Case for bank break-ups is a powerful one

IT IS hardly surprising that Britain’s banks were extremely cautious in their response to yesterday’s interim report from the Independent Commission of Banking.

The report contains a wide range of proposals, some of them highly technical, and it is far from clear how some of them will play out in practice, particularly given the potential role of international factors.

However, the fact that banking shares rose in value following the report’s publication is telling. In favouring the “ringfencing” of retail banking assets from higher-risk investment banking activity, rather than the widely mooted break-up of the two sides into separate businesses, the ICB has clearly adopted the option which the market regards as if not the best then certainly the least bad.

The banks’ objection ahead of the report’s publication that even ringfencing could drive up their borrowing costs is factual, but also unavoidable.

To protect savers’ deposits – and, in the last resort, the taxpayer – from the fall-out of any future collapse of an investment banking operation, ringfencing of the kind proposed by the ICB yesterday is the minimum acceptable reform and, as the commission acknowledged, there is a strong case for the complete separation of retail and investment banking.

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Either way, the option of a taxpayer-funded bail-out for a failed investment bank should be off the agenda in future, with a corresponding increase in the risk associated with the activity. The inevitable increase in borrowing costs, undesirable as it is, is a price worth paying in order to protect savers and taxpayers, even though, combined with the proposed changes on capitalisation, it will in turn push up the cost of borrowing to businesses.

As the impact of ringfencing is, in this respect, likely to be less serious that forcing the break-up of banks, the ICB might fairly claim to have settled on the correct option.

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However, supporters of the more radical approach might question whether the proposed safeguards will be sufficiently robust to offer the same level of protection as complete separation.

n In one respect, the ICB’s decision is certainly unfortunate and this concerns the image of the banks’ front-line retail banking staff.

Bank workers based at local level must be heartily sick of customers jumping to the entirely erroneous conclusions (a) that they are to blame for the banking crisis and (b) that they are among those coining it as a result booming investment-banking profits.

Splitting up the banks might at least have helped get across the message that bank workers operating at “the coal face” are not part of the problem.

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