The ring fencing of British banking is the right way to go for taxpayers and customers, but for it to be effective, the fence has to be high and it has to be strong. How high, and how strong, it will be remains uncertain, but a consultation paper from the Bank of England has now given us at least a few pointers on how the new system will work.
The idea of the ring-fence was first suggested by Sir John Vickers four years ago as part of his investigation into banking and the aim from the start was to protect taxpayers from ever having to bail out the banks again by separating vital services, such as retail deposits, from riskier investment banking activities. Sir John also suggested the banks should hold more capital to insure them against disaster.
Now the Bank of England's consultation has put some meat on the bone of the reforms by suggesting that the big banks, ie those with more than £25billion of deposits, will be required to hold up to £3.3billion of additional capital. They will also have to budget for millions of pounds extra in setting the new system up and millions more in running it every year.
There has been some grumbling from the banking industry about these costs. The banks have also been concerned that a related reform, which would require senior bankers to prove they were unaware or had taken action to prevent misconduct, would lead to them moving from London and working elsewhere.
It is tempting to say in response: we have heard it all before, but the compromise reached over bankers' responsibilities for failings is reasonable – they will now have a duty of responsibility to take appropriate steps to prevent any breach of regulations. However, the banks are on weaker ground in complaining about the costs of the new system – they must adjust to the new reality and learn to live with the idea of the ring fence.
The priority then is to make the ring fence work to protect taxpayers while not unduly affecting the banks' effectiveness. But the changes to the structures and business models will only work if there is also a change in the culture among bankers, and the signs there are not encouraging. Barclays has just chosen an investment banker to lead it, for example. Large bonuses are also still being paid at the big banks. Putting up the ring fence is a good start, but there is a long, long way to go.
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