Don't unpick a consensus, pleaded George Osborne. Too late.
The parliamentary commission on banking standards has taken a look at the chancellor's ringfencing proposals and concluded they are not tough enough. It wants a ringfence that can "stand the test of time" and clearly regards the government version as too flimsy, too ill-defined and too vulnerable to the lobbying power of banks.
Well done, the commissioners. Somebody had to acknowledge that ringfencing is an experiment that may not work and that more radical reform, including full separation of retail banking from investment banking, should remain an option. Given this body is a commission established by the chancellor, the criticisms will be hard to brush aside.
The need for safeguards should be obvious to anyone who has "read the book," as commission chairman Andrew Tyrie puts it. He means the history of the gradual dismantling of the 1930s Glass-Steagall legislation in the US. Big banks, tempting governments with promises of good behaviour and higher tax revenues, chipped away at the principle of separation and won themselves freedoms to mix any financial cocktail they wished. That story ended badly. In time, today's ringfencing legislation could suffer the same fate, implies the commission.
Its solution is an "electrified" ring fence, which sounds like vacuous jargon but is not. The Bank of England would have powers to force full separation on a bank that dragged its heels on ringfencing or disobeyed the spirit of reform. That idea is a direct challenge to Osborne's proposals: the Bank would be the regulator, not the Treasury, that would call the shots. (There's an open question about whether the Bank is sufficiently accountable to parliament to exercise such powers, but that's another debate entirely.)
Second, parliament would have to re-examine the implementation of ringfencing after four years. That sounds like common sense since, to repeat, the reforms are an experiment and it seems highly unlikely that a perfect regulatory regime could be achieved at the first attempt. The fact that Sir Mervyn King, the Bank governor, has argued for periodic reviews adds weight to the commission's case.
Third, the commission wants stricter limits on banks' leverage ratios. Here, Osborne finds himself out on a limb. The chancellor, seemingly overwhelmed by the grumbles of mortgage-dominated banks, opted for a leverage cap of 33 times. The Vickers commission, which produced the original ringfencing proposals, had argued for a more conservative ratio of 25 times. Tyrie's crew is firmly on the side of conservatism, even if it rubbishes the methodology behind the Vickers commission's calculations. Osborne will have to explain why he wants to allow banks to be so aggressive.
He will also have to state why he thinks he is qualified to make judgments about banks' balance sheets. The commission thinks the Bank of England financial policy committee is better placed to do the job and should not be forced to operate with one hand tied behind its back. Fair point: the world of risk-weighted assets is deeply technical and there is an obvious temptation for governments to deem their own debt to be so safe banks should stockpile vast quantities of the stuff.
There are, of course, areas where the commission is singing in harmony with the chancellor; and, ultimately, it has stayed with the consensus that backs ringfencing as the best first step in structural reform of the banking system. But the criticisms are stinging. In short, the commission thinks its ringfence is stronger and more likely to succeed than Osborne's construction. It is right.
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