SPLITS emerged over the direction of UK banking reform yesterday, as deputy leader of the coalition Nick Clegg expressed support for a break-up of British banks even as his own government’s Independent Commission on Banking (ICB) came out against a radical break-up plan.
The divisions throw into doubt the implementation of the ICB’s recommendations, which will be subject to government approval when they are published in September.
While Chancellor George Osborne welcomed a speech by ICB chair Sir John Vickers on Saturday, Clegg ignored Vickers’ warning to avoid inflammatory rhetoric.
He said that banks had been “an oversized liability for the British economy” and that regulation must “hive off or insulate very high-risk, over-leveraged banking activities from low-risk, high street retail banking”.
His comments pre-empt the ICB’s report, with Vickers having ruled out the most radical break-up plans only a day earlier as inflicting “considerable economic cost”.
“The popular ‘utility/casino’ distinction between types of banking activity seems more catchy than helpful,” Vickers said.
But Clegg shrugged off the warning, saying that previous UK governments had “allowed the housing market to let rip, to become a casino”.
Clegg’s language was slammed by Angela Knight, chief executive of the British Bankers’ Association, who told CityA.M: “We don’t have a casino banking system in the UK. All politicians and others need to be very careful about how they’re portraying our banks.”
She also said that Clegg risked “using easy words that may get a round of applause on day one but will be to the detriment of everyone thereafter.”
Another senior banking source said: “It is populist to cry for the break-up for the banks but we all need to realise there are substantial costs for customers and shareholders.”
Vickers took a moderate stance in his speech, but signalled that the ICB is looking at ways to reduce retail customers’ exposure to wholesale banks, potentially through different capital requirements. However, he rejected separating the ownership of investment and high street banks.
The ICB’s report will not be binding, meaning that Osborne will have to negotiate with his Lib Dem allies over its implementation. Clegg’s attack comes as industry-wide talks to improve banks’ image stalled.