Vince Cable gets his mojo back
Like Ronald Reagan facing down the Soviet Union, Vince Cable has managed to win his “war” with Rupert Murdoch without needing to fire a shot. So it’s perhaps no surprise that the Business Secretary has rediscovered his mojo on banking reform too.
In its interim report in April, Sir John Vickers’ Independent Commission on Banking ruled out a full separation of banks’ retail and investment arms, recommending “ringfencing” the two functions instead.
At that time Vince Cable, still smarting from the Telegraph’s reprehensible sting, went along with the verdict, no doubt calculating that a ringfence was better than nothing. And with George Osborne’s approval of ringfencing at the Mansion House speech in June the deal seemed done.
Yet in a remarkable speech* yesterday the Business Secretary sought to put a full separation back on the table.
He noted that:
“The ‘ringfencing’ approach has been criticised for being insufficiently clear cut and too open to regulatory arbitrage by those arguing for full separation.”
“The Treasury Select Committee has expressed some surprise that the ICB did not explain why it was not pursuing this approach [full separation].”
This is significant. As I pointed out when the interim report came out, the commission utterly failed to justify its decision to rule out major surgery on the banks. An otherwise intelligent piece of work descended into intellectual mush when it came to explaining why outright functional separation would be a bad idea.
Now Cable has fired a warning shot across Vickers’ bows. In his speech he stressed that the Vickers analysis in April was only an interim report, implying that he expects much better in its final instalment due in September:
“I have confidence in an independent commission of exceptional quality but it now has to provide convincing answers to some critical questions. The Government will be still seeking reassurance from the final report to demonstrate that a ringfence can be as effective as full separation at lower cost.”
He also lays out three “key tests” in this regard:
“Would it [a ringfence] stop banks using deposits underwritten by the taxpayer to cross subsidise their ‘casinos’? Will the ringfence be high enough and the ‘Chinese walls’ strong enough to eliminate regulatory arbitrage by the banks? Will the division between what is inside and outside the ringfence ensure that nothing resembling a universal bank remains?”
That final test is crucial. Cable is saying that he will only accept ringfencing if it has the same practical effect as a formal break up.
This might not be a Whitehall battle that Cable can win. The banks still have formidable lobbying power. And George Osborne seems** to be batting for the financial industry. But with Cable’s political position strengthened since the Murdoch downfall and with the Chancellor under growing pressure for his handling of the economy, it’s no longer a battle that the Business Secretary is destined to lose.
In other words: game on.
*There’s also a classic Cable joke in the speech about the dysfunction in the retail banking market: “People change their banks less frequently than their spouses, and the loyalty is not because of love”.
**In March the Chancellor reportedly offered to rule out a retail/investment separation in order to reach a deal with the banks on bonuses.Tagged in: banks, george osborne, Independent Commission on Banking, interim, investment, retail, Sir John Vickers, Vince Cable
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