damage the UK’s international competitiveness.
Last year, authorities recognised that the Basel III capital requirements needed to be phased over a sensible period to avoid choking off the recovery. I hope the government recognises that a similar approach needs to be taken at a domestic level with the ICB’s recommendations, given the wider pressures on the UK economy and bank balance sheets.
Stuart Fraser is policy chairman at the City of London Corporation