/ 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.

Comments
Guest
goldman says:
13 September 2011

The financial world was good when there were lots of providers. Potential damage was limited by the spread of customers to providers. Governments have allowed hundreds of lenders to be swallowed up. Very few remain and these are mostly driven by the need to feed dividend payments to investors. Not all, but most.

The old model was a better one. Whilst it appears there are still many financial companies, the fact is that there are only a number of them. A very small number.

Guest

These policies will do nothing to fix the problems that the article claims they will.

Whilst Which? may know about washing machines, they unfortunately they have no clue of how the banks operate or make their profit. We have not ‘pumped in’ £120bn in to the banks – we own a large proportion of the banks. RBS was not an investment bank, neither was Northern Rock or Alliance & Leicester … these banks failed because they lent money to people and bought market share.

The relevance of investment banking in these failures is nothing. We have not ‘bailed out’ investment banks. All this will do is make retail banking more expensive for the consumer. When Barclays start charging you to withdraw cash or make internet banking payments … blame your friends at Which? and the rest of the media spouting this absurd drivel that they know nothing about.

10% of UK tax receipts come from finance operations (“Bankers”). When HSBC move to Hong Kong and Barclays to the US … and tax on the ‘hard working’ majority goes up to maintain the lifestyle our jobless and lazy have become accustomed to you’ll miss the bankers and realise what they did for us.

And .. no, I don’t work for a bank, nor are any of my friends bankers …

Guest

A substantial part of RBS’s business was ‘Global Banking and Markets’ which is described as the ‘investment banking arm of RBS group’ This accounted for 69% of RBS’s assets in 2008.

The fact that investment banking operations were intertwined with essential retail banking activities meant that the government felt that they had no choice but to bail-out the whole bank. The list of assets we have guaranteed RBS against losses on includes loans to hedge funds based in the Cayman Islands and packages of derivatives which people at RBS thought they could trade for a profit.

If any of the large universal banks get into trouble then without reform it is very likely that the Government will need to bail-out the whole instituition. I cannot think of any rational economic reasons why we would want to support this kind of activity with taxpayers money if these businesses are poorly run. My general opinion is that when you provide substantial government subsidies to favoured industries and individual companies then it leads to them having a bloated cost base and continue to be extremely poorly run.

Ring-fencing is a vital part of the reform and will help ensure that when banks are run imprudently then they are allowed to fail and that taxpayers are not writing a blank cheque subsidising all types of banking activity.

Northern Rock and Alliance and Leicster failed because of an excessive reliance on wholesale markets for funding and poor lending decisions. Other reforms proposed by the ICB such as depositor preference and greater capital and liquidity would have helped limit the impact of these type of failures in the future.

Not quite sure why you think these reforms will result in a substantial increase in cost for retail customers. The UK retail arms of the major banks remained profitable throughout the financial crisis. UK retail banking will take place within the ring-fenced bank.

Please can you also provide the source for your claim that ‘Bankers’ contribute 10% of all UK tax revenue. Many surveys also include the tax paid by insurance and fund management companies. Some studies also include the tax that banks deduct on the interest paid on our savings accounts. In my view this tax is paid by consumers and not by ‘banks’ or ‘bankers’.

Guest

Thanks for taking the time to reply – you have however avoided many of my points!

The media – need to stop this hysterical ‘banker bashing’ and saying ‘casino banking’ was the cause of the crash – that’s basically a lie and designed to wind up the public. It’s irresponsible and is why we have this public hysteria and mass misunderstanding of 1) what caused the recession vs. the financial crisis and 2) why the banks failed.

Do I think bankers are idiots for the investments they made? Yes. Did it affect me or the public? No. Do I think that underwriters were stupid in the way they lent money to consumers? Yes. Am I jealous of how much the bankers earn? Probably! Do I think bank employees should be sacked or penalised? Not my decision – I only want the benefits of the banks and the profit and wealth they bring. What does any of this have to do with the bank bailouts? Nothing.

I don’t think it’s disputed that the banking types are intertwined, although looking at the fact that 69% of their assets is in an investment arm doesn’t equate to how much of their business was made in investment banking. If they hadn’t bought ABN AMRO they’d not have failed – and they’d not have reduced their liquidity to such a low level.

