David Prosser: The banks' biggest fear, a fall in their profits, is no reason to delay reform


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Outlook One by one, Britain's most senior bankers have been trooping into Downing Street over the past few days to whisper words of warning into the ear of the Chancellor: reform us if you must, they say, but not just yet. The lobbying efforts that have gone on in private have been matched by public warnings, too, with bank after bank urging George Osborne to think carefully before implementing the reforms to be proposed on Monday by Sir John Vickers. Even the CBI has been roped into the push-back, with John Cridland, the director-general of the employers' group, making dire predictions about the impact of introducing the Independent Commission on Banking's reforms too hastily.

Here's a bit of news that you won't necessarily have heard as the banks have stepped up their noisy protests. Despite what the bankers and their friends would have you believe, not everyone in business thinks it is so imperative that these reforms are delayed. Not even everyone in the City feels that way.

Take the Federation for Small Business, for example. As the trade body that represents the businesses that have found it hardest to get credit, one might have expected it to oppose reforms that the banks claim will constrain lending further. Not a bit of it: its chairman, John Walker, yesterday dispatched an open letter to the Prime Minister pleading with him not to allow the ICB's reforms to be watered down.

Or what about David Pitt-Watson, the City fund manager, on record as arguing that the Vickers reforms might actually boost the supply of credit in the economy? Then there's the Conservative backbencher Matthew Hancock, formerly George Osborne's chief of staff, who is urging the Government to consider even more radical reforms of the sector.

The debate, in other words, is more balanced than one might think. As it should be, given that the only forensic assessment of the ICB's proposals published so far suggests their impact on the economy will be minimal. The Ernst & Young Item Club said on Monday that implementing them in full would wipe 0.3 per cent off GDP – that's a less severe hit than the awful weather made last winter.

The truth is that credit is constrained in Britain's economy not because of the higher capital requirements imposed since the financial crisis, but because the banks have chosen to focus their resources on more profitable business segments than loans to small and medium-sized enterprises.

The work done by the economist Michael Saunders at Citi suggests bank assets have risen by more than £100bn since the beginning of last year, but that the increases have all come from overseas activities. Lending in the UK has fallen.

Now, it may be that we accept the banks have a right to decide where they wish to conduct most of their business. But not if we are also expected to continue to underwrite that business with animplicit taxpayer guarantee.

Would ring-fencing retail operations necessarily lead to a drop in the credit available to British businesses (and thus hold back economic growth), as the banks claim? Maybe, if the banks cut back on their assets in order to meet the demand for higher capital ratios, rather than raising the capital set aside against such assets – but they could be stopped from doing so by imposing minimum capital levels upon them set with reference to the assets they have on the balance sheet today.

Taking that course of action would not come without cost – but it would be banking profitability that suffered, rather than credit supply. And that, of course, is the endgame the banks really fear.