So George Osborne, the UK Chancellor, made a big speech at JPMorgan’s HQ in Bournemouth yesterday.
The speech announced the details of the UK Banking Reform Bill which will implement the recommendations of the Vickers’ Independent Commission on Banking (ICB) for ring fencing, account switching and more.
The speech is based upon four foundation principles for a better future for banking through:
- Better regulation;
- Better regulators;
- Better choice; and
- Better people.
Better regulation is regulation that ensures the next time a bank fails, the taxpayers don’t have to bail them out and the economy can continue to function. In other words, regulations that ensure no bank is too big to fail. The government has accepted the recommendations of the ICB, and this means that banks will become holding companies where their retail and investment arms are separated, with separate management teams and separate funding.
Better regulators is to ensure that the regulator is effective and has teeth. It is believed that the triumvirate split of the regulators between the Bank of England, the Financial Services Authority (FSA) and the Treasury failed under the last government so better regulators is to create three new authorities out of the FSA:The Financial Policy Committee (FPC):
- A committee of the Court of the Bank of England;
- Purpose: to protect financial stability (macro-prudential regulation, regulation of Clearing Houses and settlement systems)
- A subsidiary of the Bank of England;
- Purpose: stable and prudent operation of deposit takers, insurers, and investment banks (micro-prudential regulation)
- An independent company
- Purposes: confidence in financial services and markets (will regulate exchanges and other trading platform providers, and market participants); and for improving consumer protection and market integrity (regulating conduct of business for all firms)
[More on the FSA’s restructuring can be found in this presentation from the FSA]
Better choice is all about improving competition and competitive forces by opening the market to easier entry, encouraging new entrants, making it simpler for people to move their accounts between banks and providing an overhaul of the payment systems to allow any firm to connect.
Better people is all about improving professional standards. The Chancellor doesn’t say it explicitly but it implies that to be a bank leader will involve some form of certification or charter, although many of the bank leaders of the last decade should be certified anyway.
The problem with the speech is that it says nothing new.
It just wraps up the stuff that’s already been agreed and puts it into a new light for catching some headlines. For example, the big headline yesterday is that the ring fence between investment and retail banking will be electrified. Big deal.
What that means in practice is that if the bank does not ring fence under the new laws at a good speed, then they will be forced to separate their retail and investment bank arms in a Glass-Steagall style split.
The government does not need to electrify the fence however, as any UK bank that doesn’t conform will get beaten over the head with a sharp stick anyway. The only thing that might justify an electrified ring fence is to make sure banks keep confirming with this separation of retail and investment arms ten or twenty years from now.
The speech has all sorts of other political clap-trap:
“2013 is the year when we re-set our banking system.”
“A banking system that works for you … is what I’m working night and day to deliver for you.”
“The Bank of England will be the super cop of our financial system.”
“Anger is not enough – we need to channel the anger into change.”
In fact, I took particular note of his comment:
“Why, in the age of instant communication, do small businesses have to wait for several days before they get their money from a credit or debit card payment? It should be much quicker. Why do cheques take six days to clear? Customers and businesses should be able to move their money round the system much more quickly.”
Has he not heard of Faster Payments?
Is our UK Chancellor unaware that banks tried to get rid of cheques to move people and companies towards real-time payments, but the media and markets rejected these incentives?
Does he not know that almost any payment can move at light speed today, as long as the customer does not use paper?
My honourable friend, that part of your speech really was political grandstanding of the highest order [you can read more critique on this part of his speech at my friend Gareth Lodge's blog]. There’s also more of this speech. You can read the whole dirge if you’re desperate, but it's not worth it as there’s nothing new.
So what is the point here?
Well my point is that, after five years of crisis analysis, we have produced a solution for the wrong problem.
The solution presented yesterday is to separate a bank’s retail and investment arms but, as so many have pointed out including myself, it was retail banks that failed more than investment banks in Britain.
In Britain, only three banks had investment banking arms of any worth: HSBC, Barclays and RBS. Of these, HSBC and Barclays survived this crisis far better than our retail banks such as Halifax Bank of Scotland and Northern Rock. Equally, RBS caused their problems through diluting capital irreversibly in an ego-driven acquisition of ABN AMRO, which was primarily motivated by one-upmanship over Barclays.
This means that the issues we should be regulating is the fact that UK banks escalated risk exorbitantly because they could securitise funds in the investment markets.
It has nothing at all to do with having a retail and investment bank.
Nothern Rock, Halifax Bank of Scotland and others in the retail financial markets were dipping their fingers, toes and whole bodies into the investment markets to feast on funds. That was the issue. By feasting on those funds, they could generate profits and increase shareholder returns.
However, by feasting on those funds they also created risk. That is why they had bet the farm on never-ending access to funds and is why the whole farm was at risk when those markets stopped the funding.
So it is the risk models of banking that were at fault, not the structure of the banks themselves.
The only thing the ring fence is good for, is that it can help a government or regulator unwind a bank more easily the next time one fails. It is a prescription, not a cure.
For that reason, it is being considered for adoption across Europe.
But that brings me to the real point of yesterday’s speech that the Chancellor truly failed to respond to and damages Britain’s future more than anything else this government is doing.
The reforms in the Bank Reform Bill will make Britain’s banks wholly uncompetitive with any other bank in the world because we have acted unilaterally to ensure they are ineffective in a global arena.
UK banks now need to reserve capital against each part of their bank operations: retail banking, commercial banking and investment banking, and for each and every subsidiary operation.
That’s good, but American banks don’t have to do that. They just have to stop trading their own bank funds in the investment markets under the Volcker Rule, which will outlaw proprietary trading.
Add in Basel III and what this means in practice is that US banks will operate at a Tier One Capital Ratio of around eight percent, but our banks will operate at a level double that or worse, due to reserving against each and every part of the bank at Basel III ratio’s.
The net:net is that American banks will be able to leverage capital for profits far more easily than UK banks, and hence American banks will attract investors and UK banks will not.
Furthermore, and here’s the real disaster, it means our banks will be reserving funds that could have been used for lending, fuelling the economy, creating commerce and growth and getting us out of this mess.
Instead, they will be sitting on funds and letting them fester in their vaults.
Money that effectively will be like leaving money under the mattress that could have helped Britain recover faster instead.
That’s the real rub of what the UK Banking Reform Bill does: speeds our banks towards being less risky and less competitive, whilst ensuring the economy teeters and tumbles through the next decade in a poorer fashion than it ever was before.
You can watch my reactions in real-time if you want, as I talked about this with Jeff Randall on Sky News last night (11 minute video, my bit starts just after 6 minutes).
And then more on the BBC