City hits back at Vince Cable over banking reform comments

Thursday, September 1, 2011

City hits back at Vince Cable over banking reform comments

Row erupts after business secretary said banks were being disingenuous in saying that reform now would derail recovery

A row over banking regulation exploded into the open on Wednesday as the City rounded on business secretary Vince Cable for suggesting banks are using the eurozone crisis to resist looming reforms.

The bitter exchange also served to highlight divisions between Conservative chancellor George Osborne and Liberal Democrat cabinet members, including Cable and party leader Nick Clegg. David Cameron appeared to reflect the views of banks and employers, saying reforms shouldn't be "taking risks that put the economy at risk".

Cable has always argued for a tougher approach to the banks than the Tories. But he sparked uproar yesterday when he said bankers were being "disingenuous in the extreme", in arguing for a delay in plans by the Independent Banking Commission (IBC) to force banks to ringfence their retail and investment banking operations. Any regulatory changes could force high street banks to increase their reserves and the banking lobby has suggested it could endanger economic recovery.

Stuart Fraser, a former stockbroker and head of the City of London Corporation, said: "It is vital we reconcile political imperatives with what is practical for banks. There is only a finite amount of capital available, and if banks have to stump up more, they shouldn't be rushed."

Sources in Whitehall have indicated that any changes could wait till after the 2015 general election, with Osborne reported as saying they could wait till 2019.

However, Cable said the fact that there were still fears about the collapse of big financial institutions was "all the more reason for grappling with this issue".

Business groups have argued that a weak domestic economy and eurozone turmoil mean banks shouldn't be burdened with extra regulation. Angela Knight, the head of the British Banking Association, said: "The emphasis at the moment should be on economic recovery rather than another assault on the banks."

CBI chief John Cridland said on Tuesday: "Taking action at this moment, which weakens the ability of banks to provide the finance businesses need to grow, is barking mad."

Cable, who also accused banks of special pleading, indicated the coalition was agreed on the need for reform, but stressed the economic instability was not a reason to delay. He told the BBC: "Certainly on banking reform there is a common ground of the need to follow through on the report of the banking commission when its report is finalised in two weeks."

But he added: "The uncertainty and instability in the markets makes it all the more necessary that we press ahead and make our banks safe and reform them."

But Cable was taken to task by financial services lobby group TheCityUK, which said: "A rush to implementation risks weakening the UK's economic recovery if it weakens the lending capacity needed in the market."

The IBC, under Sir John Vickers, has had a year to consider banking reform as part of its brief to introduce measures designed to prevent another financial meltdown. Its interim report in April disappointed critics who argued for a total split of retail banks from the investment banking divisions.

Instead, Vickers suggested ringfencing one from the other, with both potentially owned by the same holding company. But it would mean one arm could not add to the reserves of the other, thereby raising the cost of capital. Barclays and HSBC have hinted they could partially relocate outside the UK if the IBC is too stringent. The IBC's final report, published within weeks, needs to be endorsed by Osborne.

Former banker Philip Augur, the author of The Death of Gentlemanly Capitalism, said: "The ringfence is an imaginative solution for the too-big-to-fail problem. But to be effective, the ringfence needs to be robust and if it is to be robust, the banks need a reasonable time to prepare for it. However, five years seems too long."

David Hillman of the Robin Hood Tax campaign said: "We must not be deterred by bank lobbyists whose idea of 'economic recovery' means increasing profits."

Michael Fallon, the deputy chairman of the Conservative party and member of the treasury select committee urged the banks to await the outcome of the report. "They need to calm down and wait for Vickers' final report," he said. "They've done enough lobbying."

Liberal Democrat strategists, however, believe the chancellor will have to approve of significant reforms before 2015 to avoid accusations during the election that the government failed to deal with the banking problem.