Monday, 25 June 2012

Banking Reform

Last September the Vickers Commission tabled a raft of proposals to reform the banking sector, including measures to increase competition, and raise capital requirements on retail banks. Both are necessary - currently only four banks control 70% of the current account market, while undercapitalisation was one of the primary causes of the financial crisis. Addressing these issues will benefit consumers, and reduce the risk to taxpayers in the event of another financial crisis.

The downside is that the recommendations will make British-owned banks less competitive. Ring-fencing will put British investment banks at a disadvantage to overseas banks able to access funds raised through their retail arms, and retail operations by British banks overseas will be hit. However, this is a price worth paying to shield taxpayers, whose liabilities for the banking crisis peaked at £1.2 trillion. 

Crucially, this will not jeopardize the City’s position as a financial centre. Although London is ranked as the world’s biggest financial centre by some indices, only one of the world’s five biggest investment banks is British. Recent growth in financial services was largely driven by foreign banks choosing to trade in London, rather than British banks. Vickers’ report protects taxpayers, consumers and the City, and should be applauded.       

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