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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.

Sophie Gilbert says:
27 July 2011

I also don’t want the fat cats who FAIL to be rewarded by bonuses people would be chuffed to win in the lottery and by a pension that pays more in a single year than what an average salary brings in a whole career.


Shouldn’t we ask News International what they would like to do about the banking crisis instead? 😉

Russ says:
27 July 2011

Firstly I am not a banker Nor am I a financial expert so I am not about to give a biased answer.
The personal side of banking is subsidised by the business side of banking which would mean if there there was a split we would all have to pay to have a bank account, not every body will want to pay and can afford to pay for an account, this will mean financial hardship because if you dont have an account then you cant have a job and in most cases any form of tax credit that goes with it so we need to think hard about it.
Secondly before and when we all left school we had the chance to assist ourselves in a career path, some chose to do nothing and let the tax payer pay them for sitting on their backsides, by the way the bankers pay tax on their bonuses, once we all chose our careers in which ever field it is get paid the going rate for doing that job as do bankers, I run my own kitchen studio I am not a banker I would love to earn what bankers earn but I don’t because I chose this career. We have to be objective not jealous. Yes the financial crisis is partly down to banks but mostly down to government because they are the ones that turned a blind eye and cosied upto the banks just like they have to News International.

Bill says:
28 July 2011

Russ you dont have to bank with one of the big five. Pay your salary into a building society you get cards for ATM withdrawal + credit cards and cheque books,Morgage / consumer loans if you require them ect The mutuals are not involved in casino banking the 3 ex mutuals who turned themselves into banks Alliance & Leicester,Bradford & Bingley & Northern Rock all went belly up.


If you witnessed a mugging, would you blame yourself for not having a go or the police and the government for not anticipating it? The mugger should not be blamed since he is just following his chosen career path.

Grabbler says:
28 July 2011

What rubbish! We don’t ‘choose’ our careers when we leave school. Most of us have no idea what opportunities are out there at that stage in their lives and for some people they never do. We are guided into our occupations by our parents or extended families or inspirational teachers or other influential people in our lives. If our grandparents were made unemployed due to economic recession and our parents were unable to find work when they left school there is every likelihood that the only options available appear to be to muddle along on benefits and maybe making a bit on the side by whatever means become available. Education has been no use to people in this situation; teachers have little idea about the world outside academia and the subjects taught in schools appear to have little or no relevance to children in this situation. They become the scapegoats for governments to look as if they are cleaning up the economy when in fact it is thoroughly corrupt. The people who make the most ‘succesful career choices’ when they leave school are those with ‘successful’ role models, usually in their families, and particularly those who have benefitted from a private education at places like Eton, where they join the priviledged network, the elite that manage the country in which we live – be them investment bankers, politicians, top civil servants, corporations etc. The few exceptions that join that strata from less priviledged backgrounds are merely the exeptions that prove the rule and allow the corupt bunch including their media henchmen to blackmail the majority of people to accept their status in society.

Adam says:
29 July 2011

Reading the comments and the views to this post is actually quite scary.

If you want to make something of your life, get off your backside and do something. Don’t just be jealous of others. You (and your parents/upbringing) dictate your career path, nobody else.

pickle says:
27 July 2011

I agree with Vince Cable – ringfencing the retail part would be much safer although the banks would make this the excuse to put up charges. It might be worth it…..