Banks should be forcibly broken up if they try to game the UK’s new “ringfencing” law requiring separation of their retail and investment banking units, the chairman of parliament’s Treasury select committee has said.
Andrew Tyrie used a speech in the City of London on Monday night to push back against a recent lobbying drive by banks seeking to water down the extra regulation and taxes imposed on the sector since the financial crisis.
“Regulators should not give in to special pleading from banks in implementing the reforms introduced as a result of the financial crisis,” said Mr Tyrie, whose committee regularly grills bankers and politicians on the stability of the financial system.
“In the Banking Reform Act, ‘electrification’ provides reserve powers for the regulator to require full separation of a particular bank if necessary,” he said. “This puts in statute a strong disincentive for banks to test the limits of the ringfence.”
Since prime minister David Cameron’s Conservative party won an outright majority in May’s general election, there has been a noticeable shift in tone back in favour of the City.
Recent moves applauded by the City include the ousting of Martin Wheatley as the head of the Financial Conduct Authority after he presided over multibillion-pound fines on the sector, and the removal of a ‘guilty until proven innocent’ clause in a new accountability regime for senior managers at banks.
Mr Tyrie, however, argued that regulators should keep up the pressure on banks until they are certain to have fixed the ‘too big to fail’ problem that means the biggest banks rely on the implicit backing of taxpayers to rescue them if they run into trouble.
He added that there was still much to be done to improve the standards of conduct and governance in the banking sector. Pointing out that UK regulators imposed £1.4bn of fines on the financial services industry last year alone, he said: “The plain fact is that banks have not had a grip on regulatory and conduct risk for a long time.”
This is supported by a new report from credit rating agency Moody’s to be published on Tuesday, which found the 15 largest global investment banks had taken $219bn of litigation provisions since 2008, with more added each year since the financial crisis.
“Leverage is down from stratospheric levels of over 30 times capital, but at 23 times remains relatively high,” he said. “It would take relatively modest losses to wipe out a banks’ equity — reinforcing the need for the ringfence to bolster the protections already in place through capital and liquidity requirements.”
Banks have complained that the ringfence will cost the sector billions of pounds to implement, put them at a disadvantage against international rivals, risk them losing control of their ringfenced units and fail to prevent banks from failing.
Andrew Bailey, head of the Bank of England’s Prudential Regulation Authority, last month sought to assure banks that they would not lose control over their ringfenced entity, which he said would not “be able to stick two fingers up at its parent”.
Mr Tyrie said: “Time will tell whether the governance problems are soluble. But it would be absurd — on governance grounds — to call off the ringfencing project before it has even started.”
“The regulators asked for more powers. They got them,” he added. “Parliament’s job now is to ensure that the regulators don’t inadvertently allow the reforms to be called off before they have been implemented.”
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