New retail bank proposals a 'halfway house' to reform

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Concern is growing that proposals announced last week to reform UK banks will not be radical enough to prevent another financial crisis. The Commission chaired by Sir John Vickers has proposed "ring-fencing" the assets of Britain's retail banks to protect them from riskier investment banking activities carried out in other parts of their parent bank.

But critics, like the respected British economist, Roger Bootle, say this plan doesn't go far enough. Mr Bootle told World Business Report's Manuela Saragosa that he feared the aggressive culture of investment bankers, who operate in fast moving financial markets, would still dominate the high street banks.

Transcript is below.

Roger Bootle: The recommendation is, if you want to be charitable, a finely judged middle course. If you want to be uncharitable, then it is neither nothing nor something.

I do think that there is a fundamental question about all this, which is that: if you are going to "ring-fence" these two operations, and almost treat them as separate things, separately capitalized, separate liquidity so that you can very easily separate them in the event of a ghastly financial crisis, then quite what is the benefit of them being together in the first place?

Now I know that all sorts of banking groups will say it's management expertise spread over these two sorts of banks and so on and so forth, but my gut feeling is it would have been a lot cleaner to have had a complete separation, and in that way the culture could be different.

The problem I think with what's suggested here is the very thing that bankers might advance for keeping them together. It's the idea of a single culture governing these two very different animals. We may well have quite simply a bunch of investment bankers - who are still pretty "money hungry" and aggressive - running our retail banks, and I don't think that's probably the result we should want.

Manuela Saragosa: If these reforms go through as proposed, then it's going to be down to the regulators to make sure that these two businesses stay separate; investment and retail banking stay separate under the same umbrella company. In the past, regulators have messed up when it comes to banking and enforcing the rules, so why should we now be confident that they can do it this time around?

Roger Bootle: I think that's another good reason why this is very much a halfway house and short of the ideal. In an ideal world, this solution works fine. The bank managements play by the rules and to the extent that they are tempted not to play by the rules, the regulators see them and stop them and everything is hunky-dory.

But as you rightly say, that's not quite the way things have worked in the past. There has to be at least a possibility, it seems to me, that the bank managements don't quite play by the rules. And what is supposed to be a complete separation between these two arms turns out not to be, the regulators don't spot it, then the crisis happens.

And in fact we find that what we thought were two completely separately capitalized entities aren't. There are all sorts of cross-holdings and money going backwards and forwards and so this proved to be extremely messy. Whereas, if these were two independent entities, that danger wouldn't exist.

Manuela Saragosa: Do you think that in future people will look back on this sort of opportunity to reform the banks and think it was a bit of a missed opportunity?

Roger Bootle: I think it would be unfair and unwise to criticize the Vickers Commission report too strongly. For a start, although Britain is very big in international banking, she is still a bit part player in the world as a whole. America is the dominant entity here. And it would be really rather strange I think for Britain to go completely out on a limb.

I think the Vickers Commission has gone a fair way and it's now effectively saying I think and particularly to Americans, now what are you going to do about this. And it's quite possible I think that in the wake of the Vickers Commission report, we will see more radical measures coming forward in the United States and then on the continent too.

If we could get a global agreement on the shape and structure of banking, then I think Vickers could prove to be just the beginning of a more radical approach.

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