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Lib Dem Voice: The banking sector needs radical reform but too many cures will kill the patient

by Ben Norman

For seven days before Christmas it has been an incredibly busy day for the financial services sector. The Parliamentary Joint Committee on the Draft Financial Services Bill has produced its wide-ranging report into regulatory reform; the FSA has published its Mortgage Market Review consultation; and, last but not least, the Treasury has published the Government’s response to the Independent Commission on Banking.

At least the latter was well leaked – what isn’t these days? – and gave me time to think about the ICB.

The ICB is actually something quite amazing, not to mention something entirely Lib Dem.

Sir John Vickers was given the remit and resources to step back and have a long look at banking. He talked to bankers, regulators and – most importantly – actual people. The final report was a wide-ranging and considered plan to fundamentally change banking in the UK. It is referenced in Paris, Frankfurt and New York.

And now the British government has done something really unusual. It has followed-up. This is no Simpson-Bowles deficit reduction committee in the US – attacked, dissected and promptly forgotten. This external academic study is going to become policy.

A lot of people are unhappy about this. The ring-fence is the main lightning rod for criticism – see Angela Knight and the British Banker’s Association – but the Government is going to implement it, essentially unchanged from how Sir John imagined it, in this Parliament. There’s plenty of time before then and now, however, not least if the Government accepts the Joint Committee’s proposal to wait before implanting higher capital standards.

More time for capital requirements may seem like a sop to the bankers, but many MPs of all stripes have been calling for a slowdown in the pace of reform given the current economic circumstances. That said it’s quite possible that a slower pace for enhanced capital requirements is both a boon to the bankers and good for the economy – unfortunately these things are rarely simple and never black and white.

Whilst the pace of change is under debate the Government has agreed in principle to the need for capital higher requirements than stipulated in Basel.

There have been conflicting reports on whether Britain can implement capital requirements above and beyond those decided in Brussels. The Chancellor thinks we can. Andrea Enria – Chairman of the European Banking Authority – seems less sure.

The problem remains that Brussels regulations are not even close to completion, and even if they do decide upon maximum harmonisation (preventing the UK from going higher on capital) there is more than one way to skin the capital cat.

Ultimately a good day for the ICB then. But there is a wider point. There are hundreds of work streams in London, Brussels and Washington that will impact on financial services. These are all intended to cure the ailing economy and prevent another crash.

In medicine when more than one drug is pumped into the patient there is a chance they can interact in unexpected and sometimes detrimental ways. The likelihood of interaction increases with the number of drugs. Each drug may be used with beneficial intent, but the combined result can be disastrous.

And so it is with financial services. The sector needs radical reform but too many cures will kill the patient.




This article appeared on the Lib Dem Voice website on 19 December 2011. It can be viewed online here.

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Ben Norman