James Moore: Sorry Sir John, but the banks could run rings around your ring fence
Outlook: How do you decide if a bank has been trying to ‘game’ the system? Who makes the ruling
Chip, chip, chip. The Parliamentary Commission into Banking Standards has spent much time debating the effectiveness of Sir John Vickers' proposals to force Britain's banks to ring-fence retail operations with the aim of securing the deposits of ordinary Britons if the roof falls in again.
The main concern about this approach? Any ring fence is permeable. This was perhaps best expressed by Paul Volcker, the former US Federal Reserve chief who drafted American financial reforms which go in an altogether different direction. They simply ban banks from betting with their own capital in the financial casino.
Mr Volcker's concern is that big banks, with their lawyers, and their lobbyists, will find a way around the ring fence until it is, to all intents and purposes, useless.
Chip, chip, chip.
That is, as Mr Volcker has pointed out, if a ring fence can be effective in the first place. Sure, the ring-fenced retail bank is supposed to have a separate board, but if that board is subsidiary to the group board of the parent company, is there any point?
Sir John, pictured, has pointed out that ring fences have worked in the past. Wessex Water was, for example, once a ring-fenced subsidiary of Enron. It had its own board and did its work about as well as any water company (read mediocre) even as its parent was engulfed in scandal.
The trouble with the comparison is that a utility is a very different proposition to a bank. Would a ring-fenced retail bank owned by, say, Lehman Brothers, have been protected when the roof fell in there? Interesting question, isn't it?
Chip, chip, chip.
The commission is clearly alive to the issue and there is one option for protecting the ring fence that keeps being raised. That is to include in the legislation which sets it up a provision allowing someone to break up banks which try to "game" or break the ring-fence.
It is an idea that sounds attractive, but which has significant flaws. How do you decide if a bank has been trying to "game" the system? Who makes the ruling? Is the cost of the judicial review that will inevitably follow worth it?
Of course, supporters of such a move say that banks which play the game have nothing to fear. But how much do they have to fear anyway? The lobbyists have been hard at work on the Vickers proposals and have already made some of them easier.
Leverage levels are likely to be higher than Sir John's Independent Commission on Banking suggested. Smaller banks may be exempted, and some which aren't all that small. Banks will even be able to sell simple derivatives within the ring fence, and that one is hilarious. How does one define a "simple" derivative in the first place? And weren't the derivatives that were widely mis-sold as interest-rate hedges to small businesses pretty simple as derivatives go?
Then there's the biggest problem with the whole thing, spotted by the Liberal Democrat John Thurso: the legislation to set up the ring fence is basically an enabling act. It hands Treasury mandarins the power to draft "secondary legislation" to formulate how it all works in practice. Such legislation usually gets passed on the nod before MPs head off for a subsidised pint.
And it will be drafted by the same sort of people who came up with the "tripartite" system of banking regulation under the last Labour government which left Britain wearing the emperor's new clothes when the financial crisis struck.
Chip, chip, chip.
Sir John says he's convinced a ring fence can work in practice. For the sake of my savings I wish I could feel so optimistic.
Naughty vicar does this movement no credit
The News of World may no longer be with us, but that doesn't mean the newspaper's stock in trade before it learned how to hack mobile phones has gone away.
I'm talking about naughty vicars, and the Reverend Carmel Jones yesterday proved the point.
Not that the 'Screws would have been much interested in the good, sorry, the bad pastor, because there was nothing salacious about his sins. His misdeeds were more larcenous than libidinous.
The Reverend Jones was doing God's work when he founded the Pentecostal Credit Union, which had 1,600 members in London.
Credit unions are, in general, a thoroughly good thing. They encourage members to save and offer loans to bail them out when things get tight.
Unfortunately Reverend Jones cooked up a scheme to use the credit union's funds to provide loans for his church organisation to buy and repair properties.
The Financial Services Authority told the Reverend to stop his little game back in 2004 after a fairly frothy exchange of correspondence.
At first he did, only to start again three years later in 2007, when loans were apparently made to credit union members, only to end up with – you've guessed it – the church organisation.
It gets worse: relations between union and organisation have broken down and £670,000 has been left outstanding on loans totalling £1.2m.
The FSA said it would have fined the Reverend, who's been reprimanded and banned, but he's as skint as his credit union, so there's not much point.
It's a sorry little tale, really. The Reverend did not make any personal gain from the affair. But he was a man of power and influence among his flock, and with the credit union, which he appears to have treated as a cash cow for church projects.
There's a nasty sting in the tail of this tale, too. Credit unions ought to be encouraged and promoted as an alternative to predatory payday lenders like Wonga.com.
Unfortunately, and the Rev should hang his head in shame, his actions are going to make the job of the movement's champions that much harder.
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