September 1, 2011 8:04 pm

Cameron fears effect of bank reforms

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David Cameron is growing increasingly nervous about the impact of sweeping reforms of Britain’s banks, raising fears among his coalition colleagues that he may seek to water down or further delay plans to split retail and investment banking operations.

Banks have discreetly lobbied Number 10, believing that the prime minister offers their best hope of minimising the impact of the proposed reforms, to be set out in detail on September 12 by Sir John Vickers’ Independent Commission on Banking.

Senior government officials say that talk of a “war” between Vince Cable, business secretary, and George Osborne, chancellor, is misplaced and that the real tension over banking reform is with Mr Cameron, who insists nothing should be done “that puts jobs at risk”.

Mr Cameron will express his concerns about the possible impact of the Vickers proposals on the City and the wider economy when he meets Mr Cable, Mr Osborne and Nick Clegg, deputy prime minister, at a “quad” meeting scheduled for next week.

“We’re hoping George Osborne can get him into the right place on this,” said one Lib Dem insider. Another Whitehall official said Mr Cameron was proving to be receptive to lobbying by the banks, which Mr Cable has dismissed as “special pleading”.

Although nobody in government has seen the final report, the expectation is that Vickers will set a high ringfence around the high street retail operations of Britain’s banks to protect them from riskier investment operations, which theoretically would be allowed to fail in a crisis.

But there is still much to play for. Lobbying by the banks to lower the ringfence or extend the transition period has been intense since June 15, when Mr Osborne announced in his Mansion House speech that he would endorse the plan to build a capital wall around the country’s high street banks.

The stakes were raised on August 4 when the Financial Times reported that the Vickers team would propose a retail ringfence much higher than bankers had expected, in a move that would be particularly disruptive to the likes of Barclays and Royal Bank of Scotland.

One big bank was told by Treasury officials that Mr Osborne was minded to accept a high ringfence, but he would consequently allow a longer implementation period starting after the planned 2015 election. One senior banker said: “It would give us a few more years to punch a hole in the ringfence.”

Mr Cable reacted angrily to the suggestion that Vickers might be kicked into the long grass. Lord Oakeshott, a Lib Dem peer, said last month: “What would not be acceptable is for Vickers to come out with a radical solution and then the government not to implement it immediately and in full.”

However, Mr Cable’s interviews, full of anger about “disingenuous” bank lobbying and talk of the need for urgent action, disguised a recognition that if he wanted sweeping bank reform he would have to accept it would take many years to introduce.

Over the summer, the eurozone crisis intensified, making immediate bank reform – with the accompanying management upheaval and higher capital costs – seem even riskier. That point was confirmed to Mr Cable by a team of regulatory experts that he brought in from Deloitte to advise him.

On Tuesday Mr Cable met Mr Clegg; the two men agreed that a Lib Dem “victory” over bank reform could start to look like defeat if the party kept giving the impression it wanted immediate change, which was not going to happen, even if only because of its legislative complexity.

The end result is, according to Tory and Lib Dem officials, that Mr Cable and Mr Osborne are surprisingly close on the need to legislate on the Vickers report in this parliament, setting in stone reforms to be implemented in the second half of the decade.

Bank chief executives will have a final chance over the next week to make their case for lowering the ringfence or extending the implementation phase: Bob Diamond, chief executive of Barclays, and Ana Botin of Santander UK are among those called in to see the chancellor.

But the banks have taken a different tack with Mr Cameron, not least via the sympathetic ear of Jeremy Heywood, the Number 10 permanent secretary and a former managing director of Morgan Stanley. Downing Street insiders admit tensions are rising.

Mr Cameron has reserved his position on Vickers, but his aides say he is determined not to do anything to undermine the economic recovery. He will demand assurances from Mr Osborne and Mr Cable that the proposed reforms really make the banks safer.

Some in the City are anxious that talk in government circles of delay could be counterproductive to their lobbying operation. “The more the ICB thinks the government is watering down the reforms, the more it may tighten up its language,” said one senior banker.

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