February 4, 2013 7:05 pm
After months of invaluable scrutiny by the parliamentary commission on banking standards, George Osborne, the UK chancellor, is giving banking reform a firm push down the legislative track. The bill he has just sent to parliament is not perfect. But it takes a big step towards mending the deep flaws in the UK banking system.
The bill forces banks to ringfence their retail operations from their investment banking sides and gives insured depositors priority over other unsecured creditors in the case of a bank failure. It goes further than most other countries have. Mr Osborne has a good case for claiming, as he did in a speech on Monday, that he is “resetting” the UK’s banking system, with this bill added to the recasting of Britain’s financial regulators and the new, greater powers entrusted in them. Then again, among sizeable economies, the UK has by far the largest banking system relative to its national income, so its self-interest in making banks safe is proportionately greater.
The reforms Mr Osborne has notched up – or is about to – have much to commend them, but are also precarious. Watchdogs will have better tools once responsibility for systemic stability is placed in the Bank of England and the rest of the regulatory landscape is rationalised. Still, regulators must choose to use their powers; experience shows few are willing to spoil the party while banks create jobs and tax revenue. Ringfencing, too, relies on enforcement. Mr Osborne wisely adopted a proposal by the commission to “electrify the fence” by threatening to split a bank circumventing the rules. That threat is only as credible as the regulator wielding it. How the ringfence will work depends on still-unwritten secondary legislation.
Mr Osborne also made some new promises. The boldest was that by September, British bank customers will be able to move their accounts and billing relationships in just a week simply by signing up with a new bank. If he does make switching effective enough to combat market power that “verges on an oligopoly”, as the chancellor rightly put it, he will win a prize that has eluded UK governments for far too long. That would also be true for his promise to make the payment system more efficient and less dependent on the big banks. On this, though, Mr Osborne had only future proposals to offer.
The banks will no doubt complain. Mr Osborne is right to press ahead. The City of London has shrunk in a correction from past excesses. If regulation is a cause, it is because it excises pathological outgrowths of a sector otherwise central to the economy’s health. The City’s core business will survive the reform and enjoy renewed stability once the changes are fully implemented.
Being timid is riskier than being bold. Controversy over banks’ past actions means that Mr Osborne must look tough. Finishing reform will help all to draw a line and move on. But laws cannot resolve the “too big to fail problem” if regulators and politicians are not vigilant. A “reset” requires changes in attitude as much as rules.
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