Banking On A Fresh Start?

Like it or not, banks are back in the news this week.

 

In short, the Chancellor has introduced the Banking Reform Bill which is designed to provide new rules to ring-fence risky banking investment operations separately from traditional high street banking functions. Ultimately there is the threat that the (so far incompetent) regulator can break up a bank that fails to follow the new rules (which are at the bottom of my ramblings).

 

Or to put this another way……reducing the risk of continued casino banking and avoiding another £65 billion bailout from the public purse.

 

I have a number of key questions:

 

Q: Why Has It Taken Over 4 years To Introduce Such A Bill?

A: Pass. Shocking / Frustrating / Frightening / Ludicrous (add your own)

Q: What Will The Impact Be To The Economy?

A: In essence, this is really good politics but really bad economics. The Government can only gain political points with the public and they will attract good headlines. But the reality will be banks lending even less money at a time when the economy needs significant capital to be introduced.

 

I wrote about this recently……http://stevesmithlive.blogspot.co.uk/2013/01/the-magic-of-9.html

 

Q: Will It Work?

A: Time will tell – I am rarely surprised by anything that happens in the banking sector now. Anything less than ‘shocking’ has to be a step forward.  

Ultimately this is a classic ‘catch 22’. Tying a banks right arm behind its back and expecting it to give cheap money with its left is essentially where this leaves us. It is certainly creating a challenge for the UK economy’s only source of money currently.

We can’t have it all ways I guess!

 

 Banking Reform Bill

An overview of the changes…...

The Ring-Fence:

The High Street activities of each UK bank are to be put into a separate subsidiary from its riskier investment banking.

 

Electrification:

Regulators will be given the power to split up an individual bank altogether, subject to certain conditions, if the regulator deems the bank to be undermining the purpose of the ring-fence. Regulators will also review the entire UK banking industry each year to determine whether the ring-fence is proving effective.

Deposit Guarantees:

The Financial Services Compensation Scheme currently guarantees up to £85,000 of every deposit in a UK bank. Under the bill, if a bank goes bust, the FSCS will be paid out ahead of other people owed money by the bank. It means that the FSCS will be better able to recover the money it has guaranteed, which should reduce the potential bill for taxpayers if there is a shortfall.

 

Loss Absorbency:

The bill gives the Treasury the power to impose tougher requirements on banks to increase their ability to absorb losses, in particular by requiring a bank to borrow money from markets in a form that allows the bank to impose losses on the lenders if it gets into trouble.