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Vince Cable warns against reopening banks debate Vince Cable warns against reopening banks debate
(about 4 hours later)
Vince Cable, the business secretary, has cautioned against reopening the debate about whether to force banks to break up their high street and investment banking arms, warning it would create "massive uncertainty". Vince Cable, the business secretary, has cautioned against reopening the debate about whether to force banks to break up their high street arms from their investment banking, warning it would create "massive uncertainty".
Once one of the strongest proponents of total separation of the banks to avoid the need for another taxpayer bailout, Cable said the independent commission on banking had concluded that ringfencing was the best way to reduce risk the sector. Once one of the strongest proponents of total separation of the banks to avoid the need for another taxpayer bailout, Cable said the independent commission on banking had concluded that ringfencing was the best way to make banks safer.
He was responding to a report by a parliamentary commission on banking standards chaired by Conservative MP Andrew Tyrie which put full separation of the banks back on the agenda. The report by Tyrie's commission said that the current proposals "fall well short of what is required" and that the ringfence should be "electrified" by giving the government a reserve power to separate high street banks from investment banks if they do not implement the proposals. He was responding to a report by a parliamentary commission on banking standards chaired by the Conservative MP Andrew Tyrie, which put full separation of the banks back on the agenda. The report by Tyrie's commission said the current legislation planned to implement the ringfence fell "well short of what is required". Tyrie said the ringfence should be "electrified" by giving the government a reserve power to separate high street banks from investment banks if they do not implement the proposals.
The independent commission on banking, chaired by Sir John Vickers, was set up soon after the coalition government came to power to thrash out ways to avoid another taxpayer bailout. The independent commission on banking that recommended ringfencing, chaired by Sir John Vickers, was set up soon after the coalition government came to power to thrash out ways to avoid another taxpayer bailout.
Cable said: "On splitting the banks, I started out believing that a complete separation was the only way forward. The Vickers commission, however, argued persuasively and unanimously that ringfencing achieved that objective in a less disruptive way. Andrew Tyrie is right to raise the question of what happens if it fails. But it would create further massive uncertainty to reopen the whole bank reform agenda at this stage."Cable said: "On splitting the banks, I started out believing that a complete separation was the only way forward. The Vickers commission, however, argued persuasively and unanimously that ringfencing achieved that objective in a less disruptive way. Andrew Tyrie is right to raise the question of what happens if it fails. But it would create further massive uncertainty to reopen the whole bank reform agenda at this stage."
The banking reform bill to implement the Vickers report will be formally introduced into parliament next year when it will become clear if the government intends to introduce legislation that will give it powers to break up banks if they refuse to implement the ringfence. Bank shares were among the biggest fallers in the FTSE 100 amid concerns, according to Ian Gordon of Investec, that regulators could be given "draconian, arbitrary powers".
"The banks have been the subject of an endless series of scandals, most recently with Libor fixing and the swap mis-selling to small businesses. It's right that the Tyrie review has made tough recommendations to ensure that there is permanent structural change for the better," Cable said. The banking reform bill to implement the Vickers report will be formally introduced into parliament next year when it will become clear if the government intends to introduce legislation giving it powers to break up banks if they try to undermine the ringfence.
Tyrie's commission was set up in the wake of the £290m fine slapped on Barclays for rigging Libor – a scandal which deepened this week when UBS, the Swiss bank, was fined £940m by regulators in the UK, US and Switzerland. "The banks have been the subject of an endless series of scandals, most recently with Libor fixing and swap mis-selling to small businesses. It's right that the Tyrie review has made tough recommendations to ensure that there is permanent structural change for the better," Cable said.
While Tyrie's commission was set up to look at banking standards it was also tasked with prelegislative scrutiny of the bill being used to implement the Vickers proposals. Much of it is to be tackled in secondary legislation. Tyrie's commission was set up in the wake of the £290m fine slapped on Barclays for rigging Libor – a scandal which deepened this week when UBS, the Swiss bank, was fined £940m by regulators in the UK, US and Switzerland, also for fixing the key interest rate.
In its report on Vickers, the Tyrie commission criticised the government's decison to water down a so-called leverage ratio which attempts to curb the risks banks can take. The Vickers report set it at 4%, which would restrict leveraging of banks to 25 times the size of their balance sheet, but the government has suggested that the ratio be 3%, allowing a higher leverage of 33 times. In its report on Vickers, the Tyrie commission criticised the government's decision to water down a so-called leverage ratio which attempts to curb the risks banks can take. The Vickers report set it at 4%, which would restrict leveraging of banks to 25 times, but the government has suggested that the ratio be 3%, allowing a higher leverage of 33 times.
Vickers said: "The parliamentary commission has welcomed ringfencing in the most practical way – by proposals to reinforce it. Ringfencing is seen as good for banking standards as well as financial stability. The report is also strong on boosting banks' capacity to absorb losses, particularly the need for government to reconsider its non-acceptance of the ICB recommendation on leverage". Vickers welcomed the comments on the leverage ratio and the attempts by Tyrie's commission to try to "reinforce" the way the ringfence is implemented. "The parliamentary commission has welcomed ringfencing in the most practical way – by proposals to reinforce it," Vickers said.
Tyrie also proposed an annual review of how the ringfence is working, to be carried out by the new Prudential Regulation Authority being set up inside the Bank of England. He wants an independent assessment at least once every four years. "Ringfencing is seen as good for banking standards as well as financial stability. The report is also strong on boosting banks' capacity to absorb losses, particularly the need for government to reconsider its non-acceptance of the ICB recommendation on leverage," Vickers added.
The commission intends to take fresh evidence on whether to implement "the Volcker rule" – named after former US Federal Reserve chairman Paul Volcker, who gave evidence to the commission – which suggests hiving off proprietary trading. Analysts were concerned about more uncertainty for the banking sector. Gary Greenwood, analyst at Shore Capital, said the report "highlights the ongoing regulatory challenges and uncertainties that still face the UK banks".
Tyrie said: "Over time, the ringfence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ringfence" "The most controversial proposal in the report, in our view, is that UK banks should be subject to the threat of a full break-up of their retail and investment banking operations if they fail to effectively implement ring-fencing requirements," Greenwood said.