It will now take just a week to change bank account. The chancellor is right to want to empower consumers and to seek to reform the payment system to encourage competition; let us hope he is more successful in this pursuit than his predecessors, who were all defeated by the challenge. The banks are wrong to oppose change: we eventually need to move to full bank account portability, making it easier to change bank than it is to change mobile phone company.
Another positive move is the idea that we need a new bankruptcy code to allow even the largest banks to go bust in a controlled manner, and be wound down gently, protecting depositors and taxpayers and avoiding bailouts. It is a myth that some banks are too big too fail. Lehman’s uncontrolled collapse under the old system wreaked immense havoc but the purpose of banking reform should be to make such bank failures safe for the rest of us, not to seek to make banks themselves safe. Capitalism requires the possibility of bankruptcy if it is to function effectively. Under the proposed reforms, bondholders and other creditors would see their loans turned into new equity, and shareholders would be wiped out. Creating a workable resolution mechanism for large universal banks ought to be the number priority for regulators; it is a shame, therefore, that so many, including Osborne, are wasting so much of their time on pointless grandstanding.
One such blind alley is the sort of ringfencing that Osborne is imposing on the industry. This will be hugely costly, reduce efficiency and cut the supply of credit for no benefit to consumers. The policy is premised on the myth that retail banking is intrinsically safe and investment banking intrinsically dangerous, which is utter nonsense. A ringfence wouldn’t have stopped the failures of Northern Rock, HBOS and Bradford and Bingley, all of which were pure (or almost pure) retail banks. It was not trading that caused the crisis, it was bad lending (such as to subprime borrowers) and then the fact that lots of financial institutions invested in these dodgy loans, while simultaneously holding very little capital in reserve. Lending against residential and commercial property is probably the most dangerous form of banking. It is essential to protect depositors and taxpayers, and banish bailouts for ever – but that can be done with a proper resolution mechanism and some other reforms.
Osborne’s “electrified” ringfence – the only new policy – will turn out to be even more damaging. It will give the authorities reserve powers to break up banks that don’t follow these new rules, which doesn’t make sense. Either banks will obey the law or they should immediately be prosecuted; the electrified ring-fence is a typical case of triangulation, with the chancellor seeking to have it both ways. At best, this idea will turn out to be a useless gimmick; at worst it will make it harder for the City to engage in long-term planning and create yet more uncertainty.
The chancellor’s demand that existing RBS staff – who are blameless – have their bonuses docked to pay for Libor fines is unfair and petty. Osborne is meant to be maximising RBS’s value for the taxpayers that own it, not using the bank as a political football. All in all, not a great day.