A thunderous collapse could drown out the clamour over banking reform
The banking lobby doth protest too much, methinks — to misquote Hamlet’s mother — and so doth its enemies, not to mention the opponents of planning reform. In fact, there’s a whole lot of grandstanding going on in the public arena which I fear may suddenly be silenced either by a thunderous collapse of the eurozone or the giant toilet-flush that will signal the onset of renewed global recession.
Or both. And if that sounds unusually gloomy for this column, I refer you to this week’s news that in August the US economy generated no new jobs at all and the UK service sector (including hotels, catering, transport and business services) suffered its sharpest slowdown since the foot-and-mouth crisis in 2001. Combine that data with my own analysis last week of the paralysis threatening the European banking system, and even Mr Happy might feel it’s time to buy gold and batten down the hatches.
Meanwhile, the jousting over banking reform continues ahead of Monday’s release of the final report by Sir John Vickers’ Independent Commission. Its core proposal is that the UK retail operations of banks that are ‘too big to fail’ should be ‘ring-fenced’ — separately and strongly capitalised — so that taxpayers will never again have to bail them out, whatever catastrophes befall the securities trading and related activities that are now routinely referred to by bank-bashers as the ‘casino’ side of the business.
Vince Cable roars like a bull to see ring-fences erected without delay. John Cridland of the CBI responds that it would be ‘barking mad’ to enforce such a costly regime in current conditions; the fund manager Crispin Odey says it would ‘put us back in the Stone Age’. Everyone agrees it would increase borrowing costs, restrict lending volumes and squeeze bank profits — and bonuses, or so Vince fervently hopes. In more reasonable tones, the respected Ernst & Young Item Club of forecasters says the net effect would be to set growth back by 0.3 per cent.
Better to have lower growth and financial stability than a repeat of the last turbulent decade? Well, maybe. Time to sting arrogant, unrepentant bankers where it hurts, right in their wallets? Maybe again, but that’s hardly a sound basis for policy-making in a sector which contributes a huge slice of GDP. Ring-fencing might give extra reassurance to depositors, but in my view it is neither a necessary nor a sufficient condition of long-term health in the banking sector. Inside the ring-fence, retail banks would still be at liberty to beggar themselves on imprudent home-mortgage and commercial real-estate lending whenever there’s an upswing of the property market. That is a far more pernicious affliction than the sector’s occasional bouts of trading-floor madness.
The fact that Lloyds is likely to stay under state control for the foreseeable future (the prospect of a sale of the Treasury’s 41 per cent stake has ‘faded to virtually nil’, says the FT) is entirely due to the real-estate follies of its HBOS component, rather than ‘casino’ dealings. By contrast, HSBC, and arguably Barclays, show that the universal banking model remains valid so long as it is in shrewd management hands. And as former CBI chief Sir Richard Lambert has pointed out, UK banks have already substantially reformed their own balance sheets since the crisis, with higher proportions both of capital and of customer deposits (rather than interbank funding) to loans.
Ring-fencing is not a bad idea in itself, but the pragmatists in Downing Street are right to conclude that it is a less urgent priority than the need for bank lending to businesses that will stimulate growth. And if the storm really does break over Europe, the Vickers recommendations will get knocked off the autumn agenda altogether.
Planning dilemma
As for Eric Pickles’ proposals to relax the planning regime, supported by George Osborne in the interest of stimulating growth, I find myself firmly on both sides of the argument. Our planning system is notoriously bureaucratic and slow yet rarely pleases the voters, so must surely be ripe for reform. There is a shortage of afford-able housing and workspace in places where people actually want to live and work; many small towns would have a higher quality of life if they became slightly bigger towns with greater concentrations of economic activity; and the construction sector, which was on the cusp of recovery in the early summer, needs a boost now.
On the other hand, as chairman of Helmsley town council in Yorkshire (actually a parish council, with no powers in planning matters other than the right to be ‘consulted’, which usually means ignored) I’m content for those that do have the powers to use them with extreme care in deciding where to put the next housing estate and nitpicking over ‘heritage’ detail. In the boom years, the tension between the developers’ thirst for profit and the town’s dislike of rapid change was palpable and highly disruptive. By all means slash red tape and encourage housebuilders to get on site; but do it without losing any rigour in the principles of good town planning and landscape conservation.
Ultimate solution
Worried that banks such as HSBC might leave these shores altogether if new capital requirements crush their shareholder returns, David Cameron is said to be keen that the ring-fencing of their retail operations ‘is of a “light-touch” variety’. All I can say is that we tried that with my golden retriever Douglas as his hormonal urges began to get the better of him — but matters came to a head at Easter when the scent of the local hairdresser’s spaniel in season drove him to bust repeatedly through inadequate harnesses and hedges like the bulldog in the Tom and Jerry cartoons — or a banker with a sniff of a seven-digit bonus. The ultimate solution (one which Vince Cable would no doubt advocate for the whole City if he could) was to castrate the poor chap. If you’re going to ring-fence, do it thoroughly or not at all.
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