SENIOR BANK of England policymakers were at loggerheads in a parliamentary hearing yesterday, arguing over how the incoming banking ringfence should work and where it should be placed.
Governor Sir Mervyn King, his deputy Paul Tucker – the frontrunner to take the top job next year – and director Andy Haldane revealed they disagree over the treatment of fundamental products like loans to small businesses.
Sir Mervyn has long backed full separation of banks, going well beyond the planned ringfence, while Haldane wants a wide ringfence including all standard loan products.
But Tucker disagreed, arguing many problems remain in how such a process would work. And he claimed the focus on separation alone misses many other problems in finance.
“The thing that has worried me most about this debate from the beginning is that people fall into thinking ‘if only we could make retail banking safe, the financial system will be safe and I think that is nonsense,” Tucker told the Parliamentary Commission on Banking Standards.
“I think the financial system and the economy will be capable of being blown up by vast wholesale dealers and non banks, so the question of separation is part of a much wider debate of how do you make non-banking finance safe and so we would need a very careful review of how to do that.”
Sir Mervyn also hit out at chancellor George Osborne, accusing him of letting banks take far too much risk by implementing a higher leverage ratio of 33-to-one, well above the 25-to-one recommended by Sir John Vickers.
Meanwhile the governor called for a full review of the ringfence in five years’ time, leaving the door open to total separation in future.
That would also help ensure banks did not try to “tunnel under or get around the ringfence,” he said.
And Sir Mervyn called for a review of the £85,000 deposit guarantee cap, arguing that customers with large temporary deposits, for example after a house sale, should be fully protected against a bank going bust.
The important thing about SME lending or mortgage lending is that the ringfenced bank has the capability to do it, because in the worst crises that is the bit of the financial system we will keep going without taxpayer money. But the fact that the ringfenced entity should have the capability to do these does not mean they should do all that business. It differs from insured deposit-taking where you do want all insured deposits inside the ringfenced bank.” Paul Tucker
There is a good debate to be had about what to do about SME lending because I worry about the definition of SMEs. But you’ve got to spell out much more clearly what is in the ringfence.”
“Vickers proposed that leverage would be restricted to 25:1, while the current legislation says 33:1. For my taste, 33:1 is much too high, but it is a matter of judgement. If you asked me, I would not want anything laxer than the Vickers proposals.” Mervyn King
I would mandate a broader set of services to lie within the ringfence, including loans, mortgages and SME loans. The reason for doing that is to think backwards from the unintended consequences of not having that. Imagine a world in which all SME lending was done by one bank. It was permitted to do all that lending out of the non-ring-fenced part of the business. Alongside that it decides to run a proprietary trading operation which gets itself into trouble.” Andy Haldane