Banks need ring-fencing rules to be clarified

Stuart Fraser
WITH the scandals at News International and the latest threats of European economic meltdown dominating the headlines, the responses of UK-based banks to the Independent Commission on Banking’s interim report came in under the radar.

But even in a quiet news week, I doubt that these responses would have made the front pages – and that’s a pity, because some important points were made.

It turns out that the banks are concerned about ring-fencing – big surprise – although these concerns remain rather ill-defined.

However, until the ICB provides something more specific on what exactly will be ring-fenced, the banks cannot be expected to provide absolute clarity themselves, or to move on from arguments about competitiveness and economic impacts.

Whatever the nature of the final proposal, it is likely that the ability of UK-based banks to boost growth would be restricted – this is the price that must be paid if the government decides such measures are necessary to ensure stability.

There can be little doubt that erecting such ring-fences would cost banks significant amounts – costs that could be transferred to the consumer.

And of course there is the question of scope and applicability. Would UK-based banks be placed at a competitive disadvantage and, if so, would they consider moving overseas?

Not only would this result in a drop in tax revenues but, in order to produce greater stability in a globally interconnected marketplace, we need rules that cannot be circumvented simply by relocating.

It is not just the banks who have expressed concern – American economist Paul Volcker last week added his voice to the chorus of discontent whilst speaking at Cass Business School. His major criticism of the ICB proposals is they fail to provide any solution to the “overriding question” of how to deal with institutions deemed too big to fail – an issue on which there has already been significant progress through bodies such as G20 and the Basel Committee on Banking Supervision.

With steps already being taken at an international level and serious doubts being cast over the effectiveness and indeed practicability of ring-fencing UK-based banks, government could have a difficult balance to strike between enhancing market stability whilst also safeguarding the competitive position of UK-based banks and continuing to promote growth.

Stuart Fraser is the Policy Chairman at the City of London Corporation