Ring-fencing or Separating Banking Activities

The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.

However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it.

Barclays CEO and ex casino patron, Bob Diamond, saw Chancellor Osborne last Friday to try to persuade him against any serious attempt to ring-fence banking activities. And the Santander UK CEO is doing the same this week. They argue that ring-fencing operations would hit UK’s gross domestic product (GDP), reducing it by all of 0.3%. It would also hit their banks’ financial results, that is till the next big bubble bursts. And it might even hit their personal bonuses.

Diamond and colleagues are also fearful that if investment banking were adequately separated, it would be possible to regulate it differently from traditional banking, to make it less attractive and profitable. The so called ‘Tobin’ transaction tax, which is said to be complicated to administer, would be greatly simplified. And the opaqueness of financial ‘products’, which form the bulk of investment banking trades, could be restricted if not made illegal. That would have a bigger impact than the predicted loss of GDP.

GDP growth has long been the holy grail of economic management, a simplistic proxy for reducing unemployment and creating more and better jobs. Any fall in GDP would certainly not be greeted as good news, especially now. But GDP is not a homogenous item, though it is not often publicly discussed in any depth. Does a £ of investment banking GDP have the same value as a £ created and earned in manufacture, distribution or services? Most of the ‘casino’ pound is merely wagered on more ‘casino’ activity. It is, as it has been described, ‘socially useless’. The real pound is spent on food, clothing, housing etc and results in creating real jobs. GDP is a very crude, inadequate and misleading measure.

Not only all that, but the investment banking activities of leading banks, including Barclays, HSBC and RBS, is now facing legal challenge. Lawsuits filed by the US Federal Housing Finance Agency, alleging that their selling of sub-prime investments was fraudulent, involve claims expected to run into billions of pounds. And sub-prime trading is just a starter. It would be good if banking for the real economy was separated from all that.

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