/ Money

Ring-fence the banks – it’s the government’s only choice

Wall of coins

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.

N. V. White says:
19 September 2011

Back in the 40s and 50s Birmingham had its own Municipal Bank. This gave preferential rates to citizens, encouraged savings and was very convenient. Maybe I’m naive but I wondered if the Bank of England could have put the bail out money into setting up local branches dedicated to providing all the banking services required. This would have allowed the failing banks to fund their own recovery or fail. Obviously, there would be knock- on effects but their grossly overpaid executives would have had to sign -on and look for work like so many of their victims.

Ring fencing does not go far enough. Until powerful, vested interest, US banks successfully coerced the US government to do away with it, the Glass Steagal act prevented ‘casino’ banks from destabilising US banking. This provided a long period of global banking stability. We should impose a similar control over banks operating in the UK.

John Bloye Higgins says:
22 September 2011

hello there,
My concern vis-a-vis Bank investment is one of ,accountability and Trace-ability.
Huge sums of money are moved by unknown people,generally called Bankers from
A to B . We roughly know where the money comes from,(borrowed) and eventually we know where it’s heading and later still we find out if it’s profit or loss. BUT nobody , apart from bankers know the
names of the people who Move these huge sums ,therefore no one individual is held to account,
IE. IS ACCOUNTABLE AND UNLESS he/she is a rouge dealer ,is never traceable.
My work was in ATC engineering , and I promise you it was both Accountable and traceable.!
Will ringfencing alleviate this poor QA ? I doubt

Frances says:
23 September 2011

Basic to the whole problem is who creates and manages our money.
It is not who most people think.

Many books have been written on this subject lately, but here’a a good one :-

“The Web of Debt” by Ellen Brown.

She also has a website