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Leading article: In bank reform, 'in full' must mean exactly that


There was as much politics as economics and finance about the Business Secretary's pre-announcement yesterday that the Government is to implement the recommendations of the Vickers commission on banking in their entirety. In the aftermath of the Prime Minister's refusal to sign up to European Union reforms of the eurozone, Liberal Democrat ministers, from Nick Clegg downwards, have had an uphill struggle to claim they still have a voice in the Coalition. Add the details, revealed in this newspaper last week, of the banks' intensive lobbying of the Treasury in the run-up to today's official verdict, and some of the thinking behind what the Business Secretary said yesterday becomes clear.

This is not a reason to doubt the accuracy of what Vince Cable said, or his good faith in saying it. But it is a reason to retain a healthy degree of scepticism and to keep firm tabs on what progress is, or is not, subsequently made. The banks have never concealed their misgivings about the Vickers proposals – which veer from gentle questioning to outright hostility – and they are unlikely to abandon the fight just like that, even in the light of the Government's full acceptance, if that is what it turns out to be.

When the Independent Banking Commission, chaired by Sir John Vickers, published its report in September, it was described as presaging the most radical reforms of the British financial sector for decades, perhaps ever. The central provision was for a firewall to be erected around high street banks to prevent them being bankrupted by the "casino" operations of the investment banks. The two types of bank could remain in common ownership – a concession that, in our view, need not have been made – but the investment banks would not be permitted to "gamble" with ordinary savers' money, which is what left many teetering on the brink of insolvency in 2008.

The banks have complained bitterly that separating the two types of operation will cost them huge amounts of money – something that the Vickers report conceded when it estimated the bill at around £7bn. Except that this sum, while indeed huge in lay people's terms, actually amounts to a tiny fraction of the banks' turnover. There is not the slightest risk that it could imperil their bottom line – and, if that is what they argue, they should be tartly reminded that it could, and perhaps should, have been worse.

Among other recommendations was a requirement that the banks significantly increase their capital. Again, this was not calculated to be greeted with great enthusiasm – by the banks. Given the depth of the 2008 crisis and the breadth of its repercussions, however, it seemed sensible, even modest, to the public at large.

The need to increase capitalisation is one explanation given by the banks for their reluctance to lend more than they currently are. And it is true that criticism of low lending, both from ministers and from small business, contains an element of ambiguity.

On the one hand, easy credit helped fuel the financial crisis; on the other, tight credit is now blamed for hampering recovery. That the banks overall need much higher levels of capitalisation than they had a decade ago, however, is beyond doubt; there should be no backsliding on the stipulations set out by the IBC.

If, in its response today, the Government indeed confirms that it will implement the Vickers report to the letter, as we hope it will, the banks are likely to start howling all over again. They should, though, be grateful for the – in our view, unnecessarily – generous seven-year transition and imagine what might have been if a government less sympathetic to the banking and business sector had been in power. Speaking of which, the Prime Minister should appoint Sir John Vickers to an oversight role, to ensure that what is supposed to happen, really does.