City banks must not be harmed

 
Michael Bear
THE latest heated exchange of words between Vince Cable and senior industry figures has focused attention on the impending publication of the Independent Commission on Banking’s final report next week.

This promises to be a defining moment for the industry and it is understandably provoking strong emotions on both sides. It is, therefore, worth taking a step back to understand the ICB’s key objectives. Sir John Vickers and his colleagues have been asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.

We all agree these outcomes are desirable. How the industry gets there is the real question. It is important to note that the regulatory landscape for banking has already changed considerably since the financial crisis. Everything from capital requirements and pay structures have been undergoing a period of flux. Some of these changes have been positive, others less so.

The ICB will not be stepping on unreformed ground. That is not to say that the recommendations it will put forward should be blindly dismissed. Clearly, we cannot afford another situation where the taxpayer is being asked to underwrite bank bailouts. The most high-profile proposal is likely to be the suggestion that banks should “ringfence” their retail and investment operations with separate capital structures. This, it is argued, could help solve the “too-big-to-fail” problem.

It is worth stating though that universal banking did not cause the crisis and this measure would not have stopped pure investment and retail banks such as Lehman Brothers or Northern Rock respectively from failing. In fact, many have argued that the universal banking model helps diversify risks across sectors and geographically and therefore reduce systemic risks.

Nonetheless, the Chancellor has backed the ringfencing proposal outlined in the interim report so we must now secure a workable solution that does not damage the industry’s competitiveness and lending capacity. There will be significant costs incurred by the banks for erecting firewalls but it is difficult to know whether this will be a price worth paying until the limits are set.

Last week, various reports speculated that ring-fencing will become compulsory from 2011, 2015, or 2019. If rushed, there is a danger that the additional burdens imposed will make lending conditions for businesses more challenging and place our banks at a disadvantage internationally.

Michael Bear is Lord Mayor of the City of London