Duncan’s Economic Blog

Banking Reform: The Government’s Confused Line

Posted in Uncategorized by duncanseconomicblog on September 1, 2011

Banking reform and the timetable for implanting whatever the Vickers’ Independent Commission on Banking recommends are once again making the headlines.

The Government, according to the FT, are looking at delaying implantation until 2015.

Whilst most blog posts start from a strongly held view and marshal arguments to support that view, this one will be a little different. Because I am genuinely torn on this question and still making up my mind.

Whilst I have argued for a long-time that banks need serious reform, and whilst I thought the interim ICB report was, if anything, a bit weak I can also see the point that proponents of delay are making.

Andy Haldane is surely right to argue that financial stability policy needs to get ‘macro-prudential’ and ‘lean against the wind’. In boom times regulators should be acting as a brake on banking sector exuberance but in times such as these they should be encouraging more lending – something than is, in many ways at odds with calls for firewalls, separately capitalised institutions and higher capital ratios.

On the other hand – a banking crisis seems to be brewing in the Eurozone one which will no doubt impact UK banks.

In many ways my preferred answer is, the rather useless, ‘I wouldn’t start from here’.

I think the mandate of the ICB was seriously limited as it didn’t really deal with the crucial question of ensuring the banking sector was ‘fit for purpose’ in terms of providing credit to the real economy.

The government tried to handle this separately through the very weak Merlin deal.

My ideal banking reforms – a state investment bank, more regional banks, more business-focussed patient investors and lenders, more mutuals – where never really on the table given the narrow mandate that Vickers had to work with.

But I am certain of one thing – the government’s current line makes little economic sense.

A case can be made, on macro-prudential grounds, for delaying banking reform as the economy is currently to weak with deal it. But to make that case whilst simultaneously pressing ahead with a severe fiscal tightening is completely muddle headed.

If the economy is too weak to deal with modest banking reform how can it possibly be strong enough to cope with the scale of the cuts?

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4 Responses

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  1. metatone said, on September 1, 2011 at 12:01 pm

    Will Hutton (cue jeering from all sides) made what I thought was a very important point in his recent article on this.

    A whole raft of reforms are needed and capital ratios are only one part of that. If we are heading into a double-dip (something that we should all note George Osbourne denies) then it may make sense to hold off on capital ratios. That does not at all mean that other reforms should be put off.

    Any sensible analysis of the banking sector would highlight that splitting investment banking away from retail/commercial banking would likely raise the amount of lending.

    Without the umbrella of current profits from the investment banking side, it becomes harder for the “high street banks” to justify their current inaction. Shareholders will require that they proactively try to make money again, rather than simply sit out waiting for an upturn.

  2. mark007 said, on September 2, 2011 at 10:26 am

    Citigroup analysts have claimed that the Government has lost between £15bn and £20bn as a result of banking reforms introduced in 2010 which have contributed to a fall in share price for Lloyds Banking Group and Royal Bank of Scotland – their muddled approach to the economy and the reforms is not doing anyone any favours

  3. jomiku said, on September 2, 2011 at 3:34 pm

    Interesting effect of contractionary policy is that it depresses the demand for lending, forces tightening of credit standards to avoid loss, and encourages banks to build capital to make it through. I assume the last will at some point be trumpeted as an achievement.

  4. Dave Holden said, on September 2, 2011 at 5:59 pm

    My current favoured solution http://www.positivemoney.org.uk/

    Back in the real world I’d be very skeptical of getting any real reform when times are “good”


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