THE GOVERNMENT is undermining banks’ stability and hitting lending to businesses and households by threatening to break up the institutions, banks warned last night.
Chancellor George Osborne will today announce his plan to electrify the ring fence that will sit between banks’ retail and investment operations.
Under the proposal, banks that try to dodge this partial separation will be threatened with a full break-up, as recommended by the MPs and Lords of the parliamentary commission on banking standards.
The idea is to scare banks into keeping to the spirit of the new rules, not just the letter of the regulations.
“If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence,” the chancellor will tell an audience at a JP Morgan office in Bournemouth.
“We’re not going to repeat the mistakes of the past. In America and elsewhere, banks found ways to get around the rules.
“Greed overcame good governance. We could see that again – so we are going to arm ourselves in advance. We will electrify the ring fence,” he will say.
But banks warned that hanging this threat over the industry cannot be good for long-term prosperity.
“This will create uncertainty for investors, making it more difficult for banks to raise capital which will ultimately mean that banks will have less money to lend to businesses,” said Anthony Browne, chief of the British Bankers’ Association.
“What banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow. This decision will damage London’s attractiveness as a global financial centre.”
Instead the chancellor argues the move will create more certainty by pushing banks to obey the rules.
He will add that he is trying to make the sector more competitive by making it easier to switch current accounts, and that he wants to change banks’ culture.
The chancellor has previously suggested setting up a professional body to monitor bankers in the same way as the medical and legal professions.
The speech is being held in Bournemouth to show that it is not only the City which benefits from financial services in the UK. JP Morgan is Dorset’s largest private sector employer, with 4,000 workers.
But Labour leaders said the reforms do not go far enough and called for all banks to face being broken up, not just those that misbehave under the new criteria.
“The government must implement both the letter and spirit of Vickers recommendations and we must see fundamental cultural change in our banks. If this does not happen then banks will need to be split up completely, as we made clear in the autumn,” said shadow Treasury minister Chris Leslie.
He also criticised the government’s plans for 33-times leverage ratio cap, which is less tough than the 25-times limit that Sir John Vickers proposed.
“Despite all the rhetoric the chancellor hasn’t got the appetite for the radical banking reform we need,” he argued.