Beware retail banks taking ever greater risks
WHEN it was announced that George Osborne was going to endorse the Vickers Commission’s suggestion that the retail arms of UK banks be subject to some kind of “ring-fencing” in his speech at Mansion House last week, £3.5bn was wiped off the collective market value of the UK’s four biggest banks almost immediately.
Judging from the industry quotes that accompanied these news stories, it appeared as if this move was a bolt from the blue. And yet what was the reason for such a reaction? What did the chancellor actually say that was so surprising?
By voicing his support for a broad recommendation contained in the interim report – the final report is of course not due until September – of an independent body established by the government to resolve the problem of what to do with financial institutions deemed “too big to fail”, the chancellor told us nothing that was not already known.
Given that three months ago, UK-based banks were concerned that the Vickers Commission was seriously considering the legal separation of their retail and investment arms, anything less than this should be seen as a step in the right direction!
Of course the term “ring-fencing” is very broad, and encompasses a range of scenarios, some perhaps more palatable than others.
As ever the devil will be in the detail and we must reserve judgment until the government releases specific details of what it has in mind.
Whatever action it chooses to take, there are a number of consequences that possibly cannot be avoided.
Firstly, there are likely to be significant costs involved for the banks – costs that will, ultimately, be passed on to the consumer.
And secondly, by requiring banks to hold more capital and possibly restricting their scope for deploying it, there is likely to be less liquidity in the marketplace, making it more difficult for small and medium-sized businesses to source bank funding. This in turn will make the accessibility and efficiency of other funding sources like business angels, quoted markets and venture capital more important than ever.
In fact, given their implicit state guarantee and the targets they have to hit with regards to lending to SMEs under Project Merlin, it is not impossible that the retail arms of banks might be the ones taking greater risks in the future.
This is exactly the kind of unintended and undesirable consequence that we must work hard to avoid.
Stuart Fraser is the Policy Chairman at the City of London Corporation