RBS failed because of bad management and a lack of sensible regulation. It had very little to do with ‘Casino Banking’ or ‘Bankers’.

The fact that RBS lent to businesses in the Cayman islands and hedge funds – so what? It’s not why they failed. To bring it up in an article alludes that this is why they failed – and you are misleading.

To call the money UK Plc invested a ‘subsidy’ is absurd. We bought shares at a bargain basement price. For as long as Gordon Brown doesn’t come back in and sell them in the same we he sold our gold we’ll do OK out of it.

Retail banks make their profit out of bank charges and credit cards – not current accounts where the margins are basically nothing. Retail banks do use their investment arms to bump up returns and access cash, we’re reducing their ability to do this (on both sides). The UK benefits from an impressive range of very well priced financial products – these will disappear.

Santander are a good example of a retail bank sitting on their own – look at the abysmal service they provide just so they can offer free banking.

The 10% figure is one I’ve heard several times from different sources. I can’t see how it could include including tax receipts on savings – but even so that is going to be a very small %age.

Yes, we need to protect depositors and we need to make sure we never have to bail out a bank again. I’m not sure how ringfencing will change that. The proposals will go some way to make a bank stronger, but much of it will make no difference.

Guest

When I first opened a current account in the 1960’s to have my salary paid into I had bank charges and if you wrote too many cheques they went up. In those days the retail bank’s job was to look after your deposit accounts so that your money did not lose purchasing power. The majority of the Bank’s capital was in Blue Chip shares to start with. Once it became universal for wages to be paid into bank accounts, the banks had a captive market and sent you a credit card as a matter of course. They then had plenty of money to prime the Bookmaking operations and derivative funds as ways for them to make money out of money , our money. They have been speculating and playing games with our money ever since. The Genie was out of the bottle – now it is out of the banks and it must be put back in. NOT in a few years time but in the next six months before the Great European Crash hits them. To say that they take our money and reduce its value by 4 to 5% p.a. it demonstrates how low they have sunk, both morally and in business practice. Then they have the gall to pay themselves great bonuses as if they had made a profit for their customers and share holders. They are currently defrauding us and act as a great cartel. They have too much power for the good of the world and need severely regulating world wide immediately. The problem is that many politicians have their eyes on a seat on the board of one of our financial institutions. No Chancellor or the Exchequer should be permitted to sit on the board of a financial organisation during or after their parliamentary career. New blood is definitely needed in the banking arena.

Guest

Michael, I’m afraid you misunderstand. To reiterate – the UK did not bail out any investment banks (but the US did).

I have no idea how you can blame the banks for the poor interest rates or for inflation. Labour were voted in on a large part for keeping interest rates low (which overheated our economy), and these low interest rates, the lack of sustainable market supply and bad debt / defaults is what caused much of the retail banking crisis in the UK.

The banks that use customer’s money on deposit are retail banks, some retail banks have investment arms, but these banks didn’t get a bail-out, and retail bankers don’t get massive bonuses.

Bankers that get bonuses get them because they make the banks vast amounts of money. If you don’t like that invest your pension and your investments yourself – you have a choice, but ultimately they make you money and they pay a lot of tax and work damned hard.

Guest

Adam, I am aware that investment banks per se were not part of the rescue package, but RBS and Lloyds bought debts as investments and were both involved in a disproportionate amount of high risk investment and trading in the investment bank arena. It is their performance and bonuses that are in question as they were massive and they are retail banks. Your argument does not hold up, other than the fiscal irresponsibility of the previous adminstration. The truly independent investment banks stand or fall by the quality of their investments without having a direct effect on the retail sector. I have made my choice and do not invest in via a retail bank as I explained, it is not sense to pay for the priviledge of losing money to pay for bonuses to managers of such a fraudulent practice. They may work damned hard but with little effect. The reason that the current crisis arose was that banks did not do their homework on the investments that they made and shot each other in the foot on an international scale beyond the scope of most national governments bundling bad debts and selling them on like pass the parcel as well as other poor and lazy decisions. You are welcome to your beliefs but they are not commonly shared.