Demand to curb ‘casino banking’ risks splitting the coalition

Liberal Democrats warn that George Osborne’s ringfencing could prove too weak to protect customers Senior Liberal Democrats are demanding drastic action to break up UK banks into separate retail and investment divisions, as banking reform threatens to cause a new rift in the coalition. In a letter to the Observer on the eve of the deadline for industry groups to respond to a government-commissioned report on reform, peers, MPs and senior figures in the national party insist that chancellor George Osborne’s suggested approach falls short of what is needed. The Lib Dems join a list of more than 50 politicians, academics and economists to demand that the party honours its commitments – most recently made at its spring conference – to achieve a full breakup. The group, drawn together by the centre-left pressure group Compass and the New Economics Foundation, says that the Greek financial crisis, and the exposure of British banks to it, highlights the urgent need for action to promote financial stability. Raising concerns that the chancellor is ready to accept only limited reform, as recommended in an initial report by the economist Sir John Vickers, they say that far tougher action is needed. “Ringfencing retail and investment banking through ‘chinese walls’ in the manner suggested and endorsed by the chancellor, George Osborne, will not produce a banking system that is safe and fit-for-purpose,” they write. “If companies can continue to move capital between retail and investment banking, the latter could still endanger the former. As a first step, full separation of banking functions is needed to better insulate the taxpayer against failure. Full separation would provide depositors with institutions they can trust.” The letter suggests that senior Lib Dem and Labour figures are now prepared to work together on banking reform as part of a “progressive alliance” against key Tory policies. The signatories include the Lib Dem MP Adrian Sanders and Labour MPs Yasmin Qureshi and Jon Cruddas. Other Lib Dems who signed the letter include Lord Trevor Smith, Linda Jack of the Liberal Democrat Federal Policy Committee, Prof Richard Grayson, a former head of policy, and Stephen Knight, leader of the Liberal Democrat group in the London borough of Richmond upon Thames. Many Lib Dems believe disagreements over banking reform could cause a coalition split similar to that over the proposed NHS reforms. Splitting up the banks was a cause célèbre for Vince Cable when he was a radical critic of Labour’s handling of the financial crisis. However, the issue was fudged when the coalition agreement was struck after the general election, with both parties signing up to the idea that an independent commission would report on the future of the banks. Led by Vickers, Warden of All Souls College, Oxford, the commission issued its first report in April, calling for a “ringfence” around customers’ deposits to stop them being used to fund risky investment banking activities, derided as “casino banking” by Cable in opposition. Osborne surprised financial markets by using his Mansion House speech last month to suggest that he would accept the proposals before the final Vickers report is produced in the autumn. But now his hope of drawing a line under the financial sector controversy looks in trouble as a growing number of politicians and experts are warning that the proposals lack teeth. Former chancellor Nigel Lawson said that he expected the Vickers commission to shrug off Osborne’s efforts to pre-empt its final conclusions. Lawson believes the ringfence suggested in Vickers’s preliminary report – and apparently endorsed by Osborne – is not sufficiently radical. “My fear is that it works on paper, but it would not work in the real world,” he said. “I think there needs to be a structural solution.” Paul Fisher, a director at the Bank of England, conceded last week that uncertainty about regulatory reform was weighing on financial markets. The government has faced relentless lobbying from City banks threatening an exodus from the Square Mile and Canary Wharf if a full-blown breakup went ahead. But the bank’s governor, Sir Mervyn King, has called for a “clean” solution to the problem of banks that have become “too big to fail”. The New Economics Foundation’s Tony Greenham warned that the Vickers proposal, involving Chinese walls protecting retail banking, would be bureaucratic and complex. “Behavioural remedies are never as effective as institutional remedies,” he said. “You can create a set of rules to help people behave in a certain way, but they will find ways around that — that’s what highly paid bankers do. It would be a much less bureaucratic solution just to split them up.” Liberal-Conservative coalition Banking Liberal Democrats Conservatives George Osborne Bank of England Toby Helm Heather Stewart guardian.co.uk

Posted by on July 2, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.