Tory plan to sanitise banks
The Conservatives' "plan for sound banking" (as they call their 52-page policy document on reforming the banking system to be published tomorrow) differs from government policy in a number of significant ways.
First, as I've written about here several times in the past few weeks, a Tory administration would transfer to the Bank of England responsibility for preventing banks, building societies and insurers - both individually and collectively - taking excessive financial risks.
A Financial Regulation Division, responsible for regulating and supervising financial institutions, would be created at the Bank and it would be headed by a new Deputy Governor for Financial Regulation.
This would strip from the City watchdog, the Financial Services Authority, one of its most important functions.
What would be left at the FSA would be its consumer protection functions and its responsibilities to ensure that financial institutions conduct business in a fair and proper way.
So the Tories would rename the FSA as the Consumer Protection Agency. And this Consumer Protection Agency would absorb the bit of the Office of Fair Trading which licences and regulates consumer credit businesses.
These institutional changes would be part of a broader initiative to shift the balance of power from banks and insurers to consumers.
Thus the Tories would force credit card companies and banks to provide much more information directly to individual customers about their charges and terms for a variety of products, from credit cards, to mortgages and savings accounts.
George Osborne, the shadow chancellor, wants financial institutions to provide this information in a form that could instantly be uploaded into product comparison websites, so that customers can instantly see whether they are getting a good or bad deal from their banks.
This is an idea that Osborne has borrowed from one of the pioneers of "nudge" behavioural economics, Richard Thaler.
Also, in the event that the Tories win the next election, Osborne would - in the words of the policy paper - "ask the Office of Fair Trading and the Competition Commission to conduct a focussed examination of the effects of consolidation in the retail banking sector".
Such a competition probe would look at whether choice for consumers has been reduced in a seriously damaging way by the takeover of HBOS by Lloyds, the acquisition of Bradford & Bingley and Alliance & Leicester by Santander, and the withdrawal from the UK of various overseas institutions and assorted small firms.
Since the opinion polls indicate that the Tories will form the next government, the likes of Lloyds and Royal Bank of Scotland will doubtless instruct lawyers almost immediately to prepare their cases for why they haven't acquired excessive market power in recent months.
But these banks will note with some trepidation that Osborne says the findings of these competition enquiries would determine his strategy for how to dispose of the government's huge stakes in Royal Bank and Lloyds, together with its 100% ownership of Northern Rock. There is an implication that he would break up RBS and Lloyds.
Finally, the Tories are going further than the government in detailing plans for what's called macro-prudential regulation, which is about preventing the kind of lending binge that took place in the three or four years before the summer of 2007 and precipitated the worst financial and economic crisis since the 1930s.
The paper talks about creating "a powerful new Financial Policy Committee within the Bank of England, working alongside the Monetary Policy Committee", which would have tools - such as varying how much banks can lend relative to their capital resources - to prevent banks in general from taking excessive risks.
However, although the Bank of England's size and power would be massively increased by these reforms, the Tories want to curb the personal power of the governor of the Bank of England.
The paper says that "the new structure will... reduce the institutional reliance on the position of Governor, with a collegiate approach to policy on financial stability and more use of external expertise".
The point is that responsibility for the supervision of banks and for limiting risks in the financial system would be vested in the Financial Policy Committee, which - like the existing Monetary Policy Committee that sets interest rates - would consist of Bank executives and outsiders.
So the governor of the Bank of England could not dictate - as he can in limited areas now - how the bank will act in a financial crisis.
What is striking is that - as a backstop to the powers of this Financial Policy Committee - the Tories are committing themselves to the introduction of a leverage limit, or a simple ceiling on how much banks can lend in gross terms relative to their capital resources.
But what's also conspicuous is something of an internal contradiction in the Tory analysis.
On the one hand, the paper is quite clear that certain banks - such as Royal Bank of Scotland - borrowed and lent far too much and became far too complex for the health of the economy. They became instruments of economic destruction.
The paper says that there are "some valid arguments in favour of some degree of structural separation between the riskiest banking activities and deposit taking institutions [or those that look after individuals' savings]".
However, it thinks that unilateral action to force banks to divest these allegedly dangerous activities would not be feasible and would damage the City as a financial centre.
So it's relying on the Bank of England to impose the equivalent of a punitive tax on banks that do considerable trading for their own account of a speculative kind, by forcing such banks to hold disproportionately higher capital reserves.
And the Tories believe that this approach "would result in the separation of the riskiest activities if retail banks find the additional costs of engaging in them are too great".
Well, we'll see. Interestingly, this is one of the few policy areas where the government and the Tories are somewhat converged in their thinking.
There's a good deal more to say about the Tory paper. And given that most in the City assume - rightly or wrongly - that the Tories will be in power next year, it'll be studied in minute detail in the City over the coming weeks.
But I'll restrict myself to four additional observations.
• First, the Tory paper is vague about what will happen to the FSA's oversight of regulated markets and listed companies, and its powers to investigate market abuse and insider trading. That said, I understand that these roles might well end up - in the longer term - merged with the Takeover Panel and the Financial Reporting Council as part of a new regulatory authority with broader responsibilities for the conduct of publicly listed companies.
• Second, the management of the FSA now faces a nightmare few months: given the high probability that its days are numbered, retaining and recruiting staff will not be easy.
• Third, breaking up the FSA in the way that the Tories want to do is easier said than done, in that recent reforms have created unified teams within the FSA of those who look after consumer protection and those who are responsible for checking that banks and insurers are lending and investing prudently.
• Fourth, on the assumption that Lord Turner, the chairman of the FSA, becomes the new Deputy Governor for Financial Regulation (my sense is that the chief executive of the FSA, Hector Sants, is planning to leave the regulatory fray next year), we'd see the start of a compelling contest to succeed Mervyn King as Governor in 2013.
This would probably be a death match between Turner and the Deputy Governor for Financial Stability, Paul Tucker.
Which, of course, is to trivialise these weighty policy matters, but is not uninteresting.