Higher bank fees a price worth paying

THE banking sector is understandably concerned about the indications from Sir John Vickers, chairman of the Independent Commission of Banking, over the likely direction of reform.

In a speech at the weekend, Sir John confirmed that some form of split between retail and investment banking operations – probably in the form of ring-fencing but possible involving the break-up of some banks – was on the agenda as a possibility.

Given that investment banking contributes such as large proportion of profits at some of the major players – 80% in the case of Barclays, for example – such a move would be likely to result in higher banking and borrowing costs for retail customers.

In evidence to a Parliamentary committee earlier this month, Bob Diamond, the new chief executive of Barclays, suggested that this was a reason for resisting such change.

However, it can also be argued that higher fees and interest charges are a price worth paying given the risks involved.

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In pointing out to the committee that Northern Rock failed despite being purely a retail bank while Barings went bust even though it had a “subsidiarised” (ring-fenced) structure, Mr Diamond was missing the point.

Should a retail banking operation fail in future it will of course still have to be bailed out in order to protect deposits, regardless of whether it is a stand-alone organisation or part of a larger group.

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The point of the suggested reform is that the investment banking activities of any failed bank would not have to be bailed out in future.

In the invent of a bank collapsing as a result of excessive risk-taking, the cost of the investment banking failure would fall ultimately on its shareholders and not on the taxpayer.

There are potential difficulties in the UK acting alone on reform; a worst case scenario would involve banks quitting London and relocating elsewhere.

However, the UK – and many other countries, come to that – cannot afford, either literally or figuratively, to foot the bill for another round of bail-outs such as those of the past three years.

n Having been denied the role in Ed Miliband’s initial Shadow Cabinet line-up, Ed Balls has become Shadow Chancellor after all thanks to Alan Johnson’s surprise decision to quit front-line politics as a result of widely-reported “personal” issues.

One might feel, however, that Mr Miliband got it right the first time in not giving Mr Balls the job.

From the sale of the UK’s gold reserves to the increase in borrowing at a state of the economic cycle when a sensible government would have been paying off debt, Mr Balls’ figureprints are to be found all over Gordon Brown’s policies.

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