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‘Separation lite’ bank reform likely to fail unless it goes all the way, say nef and Compass

Almost three years after the financial crisis that almost brought down the global economy, this is the first sign of awareness from government that structural reform of the banking system is necessary, but this is not it. The Chancellor, George Osborne, is effectively conceding that another bank crisis is likely and acting, not to prevent a crisis, but to protect the taxpayer and depositors when it happens.

The proposed reform stops short of the full and effective separation of casino-style investment banking and high street retail functions, which the United States enjoyed under its Glass Steagall Act. It is a half-measure that lacks the simplicity of full separation and as a result both fails to adequately protect the taxpayer and will be complicated to implement. It also leaves untouched the range of ways in which the banking system is failing large areas of Britain, countless businesses and much of the population.

Also, according to the Bank of England’s own figures the banks are still dependent on significant public support. As the government’s economic strategy fails to impact on the deficit and further weakens the economy, we are left wondering whether the ringfencing of retail and investment banks is designed to protect the taxpayer from the possibility, or the certainty, of another bank failure:

  • Ring-fencing won’t protect the tax payer. Full separation would be cleaner, clearer and reduce red tape;
  • Putting Northern Rock back into the private sector increases risk. If we are to rebuild a stable banking system that works for people, we need more diverse forms of banking like Mutuals, not more risk-taking private companies. Re-mutualisation of Northern Rock would have helped to build a more plural and resilient system.

"If the Chancellor wants to separate retail from casino contamination then the quick clean and comprehensive way is full legal separation.  What is he scared of?" said Neal Lawson, Chair of Compass

“This is ‘separation lite,’ that will still leave behind a banking system that is failing businesses, failing large parts of Britain, and failing ordinary customers. It shows good intentions but doesn’t reach a logical conclusion, like building a bridge only half way across a valley. It also leaves in place the spectacle of bank executives walking off with massive pay and bonus packages because they are underwritten by taxpayer guarantees.” said Andrew Simms, fellow of nef (the new economics foundation)

Related links

Compass

The Guardian: Ringfencing will cost customers dear, say banks

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