Ring-Fencing Retail Banks – why it’s barking mad to delay

The director general of the Confederation of British Industry in an interview on Radio 4’s Today Programme, on 31/8/2011, commented that all the “over 240,000” members of the CBI – who come from just about every industry in Britain from banking to bolt-making – oppose plans to reform bank regulation at this time.

When Evan Davis, presenter of the Today Programme, suggested the CBI director general, John Cridland, is a paid spokesman for the banks, Cridland responded:

“I am a paid spokesman for business, I’m not a paid spokesman for the banks on their own….There is no division in our membership [on opposing reform at this time]….”

Reforms that Cridland describes as “barking mad”. To suggest there is “no division” for such a diverse group smacks of a North Korean election result. Perhaps it reflects the fact that the CBI’s idea of representation bears the hallmarks of the advisory panel of the Dear Leader, Kim Jong Il, which includes his long dead dear dad Kim Il-Sung in his role of “Eternal President”. As can be seen by the constitution of its Charimen's Committee which drives CBI’s policy:

• According to the CBI website, the CBI Chairmen’s Committee “takes the lead responsibility for setting the CBI's position on all policy matters” and comprises at least 10% representing SMEs.

• Government stats show that small and medium enterprises (SMEs) represent “99.9 per cent of all enterprises, 59.8 per cent of private sector employment and 49.0 per cent of private sector turnover”

Evidently small and medium businesses are poorly represented on the policy making committee of the CBI. The key point of contention the CBI has joined up with the British Bankers Association to oppose is the ‘ring-fencing of retail banks’.

The big banks and their acolytes have a whole legion of reasons why ring-fencing is not a good idea. Their pronouncements go on about how things will be worse and more expensive for the likes of you and me and the butcher, baker and candlestick maker. Commentators from august organs such as the Financial Times deny this. But they are not paid to bang on about it, lobbying, dissembling, and generally propagandising as their day-jobs. So it is the banks’ well paid voices that prevail, most importantly in Conservative Central Office.

Two key reasons why the banks don’t like the ring-fence:

•         It takes away one of the dirt-cheap ways they have of raising money to bet on risky investments: our deposits.  The money from our monthly salaries and our saving, for which they pay us around 0.1% interest – and charge many of us £100s per annum for the privilege.

•         So long as their Investment Bank is tied to their Retail Bank, there will be an implicit guarantee that they will never go bust – the taxpayer will save them. This also brings down the cost of borrowing for the banks, because lenders to the bank know even in the worst case they will get their money back from the taxpayers.

Two things that boost the banks’ profitability. Bankers’ bonuses up, but we still get our measly 0.1% interest on our savings.

So what is the ringfencing all about?

Keeping things simple – a business is solvent so long as its assets exceed its liabilities. For a bank:

If people can't pay back their loans, (a mortgage or business crisis, or a country defaulting on its loans), or the bank's own proprietary investments fall then the banks’ assets fall, threatening the gap between assets and liabilities.



The Equity Capital (money raised by the bank by selling its own shares) is the buffer to keep total Assets more than total Liabilities - so people can get their deposits back if they want to.

If things get even worse, then the bank must either raise more capital or go bust. During the Credit Crisis banks couldn't raise capital because they were so clearly busted not even other banks were daft enough to invest in them, so it was left to the taxpayer to bail them out. Taxpayer money was injected into banks around the world to bring the banks’ assets back above their liabilities.


What this means, in plain English, is that taxpayers' money was paid to the banks to cover their losses - whether losses came from lending to home-owners and businesses, or from speculating in the casino of derivatives, equities, and whatever.

Ring-fencing retail banks basically means:

·        They must maintain a larger equity capital buffer

·        They must not get involved in higher risk activities

This graphic from the IBC’s Interim Report provides an outline of where the ring-fence lies. All retail deposits - your and my savings - are held within the ring-fence.

The current situation is like having a high risk boy-racer (the investment banker) driving a bus with all us ordinary citizens in it. The boy-racer gets his multi-million bonuses, while us passengers collect our 0.1% interest on deposits.  When the racer crashes – as we have seen with painful regularity over the last few decades – everyone gets injured. Though the driver generally has an air-bag stuffed with his previous years’ bonuses.

Ring-fencing will put a more cautious driver on the bus, and let the boy-racer take his risks in his go-kart.  The cautious driver is less likely to have an accident, the damage from any accident that does happen is likely to be less severe – so we the taxpayers are prepared to insure the bus. When the boy-racer crashes, the victims are those who were seduced into the risk by his furry dice and go-faster stripes. Who knows – take away the investment banks' taxpayer funded airbags, and even they may drive less foolishly.

The ring-fenced retail banks are less risky. But in the less likely event they need rescuing, it will cost the taxpayer far less than the £850billion it cost the UK taxpayer in 2008. A bill paid for by cuts in defence, education, health, and just about everything else - except bankers' bonuses.

Since the 2010 election, Tories have appeared to be more even handed than in their Nasty Party past. But is their benevolent smile actually a rictus grin carved by their Liberal-Democrat bedfellows, in particular Vince Cable? And does their apparent intention to postpone any regulatory change to after the next election in 2015 reveal their hope that the Lib-Dems will be wiped out? And with it the forced Tory grin relaxing back into its customary snarl?

I hope not, but think so.