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Osborne, competitiveness and confidence

14 June 2012

6:30 PM

14 June 2012

6:30 PM

George Osborne will formally unveil the government’s banking reforms in a speech at Mansion House later this evening. The reforms are in line with the recommendations of Sir John Vickers’s Independent Banking Commission (ICB), as laid out by the Treasury, which published this White Paper earlier today.

For those who’ve forgotten, Vickers suggested splitting retail and investment banking through a Glass-Steagall-type ‘ring-fence’ mechanism that would protect retail, SME deposits and overdrafts while commanding that the ring-fenced part of the bank is not dependent on other departments for liquidity. This, it is hoped, will ensure that the taxpayer is insulated from bailouts in the future, which is, obviously, a key political demand across the spectrum of voters.

The ICB also advised that capital requirements be raised to limit risk. For some time now, the government has been pushing the EU to go further than the Basel III protocals. It intends that British banks should have an equity-to-capital ratio of 10 per cent, in line with the ICB’s report.

The Treasury says that this requirement will improve the competitiveness of British financial services. Critics say that raising the ratio above the standard set by Basel III is, by definition, uncompetitive. While others warn that greater capital requirements will further stifle lending, which will impede economic recovery, which will have electoral consequences.

And others insist that the whole premise of the Vickers Report, the ring-fence, was tested to destruction by the collapse of Lehman Brothers. Financial services are so manifold, pervasive and interconnected these days that no major bank can be allowed to fail. Total reform, they say, is needed rather than reviving half-measures from the previous century.

Osborne will face a sceptical audience this evening; an audience whose scepticism must be, to some extent, fuelled by the lack of confidence in the global economy, the exposure of banks to the horrors emerging on the continent, and continuing high unemployment in this country and elsewhere. There is, apparently, no shortage of capital. Some estimates say that nervy British businesses are sitting on £750bn, waiting for something to turn up. The government’s plan (or hope) appears to be that large capital requirements will restore a degree of confidence in the banking system, which might stimulate investment, credit and growth. All underpinned, of course, by yet more debt.

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