Peter Hoskin

The Tories’ plan for regulating the banks

The Tories' plan for regulating the banks
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I've just flicked through the Tories' new White Paper on banking regulation, which Osborne & Co. are touting as their "plan for sound banking".  There's much in there which has been trailed or suggested over the past few weeks, but a few new ideas as well.  I'll refrain from going too far into the nitty-gritty, but here are my take-home points:

Attack, attack, attack.  Ok, it's to be expected of a White Paper put together by Her Majesty's Loyal Opposition, but the language used in the document is strikingly robust.  Entire sections (e.g. Part 1: What Went Wrong, pp.8-18) are devoted to atacking Gordon Brown's handling of the economy, his tri-partite regulation system, and the debt bubble which expanded on the back of it - with the subsequent emphasis being on Not Letting It Happen Again.  At times, they slightly overplay their hand: for instance, using a Peter Lilley quote from 1997 as evidence for the Tories' opposition to Brown's regulatory system, without - of course - letting it be known that they didn't complain too loudly for the next ten years.  But these attacks are better made late than never, I guess.

Note to Europe: quit meddling.
  Speaking of robust language, the paper is surprisingly strong when it comes to Europe.  The message, at least, is that the Tories won't abide EU financial directives which could harm the British financial industry's growth and competitiveness.  To that end, they pledge to "enhance" the Treasury team that does business in Brussels, and to "fight any new attempt to create an executive pan-European supervisor".  A further pledge that "we will ensure that the Chancellor regularly attends meetings of European finance ministers," feels like a dig at one G. Brown, who notoriously used to avoid meetings with his European counterparts.

Dumping the tri-partite system into the rubbish bin of history.
  Long story short, the Tories say that they'll ditch the tri-partite system.  In effect, this means greater powers for the Bank of England, no more Financial Services Authority, a new Consumer Protection Agency and few little tweaks involving the Office of Fair Trading.  Here are some more details:

Bank of England.  The Bank is the big winner, so to speak, from the Tories' proposed changes.  Under Prime Minister Cameron, it would keep all its existing powers, but also be granted "responsibility for maintaining financial stability" and "monitoring the overall level of credit and debt in the economy".  This effectively means that it would oversee all the banks, building societies, insurance companies etc., and could step in when it feels they may be taking undue risks.  Some of its new powers would include demanding certain capital requirements of financial institutions that are engaging in particularly risky transactions, as well as restricting "risky bonus structures".  

Financial Services Authority / Consumer Protection Agency.
  So bye-bye, FSA - it was was nice knowing you. According to the White Paper, a Tory government would scrap this third wing of the tri-partite system - passing many of its functions over the the Bank of England, and putting in its place a new, beefed-up Consumer Protection Agency, which would "take responsibilities to protect the consumer that are currently and confusingly divided between the FSA and Office of Fair Trading".

Office of Fair Trading.  Despite losing, one assumes, much of its power to the new CPA, the OFT remains.  Why?  Well, for one thing, the paper says: "We will ask the Office of Fair Trading and the Competition Commission to conduct a focused examination of the effects of consolidation in the retail banking sector. The findings of the OFT and the Competition Commission will help to inform a Conservative Government’s ongoing strategy for disposing of its banking shares."  It's not quite clarified in the paper, but you imagine this means the OFT will hang onto its competition-monitoring powers.  It's worth noting, too, that this nod to the Government "disposing of its bank shares" makes no mention of splitting the banks up into smaller chunks.

So does the Tory system eradicate the flaws of Brown's tripartite regime, which they describe as "confused and fragmented, with responsibilities, powers and capabilities split awkwardly between competing institutions"? Hm.  As with all regulation, the proof of the pudding is often in the eating - but many of the proposed changes look sensible enough on paper.

Hand of friendship for Mervyn King
.  Quite aside from improved powers for the institution he heads, there's plenty in the paper to flatter the Governor of the Bank of England.  It quotes him - approvingly - on a regular basis.  It proposes to involve him in more policy decisions.  And it even sympathises with him: at one point saying that, "it is shocking that the Governor of the Bank of England was not shown a copy of the Government’s recent White Paper on financial regulation until just days before it was published".  Given the dificulties that Merv has had with Brown and Darling, it does rather feel like an effort to get him on side with the Tories.

Inflation-targeting.  Seems like the Bank would keep this responsibility under a Tory government, but it's left undecided what measure of inflation they should use: the Consumer Price Index (which doesn't account for changes in house prices) or the Retail Price Index (which does).  The prevailing view is that if the Bank had used RPI, rather than CPI, over the past few years, then they'd have stood a better chance of spotting the debt bubble.  It seems the Tories share this opinion, as their paper frequently criticises the "narrow" CPI targeting.  But their final word on the matter reads thus: "We will conduct a review in government, involving the Governor of the Bank of England, to consider the case for putting housing costs back into the inflation target. Given the fragility and uncertainty in financial markets, any change to the measure of inflation should be carried out in a careful and considered way, with extensive consultation."  

No British Glass-Steagall Act (or is there?).  Quite a few folk - including Lord Lawson, here - have called for a British Glass-Steagall Act, which would formally separate the commercial banks, which hold our cash, from the investment banks, where the Masters of the Universe get up to all kinds of risky business.   The White Paper says No! to this idea, claiming that it would harm the global competitiveness of British banks.  But, intriguingly, it also hints that new powers for the Bank of England could bring about a de facto Glass-Steagall - or at least that's what I read into this passage: "A Conservative Government will empower the Bank of England to impose much higher capital requirements on high risk activities such as large scale proprietary trading carried out by banks that also take retail deposits. In practice this could prevent banks that take retail deposits from engaging in many of these high risk activities by making them more expensive."

Anyway, I think that's enough for now.  I'll post a link to the White Paper as soon as it shows up online.  If any CoffeeHousers spot anything else particularly noteworthy in its pages, do shout out in comments section below.

Robert Peston's thoughts here.