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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory