/ 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.

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.

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 …

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’.

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.

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.

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.

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.

Excuse my ignorance, but what is “ring-fencing” ??

Hi Anon – there’s another post here which explains it in more detail – hope that helps you!

goldman says:
15 September 2011

Re Dominic Lindley’s article – Good item.

The banks failed not only because they expected to continue to borrow money cheaply but because they lent money to people who could not afford to repay the loans when the cost of money increased.

Precisely how many top bankers and politicians were penalised by loss of income/pension and loss of job due to the damage these lending policies caused?

I agree with this – they failed because the places where they borrowed money from no longer existed and they should’ve realised this was the case. They were stupid – many people saw much of the financial crisis and they buried their head in the sand.

These are not the same bankers however that are paid crazy bonuses in investment banking. Some of these bankers were also idiots, but it’s not our business to judge them and the gov’t didn’t bail them out.

The point is I don’t see why investment bankers should be penalised. I’d like every tube driver to get the sack for being greedy and going on strike every five minutes but that’d never happen.

As for penalising politicians, sounds knee-jerk and I’m not sure it’s their job to understand the intricacies of wholesale markets and retail bank funding sources. Surely this is what the FSA was setup to do – but has failed from the start.

Anon’s question is a good one, which I’d follow with another: How strong is ring-fencing?
I’ve known many instances of “ring-fencing” in organisation which have been compromised and the money (or some of it) being used for purposes it wasn’t intended for. My knowledge is of public bodies, but I am sure that if anyone can duck under or break through a ‘ring-fence’ it is the financial services industry.
Surely what is needed (and I see NEF recommend this) is a complete separation of the risky investment businesses and high street banking.

owdsyko says:
16 September 2011

I completely agree with ringfencing Retail banks ahould be prohibited from dealing in derivatives(gambling) and must keep sensible capital reserves. The unfenced part must be allowed to fail when the gambles go wrong. Old style mutual builing societies should be encouraged and limited to the original funcion of providing domestic property funding and retail banking.

I think Adam has summed the situation up perfectly. I just hope that all those who continue to bash the banks either because of a vested interest or through ignorance, will still be happy when some of these large financial institutions have departed our shores and the UK is left with….. nothing !

When the Government deregulated the banks, they invented smoke & mirror schemes to make money. A lot of the old mutual building societies rushed to be a bank so they could join in this feeding frenzy. Shareholders’ dividend bonanzas, huge pay rises and massive bonuses were the order of the day. But it was just smoke & mirrors. The majority of us taxpayers didn’t share in the feeding frenzy, but we are having to pay the cost of it. The banks continue, virtually unscathed, their bonuses intact. The scapegoats got golden goodbyes and pension pots worth millions. The politicians who made the decision to deregulate continue to enjoy their salaries, golden goodbyes and very generous (and early) pensions AND then go on to become non-executive directors of companies (including banks) who want to either reward them for their back door support whilst in office and/or want them to continue to lobby on their behalf, using their contacts, part time and for a small fortune. “We are all in it together” we are told. I think we all know what the “**it” is, but it’s pretty obvious that some of us are being forced in it up to our necks and others are floating on top!

Richard Pembrose says:
16 September 2011

I agree entirely with your sentiment and proposals. However, the very fact that the worst performing banks retain the highest number of customers tells us that; we don’t care, it’s too difficult still to change bank, or actually, it is precisely because these banks are large that they provide poor service. Whatever the reason, consumers clearly don’t feel sufficiently aggrieved to act with their feet.

Northern Rock was largely a retail bank – remember it? The major part of the failures were in the retail arms of banks that loaned money to people who could never pay it back and then bought financial instruments from other banks that did the same. The only part of BoS that continued to make a profit was the “investment” arm.

The taxpayers now own large chunks of these banks so, if they do well, the taxpayer will benefit. Ringfencing will just increase the banks costs – £7Bn a year. Who do you think will have to pay for that? The customer, of course – who are also taxpayers. Net effect – the government takes the profit from the sale of their share of the banks while we pay more for the banks’ services. Double taxation.

