Ben Chu: Case for splitting up banks is now unanswerable

 

Share

Do you trust investment bankers? Don't laugh, because faith in the good behaviour of these individuals is the linchpin of the Government's reforms of our financial sector.

First some background. We taxpayers were forced to bail out our bust banks in 2008 because allowing these institutions to collapse would have plunged us into economic chaos. This prompted calls for the Government to split up the banks, separating their ordinary high-street banking arms from their casino trading operations.

The logic was straightforward. Retail banks, which take deposits from ordinary savers and provide credit to households and businesses, provide an essential utility, similar to the water or electricity companies. The state simply cannot allow these vital economic services to be disrupted. The same is not true of the operations of investment bankers, which take massive bets in global capital markets on behalf of themselves and high-rolling clients. The goal of the split was to protect the taxpayer by making it clear that future state rescues, if necessary, would be limited to ordinary savers, removing the de facto government insurance policy for reckless, bonus-driven investment bankers.

Labour said no to the proposal, but the Liberal Democrats and the Conservatives, who were then in opposition, signed up. But rather than legislating to mandate a split when they formed the Coalition in 2010, those two parties appointed an independent committee, headed by an economist called John Vickers, to examine the case. And the Vickers Commission stopped well short of recommending a total separation of high street and investment banking. Instead it proposed the creation of a "ring fence" around banks' high-street arms. Ring-fenced banks could remain under the umbrella of the larger institution, but would hold a bigger capital buffer. They would also have some independent directors and face restrictions on what they could do with ordinary depositors' money. Vickers claimed this would achieve all the benefits of a full split but with none of the costs involved in physically separating the operations.

I, along with others, was never convinced. The idea smacked of the internal "Chinese walls" that supposedly stop traders using privileged information gleaned from colleagues in mergers departments to make bets. Anyone who has had any contact with the City of London knows these non-contact rules are generally ignored. And the fear was that cunning bankers would find ways around the ring-fence just as easily. Vickers' proposal seemed to be largely based on the idea the bankers could be trusted to respect the spirit of the new institutional arrangements.

They have already shown that they don't. The banking lobby has succeeded in getting the Chancellor, George Osborne, to water down Vickers. Last month's White Paper permits ring-fenced retail banks to continue selling interest-rate derivatives to their customers – the very toxic products that banks have been conning ordinary businesses into buying.

And now we have the revelation of interest-rate fixing by traders at Barclays. It should now be screamingly obvious that the investment banking world is irredeemably unscrupulous and mendacious. It cannot be trusted. And the Vickers ring-fence simply does not provide credible security for taxpayers. The Coalition parties need to go back to what they promised in opposition. Nothing less than a complete separation of the essential services provided by high-street banks from the corrupt world of the investment bankers will suffice. The credit of these individuals with the British public has been utterly exhausted.

Are they all predators?

Yesterday's outré radicalism is today's conventional wisdom. Ed Miliband gave a speech last year in which he made a distinction between "producer" and "predator" capitalism. The Labour leader said: "Let me tell you what the 21st-century choice is: are you on the side of the wealth creators or the asset strippers? The producers or the predators?"

Many commentators bristled at what they saw as the Labour leader's "anti-business" rhetoric. Others scoffed at the naivety in display. It was simply impossible, they pointed out, for politicians to tell the difference between the two.

Things have changed. This week GlaxoSmithKline was found guilty of bribing doctors to prescribe dangerous antidepressants to children. Last week Barclays was shown to have manipulated interest rates for profit. So did those two firms behave as producers or predators? Perhaps it's not such a terribly difficult distinction to make after all.

b.chu@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

CRM Developer (MS Dynamics 2011/2013, JavaScript)

£55000 - £65000 per annum + Benefits + Bonus: Harrington Starr: CRM MS Dynamic...

IT Teacher

£22000 - £33000 per annum: Randstad Education Leeds: ICT TeacherLeedsRandstad ...

Graduate C#.NET Developer (TDD, ASP.NET, SQL)

Negotiable: Harrington Starr: Graduate C#.NET Developer (TDD, ASP.NET, SQL) Su...

Junior SQL DBA (SQL Server 2012, T-SQL, SSIS) London - Finance

£30000 - £33000 per annum + Benefits + Bonus: Harrington Starr: Junior SQL DBA...

Day In a Page

Read Next
The woman featured in the Better Together campaign's latest video  

Tea and no sympathy: The 'Better Together' campaign's mistake is to assume it knows how women think

Jane Merrick
On alert: Security cordons around Cardiff Castle ahead of this week’s Nato summit  

Ukraine crisis: Nato is at a crossroads. Where does it go from here?

Richard Shirreff
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Fashion walks away from the celebrity runway show

Fashion walks away from the celebrity runway show

As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

Meet the stars of TV's Wolf Hall...

... and it's not the cast of the Tudor trilogy
Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

Europe's biggest steampunk convention

Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
Don't swallow the tripe – a user's guide to weasel words

Don't swallow the tripe – a user's guide to weasel words

Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

Daddy, who was Richard Attenborough?

The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor
She's dark, sarcastic, and bashes life in Nowheresville ... so how did Kacey Musgraves become country music's hottest new star?

Kacey Musgraves: Nashville's hottest new star

The singer has two Grammys for her first album under her belt and her celebrity fans include Willie Nelson, Ryan Adams and Katy Perry
American soldier-poet Brian Turner reveals the enduring turmoil that inspired his memoir

Soldier-poet Brian Turner on his new memoir

James Kidd meets the prize-winning writer, whose new memoir takes him back to the bloody battles he fought in Iraq
Aston Villa vs Hull match preview: Villa were not surprised that Ron Vlaar was a World Cup star

Villa were not surprised that Vlaar was a World Cup star

Andi Weimann reveals just how good his Dutch teammate really is
Bill Granger recipes: Our chef ekes out his holiday in Italy with divine, simple salads

Bill Granger's simple Italian salads

Our chef presents his own version of Italian dishes, taking in the flavours and produce that inspired him while he was in the country
The Last Word: Tumbleweed through deserted stands and suites at Wembley

The Last Word: Tumbleweed through deserted stands and suites at Wembley

If supporters begin to close bank accounts, switch broadband suppliers or shun satellite sales, their voices will be heard. It’s time for revolution