Bank Reform: Ringfencing Could Protect Taxpayers From Another Bailout

Ringfencing among the top issues concerning banking reform.

Ringfencing among the top issues concerning banking reform.

In light of the calls for banking reforms, both the CBI and the British Bankers’ Association issued official statements that spoke against reforms and warned of the possible economic ramifications should they be passed in the midst of this slow recovery.

Many considered it to be banks lobbying in their own interest, and business secretary Vince Cable called it “special pleading” for the purpose of “trying to create a panic about something they know has to happen.”

Two Distinct Issues

The banking sector is lobbying against banking reform in general, arguing that a fragile recovery is no time to “burden” banks with more regulations.

But the proposition for reform is in two distinct parts: one concerning the structures of large financial institutions, and one concerning how much capital the banks should be required to have on hand.

Western banking institutions all have a problem of having too little capital compared to the money that is lending, but Britain’s currently has the highest level of bank lending compared with Gross Domestic Product (GDP) in the industrial world.

Protecting the Taxpayers

Structural reform centres around the idea of  “ringfencing” retail and commercial banking away from the riskier investment banking sector. This kind of separation addresses the issue of banks being “too big to fail,” protecting taxpayers from having to shoulder the burden of another bailout should any banks bust.

The Independent Commission on Banking will propose a twofold approach to banking reform, covering both ringfencing and the requirement for banks to hold more capital.

Andrew Haldane, Bank of England’s financial stability director, argues against the latter half of reform policy, stating that the demand for loans has fallen to the point where requiring banks to hold more capital is unnecessary.

Precedent shows that in the U.S., Roosevelt helped foster lending and growth by actually relaxing regulations on capital, and ringfencing commercial and investment banking. While ringfencing is necessary to protect taxpayers and curtail another bailout, perhaps the banking industry’s calls for looser regulations is not just self-interest.

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