I note that Dominic is not sure why we think that customers costs will increase. Most commentators think it will, all bank spokesmen have said it will, and common sense allied to past experience says if will. Finally, my bank has just raised it charges to me – dare I say in anticipation of these imminent costs.

neil spencer says:
16 September 2011

Our banks exposure to ‘credit default swops’ the continuation of short selling and other casino economy activities by the banks is a massive financial time bomb. When Greece defaults followed by Italy the impact will be like nuclear bomb hitting everyone but the supper rich elite. Ring fence the banks now. Prohibit short selling now. Introduce a Tobin Tax now. Do everything that is possible to isolate the impact of ‘credit default swops’ today. Set up a green investment bank and expand the mutual finance sector. Set up a People’s Commission / Audit to investigate who is really responsible for hijacking our national wealth

This is a historic moment – the Vickers Report only starts to scratch the surface of this scandal and theft of our shared national wealth and future

Allan Ford says:
16 September 2011

I believe that banks should be treated in the same way as they treat customers who fail to meet their obligations because they have no income because of job loss. That is take everything that they have, put them on the street homeless and leave them to get on with it. PS do the same to thieving polititions also strip them of lordly titles and see how they manage on wellfare or give them a job cleaning hospitals if they don’t actually contaminate the patients.I rate both these professions lower than child molesters. Send this to Cameron the smarmy little rat. There I’ve had my say.

Allan Ford

Tim Shepherd says:
16 September 2011

Ringfencing the investment side of banking is utter madness. Why do people think that they get a service from banks without having to pay for it? Bank charges were abolished because the banks could make a profit by investing the money lent to them by customers. If they can’t make a profit this way, then they will have to bring back bank charges. We will all be paying for every transaction and every service the bank supplies. This is surely so obvious that it is almost unbelievable that the idea got further than the House of Commons bar.

goldman says:
16 September 2011

Ref Tim Shepherds bank charge comments – he is aware the banks have customers money virtually free of charge and can generate wealth from it, especially when they charge to loan it out. The banks started sound, profitable businesss in exactly this manner. Ring fence the current account business and do so today not in 2019. Every Greek and other national debt the banks underwrite will cripple us for decades and decades.

The problems are many, but started under Thatcher with the slow removal of controls on borrowing and lending, first at the local level and then on the international stage. The change from paying bank/building society employees in their investment arms by commission rather that salary exacerbated the situation; it didn’t matter to the person sanctioning a loan if the borrower was capable of prepaying any loan. They would walk away with their commission and couldn’t care less about the consequences.

This is small fry compared with the deregulation of currency controls. In the bad old days, movement of extra-large funds from one currency to another was forbidden. Now, following the example of multi-nationals like Shell which had a large “pocket-money” fund which could be used to play the currency markets, and with the removal of proper controls, most investment banks throw money around like confetti, relying on comparatively small variations in exchange rates to garner huge profits. Not too much harm you might think except to the country under the cosh. The re-introduction of control on currency movements would go a great way towards preventing the reckless (and effectively risk-free) speculation on currency movements.

Just why should Lloyds be constantly villified in the press and by the public ?
This was a well run company, which took on the debts of Halifax Bank of Scotland and landed itself in trouble leaving staff and shareholders alike to suffer.
We should be asking ex Chairman Victor Blank, Eric Daniels and Gordon Brown just what was behind such a toxic move.
Better still return Lloyds to it’s rightful shareholders and leave the taxpayer to pick up the mess left by Halifax etc.
And why given the above should Lloyds be penalised further by being forced to sell off branches.
Someone in government has answers and is to afraid to speak up.
It will become clear under Freedom of Information requests

Don Clark says:
19 September 2011

The banking industry and its lobbyists protested too loudly in the run-up to the Vickers’ publication that ring-fencing or a retail-investment split will harm the its’ competitiveness and the UK economy.

More accurately, the banks’ health will be enhanced when they stand on their own feet without the ability to borrow lakes of money at artificially low rates, or to rely on free insurance policies underwritten by the nanny state. A Glass Steagal split would again confer stability, drive way the rash undisciplined gamblers – of our money – and attract good banks of high professional standard which value a stable context for sustainable growth that a light but well-regulated UK can offer.

Unless and until we regain that stability, the well-being of the majority of UK citizens, their children and grand children will not coincide with the interests of the banking industry, which will surely be tempted to mug the taxpayer hard again. Charles Moore in The Telegraph (22nd. And 29th. July) is right:-



If we are to ring-fencing retail and investment banking, why not the full separation to minimize the chance of a weak political fudge. Are the Prime Minister and the Chancellor of the Exchequer to act as statesmen in the interests of the people and the nation, or only in the interests of the banks?

This matter is the elephant in the room, and it will not go away, as the anger felt by many hundreds of thousands of voters has not and will not go away.

Those voters will closely watch the implementation – and the timing – of any and all good solid proposals by Vickers. That timing should be absolutely as soon as possible, and, rightly, immediately following Vickers’ publication.

Why does the consumers association think that ring fencing is good enough?

Chinese walls only work when all parties need them to work. The banks will work to subvert them. They have already claimed their most important victory by avoiding total separation.

‘Which’ as an organisation, should know better than most, the way banks have historically found ways of working within regulations to the detriment of their customers. It beggars belief that they will not subvert any ring fencing arrangement.

There should still be complete separation of retail and investment banking. The Which organisation should be campaigning for it.