In his speech to Mansion
House last year, George Osborne asked a question of his frosted and cumberbunded audience: "Should we restrict or split the activities of banks?" In his speech tonight, he looks set
to deliver an answer of his own. As Robert Peston reports, the Chancellor is to announce that the investment and retail arms of banks will
be ringfenced off from each other, so that the dice rolls of the Masters of the Universe cannot tumble across everyday savers’ cash. This does not mean a complete, Glass-Steagall-style separation between the two halves. But, rather, it follows the recommendations of the interim report of the Vickers Commision: banks will have to create subsidiaries of their
investment arms, which can then go bust without excessive effect upon their retail counterparts. It would, in theory, be like a contained explosion.
It is a solution that has the benefit, from Osborne’s perspective, of being politically neat. The Tories have always promoted something that borrows from Glass-Steagall but doesn’t go quite so far. And while the
Lib Dems might have preferred the Chancellor to go all the way, and announce a full separation between investment and retail banking, they have already signalled their satisfaction with this approach. Peace, for once, reigns.
Or does it? Quite apart from how the banks will react — and many of them are sweating that any sort of split will make it more difficult for them to raise capital — there is still the
potential for political turbulence. Much depends on the details of how Osborne intends to implement these subsidiaries, of which we know little. One option is to use them as a fall-back, operating
only during times of economic stress. Another is to have them operating fulltime, regardless of the state of the economy. The latter, one assumes, would be more amendable to the Lib Dems. The
former to the banks and, possibly, Tory backbenchers. Even within splits, it seems, there are further splits to consider.