The New Banking Reforms
The Chancellor, George Osborne, has given an assurance to voters that the government is committed to transformation of the banking system on the day that the much-vaunted banking reform bill goes to parliament.
Mr Osborne will commit to ensuring that the new ring-fence surrounding any bank's investment and high-risk operations is 'electrified' to ensure that these activities are kept separate from retail banking.
UK's Finance System has Often Been Considered Relatively Backward
This system acts as the 'plumbing' for the UK's finance system and it has often been criticised for being relatively backward, particularly compared to other countries. The different parts of the payments system, including CHAPs and BACs, have been largely self-regulated as they are owned by the UK's main banks. The Chancellor wants to see this system opened up and many people outside of the industry will support this.
Previously Recommended Banking Revisions Failed to be Implemented
A report published during the Labour government's time in office recommended changes to the system. However, the government failed to implement them. Those who remember history will be keen to learn of the detail behind Osborne's latest proposals and then watch to see whether they are subsequently watered down over time.
Fresh Uncertainty for British Banks
There are two primary schools of thought. The first group thinks that the proposal represents a climb-down for Mr Osborne and that it opens up the topic of optimal structures for UK banking and creates fresh uncertainty for British banks in the process. The second group feel that this change will be largely cosmetic and the strength of feeling in this camp does clearly indicate how little regard the public now has for this beleaguered industry.
Will the Threat of a Break-up be enough of an Incentive for Banks to Reform?
There is a possibility that the distant threat of break-up will focus the minds of each bank and provide a strong incentive to view the ring-fence in a genuine and serious way. However, even this change will mean little to the critics, who believe that both the Independent Banking Commission and the government should have pushed for clear separation from the beginning.
The problem is that if you believe that a ring-fence will be ineffective by nature, or that the government continues to allow the banks far too much leeway in setting their own terms, then you'll probably feel that the concept of 'electrifying' the ring-fence will make very little material difference. After all, let us not forget that even the world's most stringent ring-fence would not have been able to prevent the fall of Northern Rock, which didn't even have a 'risky' investment arm and instead had a basic mortgage and retail operation.
Written by David Archer of Circle Square - Financial Recruitment London
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