TOMORROW, Barclays chief executive John Varley will become the latest business leader to appear before the Treasury Committee’s inquiry into how to solve the problem of banks that are deemed too important – or too large – to fail. Following President Obama’s recent proposals, this is a hot topic at the moment and the committee’s chairman, John McFall, has made it clear he holds a similar view on reducing the size of banks based in the UK.
It is incumbent upon everybody in financial services to engage in this debate and to demonstrate why big firms based in the UK must be allowed to continue to innovate and to grow. There is a risk of oversimplification – the world has moved on from Glass Steagall and the 1930s. Limiting the size of financial institutions would inhibit their ability to acquire new business. Do we really want to consign the UK’s most successful industries – an industry that produces 12 per cent of our tax take – to zero growth, especially at a time when there are huge opportunities up for grabs in the emerging markets?
At the cornerstone of Obama’s proposals is the idea that big firms should be banned from trading on their own account, thus barring them from “owning, investing in or sponsoring” hedge funds and private equity groups. Unilaterally limiting the ability of banks to engage in proprietary trading of all forms is a dangerous path to tread.
Proprietary trading did not cause the financial crisis and limiting the ability of banks to engage such activities will not provide the answers we are looking for.
Northern Rock and Bradford and Bingley had a very narrow focus and look what
happened to them! Forcibly restricting the focus of our banking sector would inhibit the ability of firms based in the UK to offer large multinational companies a full range of services, thus diminishing our international competitiveness by driving business overseas – to places where their needs can be dealt with under one roof.
I have high regard for McFall’s views but I must disagree with his position that discussions based around capital requirements and liquidity ratios neglect the central question of what to do with institutions that are too important to fail.
Proposals such as recovery plans put in place in good times, setting up arrangements that will allow banks to survive in bad times are an integral part of the solution. These, coupled with the massive increases in capital and liquidity the banks in this country have already undergone will provide stability and protection for the taxpayer should anything go wrong.
Banks are not complacent about risks and the need to better manage them but, instead of artificially limiting the size of the UK financial services industry, we must introduce a sensible, well considered programme of regulation that promotes stability whilst also allowing the City to retain and enhance its competitiveness.
Stuart Fraser is chairman of the City of London’s policy and resources committee.