Banks – keep our money out of your risky investments

Banks provide a series of very useful services that most of us can’t do without. As a result, if banks are under threat, the government feels obliged to bail them out.

But our money and the essential services we rely on shouldn’t be at risk – they should be protected. So rather than banks keeping all this cash in one pile, the money we share with the banks should be separated from their risky investment banking arms. There’s a name for this – ring-fencing.

In the Future of Banking Commission we recommended that retail banking services should be ring-fenced to help protect depositors and prevent them being contaminated from risk-taking elsewhere within a bank.

This should also make it easier and cheaper to sort out banks if they get into trouble, further minimising the risk to their customers.

So we were happy to see this recommendation taken up by the UK Government’s Independent Commission on Banking, and even more happy to hear Chancellor George Osbourne back the idea today.

Too big to fail

In most industries you get big by providing good value for money and great customer service to attract loyal customers. But for banks, these criteria seem to be irrelevant.

Competition between the banks has been massively distorted by the bail-out, rewarding banks that did poorly rather than those that were more careful with our money. The larger the bank, the more likely it will be bailed out by the government and the larger the subsidy. So even if they do wrong, or treat their customers badly, they’ll still come out the other side almost smelling of roses.

For instance, the two banks with the largest share in the current account market (Lloyds Banking Group and RBS) would both be bust without the support of taxpayers.

Taxpayers bailout

In the UK, direct bank subsidies committed during the bail-out amounted to £2,000 for every man, woman and child in the country. This means that taxpayers have guaranteed the banks against losses they made from trading complex derivatives and on loans they made to hedge funds based in the Cayman Islands. The banks told the government that if we didn’t bail them out then money would stop coming out of the ATM.

The Chancellor’s announcement on ring-fencing is a step in the right direction but we still have a wish list of demands that need to be met before the banking system is truly reformed. We need to improve competition to ensure customers understand the products they’re sold and if they’re not happy, be able to easily take their business elsewhere.

Would you trust a bank more if you knew your money was being treated separately from potentially risky investment banking activity?