Osborne’s bank plan set to hurt City and economy

THREATENING to split up all banks if the ringfence does not work will hurt the economy and hit the value of the bailed-out banks, analysts and lawyers claimed yesterday, attacking George Osborne’s plan for the sector.

Individual banks could be broken up if the authorities fear they are trying to get around the partial separation of retail and investment banking, while the whole sector could be hit if the rules are reviewed and found wanting in years to come.

As the exact size and location of the ringfence has yet to be finalised lobbying is set to intensify, potentially meaning the move to electrify the ringfence will backfire, as banks try to shift its foundations. And that unpredictability is likely to hurt any sale of the state-owned banks.

“The high stakes approach now being introduced to the ringfence measures will make it difficult for the government to decide the optimum time to reduce their holdings in UK banks,” said Pinsent Masons’ Tony Anderson. “There could be significant political fallout for the government from any proximity between a sell down of shares in a state owned bank and a full separation of banking operations following a breach of the ringfence.”

And the UK’s economy could lose competitiveness as its rules become tougher than those in other countries.

“It is frankly extraordinary that the British government should be trying to electrify the regulatory fence for banks here when in Germany and France they are busy trying to dig holes under it,” said Ash Saluja from CMS Cameron McKenna. “An uneven playing field is not what the single market is supposed to be about.”

And analysts at the Institute for Economic Affairs argued the whole concept of ringfencing is flawed.

“We need to make bank failure safe. We therefore need more focus on how to wind up failed banks without recourse to taxpayers’ money,” said Mark Littlewood. “Sadly, Osborne seems to want to introduce more prescriptive regulations which will make genuine competition harder and could exacerbate the too big to fail problem.”

The chancellor also argued he is making the sector more competitive with seven-day current account switching.

He added he wants to open up the payments system to improve service and make sure small banks no longer have to go through rivals’ systems.

OSBORNE’S SPEECH

■ Banks face being broken up if they try to undermine the ringfence

■ The chancellor said that this is in response to banks previously pushing hard to get around regulations

■ “We are going to arm ourselves in advance. In the jargon, we will electrify the ringfence”

■ He pledged to increase competition in the sector

■ Customers will be allowed to switch current accounts from one bank to another in seven days

■ They will be able to take all their direct debits with them seamlessly

■ Osborne hopes that will encourage movement between banks

■ The theory is that should put pressure on institutions to take more care of their customers

■ The chancellor wants to open up payments services, too

■ He said he does not want small banks to have to rely on bigger rivals for access to payments systems

■ Osborne believes it is unfair that small firms must wait days for payments when banks can carry out the transfers in seconds

■ He argued it is wrong and damaging that it takes several days for cheques to clear

■ The chancellor added he wants to make sure RBS pays its impending Libor fine from bonuses, not taxpayer money

■ And he told his Bournemouth audience that Barclays’ £290m Libor fine is going to a variety of good causes including £35m to armed forces charities.

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