Radical proposals to ring-fence retail banking were presented to the government today. And with 70% of the general public supporting a ring-fence, it’s vital that it accepts them to protect consumers when banks fail.
When Sir John Vickers’ Independent Commission on Banking published its recommendations for banking reform this morning, the government was given a choice – act in the interest of taxpayers, consumers and the wider economy, or act in the interest of banks.
The banks’ PR machine has gone into overdrive in the past few weeks to warn against the dangers of imposing a ring-fence around retail banking – the part of the banks that looks after deposits and lends to small businesses and consumers – and it’s easy to see why.
Figures released last week by the New Economics Foundation show that the implicit taxpayer guarantee is worth around £50bn a year to our big universal banks.
The banks argue that a ring-fence will harm the economic recovery, damage lending and increase costs for consumers and businesses. We believe that these arguments lack substance. Kicking ring-fencing into the long grass could increase the risks to economic growth by building that growth on the same flawed foundation of casino banking as in the past.
Taxpayer guarantees on banks should go
What effectively happens at the moment is that the banks use the profits generated by their retail arms and the security of the taxpayer guarantee to reduce the costs of capital within their investment banking arms. These parts of the banks then lend to (as has been shown in the crisis) riskier customers such as property speculators and offshore hedge funds. When things go wrong and it looks like a bank could fail, we, the taxpayer, pick up the tab to keep it alive.
If the stakes are high for the banks, they’re even higher for us as taxpayers. A delay in implementing a ring-fence will leave us with an open-ended liability to support large banks.
Therefore, the best way to achieve a stable, responsible and, in the long run, effective banking sector is to ensure they are able to fail if they take unsustainable risks or run their business imprudently.
We can no longer afford to subsidise the banks
We have pumped £120 billion into the banking system as part of the bail-out, or over £2,000 for every man, woman and child in the country. This is unsustainable. Banks have assets of five times the size of our economy. Taxpayers simply cannot afford to write a blank cheque subsidising every type of banking activity.
A ring-fence around the essential retail banking services, which consumers and small businesses rely on, will help prevent this situation from repeating itself. It’s also what the public wants – Which? research released this week showed that 70% of the general public support a ring-fence.
The government must not allow itself to be deceived or held to ransom by the banks. Industry lobby groups are defending a business model which has not delivered for customers, businesses, shareholders or the economy as a whole.
Ring-fencing of UK retail banking is a vital part of reform and, for the long-term good of the economy, should not be delayed.