/ Money

Banks – keep our money out of your risky investments

Wall of money

Would you prefer banks didn’t intertwine ‘your’ money with risky investment banking activity? We think your money should be protected, and today the government backed our idea.

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?

Jeff H says:
15 June 2011

The Government nor its senior members appear to do what they say they will do. It’s all words. Most of our problems will only be solved when we have the promised Referendum to enable the people of the country to leave the EU – promised but not given. Bankers are to blame for our current problems, but it is the old people who are suffering with inflation which could alleviated if we had the money wasted in paying to keep the EU and the Euro going. The Bankers should be treated as criminals and stripped of their illgotten gains. The Government will fail to ringfence our money from the casino banking – they are incapable of dealing with reality because hardly any of them have ever had a proper job and have no idea of how to make realistic decisions.

Sophie Gilbert says:
16 June 2011

Would I trust a bank more if I knew my money was being treated separately from potentially risky investment banking activity? More, yes, indubitably, but never fully. This ring-fencing idea is the first step in the right direction.

NeilR says:
16 June 2011

Those very clever people in the higher technical echelons of banking will find ways round the ring – fence regulations – compare tax avoidance schemes. Separation of the two arms of banking would be more effective.

The title banker should not apply to most currently using this identification. The most appropriate term is Bookmaker as they gamble and lay off their debts to unsuspecting punters. They charger for services that they never provide or at grossly inflated rates compared with the cost of their service. I doubt, however that they pay anywhere as much tax as proper bookmakers. Parasites is too kind a word for those who play the system of making money out of money. Someone has to provide the real money — we the labourers upon whom the whole system turns. Maybe we should have an official ‘Open Season’ for hounding those who have hounded us for so long.

Nice to see that Which are deleting comments that disagree with their article. Appalling!

I apologise and rescind that last comment! Some confusion over very similar articles. Sorry!

But will go on to say that bankers do not gamble with your cash, there is very little link between investment banking and the retail banking (the money in your savings / current account).

The money in your pension however, that I’m sure you expect to grow, is invested by investment banks … if you don’t like it, go invest it yourself.

This ‘ringfencing’ will simply mean that you will get less interest on your savings, and you’ll have to pay for your current account banking / facilities. When RBS changed the places people could withdraw cash from for free, there was uproar. This will become widespread if the proposals go ahead ….

Putting money as an investment in future events is gambling full stop and some of it is very high risk.
Money in your pension scheme is not normally in the realm of retail banking except when acting as an agent for an ‘Assurance’ business. Ring fencing will not mean that you will get less on your savings. If the money is invested in a high percentage of Blue Chip shares the returns are usually as secure as it is possible get and the overnighting of funds for retention of liquidity is relatively safe. When lending to a small business the money should be loaned against some form of security which enables some recovery from a bad debt. Similarly with overdrafts. It is the steady Eddie approach which we require from the retail banking sector. In recent times this approach has made more money than the investment specialists on average. Buying futures in coffee, copper etc is a much higher risk, if there is a glut of coffee at the time your future is reached you can lose heavily and such activities distort markets any way when there are large purchases from a small number of people wishing to corner the market. It is the way banks used to make money until they became too greedy. As for the limit on cash vending machines to their own will cost RBS more than they save as the tit for tat restrictions take hold the inconvenience to their customers will make them reconsider what they want a retail bank for and if swapping becomes as easy as swapping energy suppliers they will spend more time chasing customers than serving them. All we want now is the return of the cheque guarantee card and the return of general acceptance of payment by cheque!