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An electric fence to keep the City of London’s light from dimming

21 December 2012

10:16 AM

21 December 2012

10:16 AM

The Parliamentary Commission on Banking Standards was conceived in those tumultuous days following the first Libor revelations. At the time, some hoped that its report would lay the blame squarely at the feet of a certain former city minister. But the cross-party committee of peers and MPs has produced a sober report this morning which makes for relatively comfortable reading for those Labour politicians whose regulatory system saw the birth of Libor rigging as it does not name them. It is slightly less comfortable for the Coalition, which now has to consider whether to beef up its existing plans for banking reform.

It doesn’t contradict the spirit of the Vickers reforms, but it does go further, calling for an ‘electrified’ ring fence between the retail and investment arms of the banks. This electrification includes legislation to ensure that the banks ‘comply not just with the rules of the ring-fence, but also with their spirit’. Currently, the Commission argues, there is a risk that that the ring fence is ‘especially vulnerable to erosion over time’. In a reminder of those cosy days when Labour and the bankers scratched one another’s backs, the report warns:

‘The Commission has also identified the propensity of regulated firms to seek to press at the limits of permitted activities for short-term economic gain, and the risks that such efforts might be supported by pressure on politicians to agree to convenient changes which reduce the long-term effectiveness of the ring-fence.’

If banks do not comply with the rules or the spirit of the ring-fence, then the Commission recommends that they should be forced to split up. These threats are all part of an attempt to restore confidence in the banking system: if politicians come away feeling at least relieved by the report, bankers will not. The report paints a discomfiting picture of the system, with Commission chair Andrew Tyrie saying ‘the latest revelations of collusion, corruption and market-rigging beggar belief’. Tyrie says his commission has produced ‘the clearest illustration yet that a great deal more needs to be done to restore standards in banking’.

The most important achievement of the Commission will be to restore confidence in the sector, so that the City is no longer seen as a cesspit, and so that other financial centres don’t see an opportunity to usurp London. If an electric fence can stop the City’s light from dimming, then it’s a bright idea.

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