/ Money

Vince Cable: banks need reform, but what form must it take?

Vince Cable

At a banking debate this morning, Which? called upon the Independent Commission on Banking to be brave with its recommendations. Vince Cable joins us to explore how we can prevent another banking crisis.

It’s 15 months since I worked with Which? on its Banking Commission, before joining the Coalition government. A group with disparate views came together to recommend unanimously a series of strong conclusions.

Its central point was that ‘banking is a structurally flawed industry that has failed its customers, its investors and the taxpayers who stand behind it.’ A year and a bit later, that verdict retains its force.

Banking needs structural reform

The Independent Commission on Banking (ICB) under Sir John Vickers was asked to look at the issue of structural reform in detail.

The Interim Report sets out carefully the argument for separation, or keeping banks’ risky investments away from your money. Traditional banking underpins a modern economy and has to be protected by the state from the risk of systemic collapse; that is not true of most wholesale and investment banking activities.

The implicit subsidy enjoyed by the banking sector effectively involves you, the UK taxpayer, underwriting bank’s high risk investment activities. When bankers have massive global exposure as they do in the UK, the public sector is taking on massive liabilities.

And since banks know that they are ‘too big to fail’ they have a big incentive to take excessive risk; and in the financial crisis some of those risks became a costly burden for the taxpayer.

We in government do not believe this is sustainable.

Will ring-fencing banks work?

The ICB recognised a trade off between the benefits of making banks safer through separation and the costs to the banks (some of which might be passed to their customers). It recommended separation through ring-fencing with retail banks having higher capital levels than now and wholesale/investment banks being sufficiently separate to allow them to fail in a crisis.

The ‘ring-fencing’ approach has been criticised for being insufficiently clear by those arguing for full separation; and by the banks themselves for going too far.

However, the ICB has made it clear that the huge advantage the UK currently has as a hub for the activities of global financial services is in no way threatened by further separation of investment and retail banking activities.

Key tests still remain

It is important to remember that this was an interim report. I have confidence in an independent commission of exceptional quality, but the ICB now has to provide convincing answers to some critical questions.

The government will still be seeking reassurance from the final report in September to demonstrate that a ring-fence can be as effective as full separation at lower cost. The keys tests will be:

  • Would it stop banks using deposits underwritten by the taxpayer to cross subsidise their ‘casinos’?
  • Will the ring-fence be high enough to eliminate regulatory arbitrage by the banks?
  • Will the division between what is inside and outside the ring-fence ensure that nothing resembling a universal bank remains?

We, as a government, shall await the report before coming to a firm conclusion. But once we have agreed a way forward it will be essential to put the new arrangements in place as quickly as possible; we cannot wait for another banking crisis to cause even more damage.

John Knox says:
23 July 2012

I would like to see flexibility and choice with regard to repayment of credit cards, overdrafts and mortgages etc as well as other bills in general.

For example not everyone is paid monthly, some people are paid 4 weekly, Fortnightly or Weekly.

When all your statements are monthly and you’re not paid monthly it puts your payments out of sequence and it is not easy for you to budget as well as say someone who is paid monthly.

I would like to see all banks and other financial service providers forced by legislation to reform and have to issue statements and bills whenever the customer wishes in terms of time-frame.

Of course I do not mean in terms of repayment of your obligations as part of your contract but simply the time-frame of your statements, when they are produced and fall due.

Also this should not be variable by the banks or financial institutions, it should be fixed. It should not change.

I’d like to see the scrapping of the direct debit system as again it is not something the customer is in control of and it offers absolutely no guarantees whatsoever. Have you ever needed to use it’s guarantee to get an immediate refund for an error by the other party? Good luck with that!

Also the BACS system is run by the banks and they deliberately hold payments through it in order to profit from the interest. That can also be done away with.

And finally all these banks involved in the fraud and corruption should lose their license for a lot of their branches. They should be given to other companies to operate banks instead. Get some fresh new companies in there who are willing to force change.

The banks owned by government should also be sold off and broken up into several parts by region and privatised.

tony browne says:
6 January 2013

The bank of england, The federal reserve ect are not only private companies with unknown shareholders, they are above the law. They print money out of fresh air and charge you and me intrest on our loans. When they are challenged with questions from people using the freedom of imformation act ect, they refuse to answer direct questions. And that is why you have this awful system where we are all rushing round like slaves to make ends meet, while certain familys enjoy a fabulously rich lifestyle. All the above can easily checked out by spending an hour checking things out.