Duncan’s Economic Blog

Worrying news on banking reform

Posted in Uncategorized by duncanseconomicblog on March 31, 2011

Today’s FT reports that ‘Treasury officials’ are pushing for a three way deal between the government, the big banks and the independent Vickers Commission on Banking Reform – which is due to report on April 11th.

As they report:

The move is aimed at forestalling a public confrontation between the banks and the commission, easing any possible tensions between the Conservatives and Liberal Democrats over banking reform, and smoothing the way for the reprivatisation of Lloyds and Royal Bank of Scotland.

This strikes me as big news – the independent commission hasn’t even published its initial findings and already the Treasury is talking about a ‘compromise’.

This isn’t the first time the Treasury has interfered either, as the Evening Standard’s City Commentator Anthony Hilton wrote four agos:

The Government offered to emasculate the Independent Commission on Banking as it tried to strike a deal on bank bonuses a few weeks ago. I am told it backed off only when Sir John Vickers, chairman of the inquiry, and his entire committee, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf threatened to resign.

The row emerged in the last few days of frenzied negotiations around Project Merlin early in the New Year. A key objective of Merlin from the perspective of the banks taking part was to normalise relations between them and the Government. Thus the impression created by both sides was that the main area of discussion was bonuses and lending to small businesses.

It has now emerged, however, that the chief reason the banks took part was to lift the threat that Vickers’s commission would recommend a major restructuring of the banking industry which would have the potential fundamentally to alter how they do business and where they make their money.

It increasingly looks like the Vickers report will actually deal with some of the big issues around the banking sector. However last month I expressed some worries about how the government would react:

This is the same pattern we saw with Project Merlin, Osborne will do nothing to damage the resale value of the banks. Given a choice between a better functioning, safer system and a larger pre-election war-chest from the sales of RBS and Lloyds, he is taking the second option each and every time.

I’m rapidly losing faith that the UK will see any major banking reform after the Vickers Commission reports in September.

The news today makes me think I was right to lose faith.