Monday, September 12, 2011

Banks face new regulations: a lost opportunity?

The UK's Independent Commission on Banking has recently announced its proposed regulations for British banks. Details here. The main proposals include:

* Ring fence retail from investment banking

* Keep 17-20% of certain assets as "loss-absorbers"
* Lloyds branch sale to be opportunity to bring in competitor
* New system to help customers switch current account
* Reforms to be implemented by 2019 at the latest
* Cost to banks of between £4bn-7bn

There are other proposals floating around as well, such as Ed Miliband's idea that bankers could be "struck off" in certain circumstances. (Details of this proposal can be found here.)
It seems obvious some new regulations will become necessary if only to better guarantee greater protection for the taxpayer. The public bailout of banks was a tragedy, but the major bonuses paid out at public-owned banks a public relations catastrophe for governments of the day.
I fear this may be an opportunity lost. Why? The Independent Commission recommends some good reforms, such as ring fencing different areas of business, but the time for implementation is far too long. While there is surely an interest at not rushing major structural reforms, there is also a major public interest at stake in ensuring reforms are sufficiently timely. 2019 is not timely - and by then many may forget why such reforms are needed in the first place (running the risk that full implementation would never occur in future).
Perhaps the biggest question is why is it that no minister or public representative is making an impact on boardroom decisions? While there is certainly the worry about politicians "interfering" in financial institutions that might damage the business, it is also the case that these financial institutions only exist because of the actions of politicians. If the public is majority shareholder, then there is an argument that more pressure should be done to change the way loan applications are scored to make it easier for first-time buyers and start-up businesses to launch, for example. There should be greater pressure against rewarding a culture of failure and entitlement. Instead, the coalition government seems more concerned about letting bankers off the hook rather than working in the public interest.
The public will not reward a government that has failed basic tests of fairness. There is a wide consensus that the banking crises has favoured a small minority over others left to clean up the mess. The government must act to correct this problem. Or risk a major electoral defeat - and a lost opportunity to do an immense amount of public good in reforming the banking sector now.

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