Ringfencing in Britain, here we come. The Guardian had back in September 2011: Britain’s biggest banks are to be given until 2019 – longer than had been expected – to implement radical reform of their operations to prevent another taxpayer bailout of the system.
The Independent Commission on Banking – issuing its report almost three years to the day after the collapse of Lehman Brothers Holdings Inc. (PINK:LEHMQ) which led to the major 2008 bank bailouts – said that banks should ringfence their high street banking businesses from their “casino” investment banking arms.
5 Charlie Munger Quotes Every Investor Should Know
Charlie Munger is perhaps best-known as the vice chairman of Berkshire Hathaway, where he has been Warren Buffett's longtime business partner. As well as holding this position, he also servers as the chairman of the Daily Journal Corporation and is a director of Costco Wholesale Corporation. Munger started his investment career in the 1960s when, Read More
Now The Guardian on December 21st 2012:
Andrew Tyrie, the Conservative MP who chairs the parliamentary commission, said: “The proposals, as they stand, fall well short of what is required. Over time, the ringfence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ringfence.
“For the ringfence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to. That’s why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.”
In 2013, the commission will report on changes to competition, corporate governance, regulation and civil and criminal law to enhance standards and culture in banking after taking hours of evidence since being set up four months ago. Since then, even more banking scandals have erupted, most recently leading to a £940m fine imposed on UBS AG (NYSE:UBS) for rigging Libor.
Tyrie said the latest revelations “beggar belief” and evidence would be taken onUBS AG (NYSE:UBS) next year.
In response to the recommendations by the commission, a Treasury spokesman said: “The government is committed to reforming the financial sector and putting in place a regulatory structure that learns the lessons of the past and protects taxpayers in the future. It has been committed to building consensus and has consulted widely on these reforms over the last two and half years.”
The shadow chancellor, Ed Balls, said: “If the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. The commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks.”
The banking reform bill to implement the Vickers report will be formally introduced into parliament next year.
Cable said: “On splitting the banks, I started out believing that a complete separation was the only way forward. The Vickers commission, however, argued persuasively and unanimously that ringfencing achieved that objective in a less disruptive way. Andrew Tyrie is right to raise the question of what happens if it fails. But it would create further massive uncertainty to reopen the whole bank reform agenda at this stage.”
It is very clear that David Cameron’s conservative government is in severe trouble. From the start it has been doubted that a 2019 deadline would bet met, and what action would have been taken in the mean time. As far as Labour is concerned the banks have succeed with their delaying and watering down tactics – and they could very well be right.
The problem is however multi-fold:
Quote: “In its report on Vickers, the Tyrie commission criticised the government’s decision to water down a so-called leverage ratio which attempts to curb the risks banks can take. The Vickers report set it at 4%, which would restrict leveraging of banks to 25 times, but the government has suggested that the ratio be 3%, allowing a higher leverage of 33 times.” In Denmark the leverage ratio is the double – or 8% – which in case of banks in the garbage can of the Bank Inspection has been shown to be an illusion in so far as equity has been lost 2-3 even 4 times. That the health of British banks should be that better is difficult to believe. The reality is that British banks are severely under-capitalised – which in itself is a problem; but the question is really: Where should the money come from to recapitalise the big banks of Britain? We saw in Spain, that the taxpayers could not! The final option was the ECB.
A European rescue would entail Britain under complete EU administration – Spain as a country half as big cannot move a foot without permission – and has to institute austerity plans of which we have only seen the beginning of.
The British banks are clearly too much to handle for Britain alone. A European Bank Inspection will be insisted upon if Britain is to have any aid from the EU. Once they gain access to the big banks books all hell will break lose.
There is an end to the coffers – even in Germany. For the time being Spain seems to be limited to 40 bio. EUR recapitalising their banks; but then we have not even started on the big three: Banco Santander, S.A. (NYSE:SAN) (MCE:SAN) (which is also one of the larger ones in Britain), Banco Bilbao Vizcaya Argentaria S.A. (MCE:BBVA) (NYSE:BBVA) and LaCaixa. Furthermore nobody dares guessing how much the upcoming overhaul of the French banking system is going to take.
I seriously doubt ringfencing in any meaningful way can be done, as it would entail separating banking entities a recapitalising them separately. There isn’t money enough for that in Britain. To raise that sort of money would mean taxing pension funds and what have you – without touching income tax and consumers – as that would devastate the economy.