Inside the world of business

Darling not sweet on UK bank plan

THREE YEARS after the high noon of the financial crisis, the UK is gearing up for a major resurfacing of its banking landscape. The report by Sir John Vickers recommends banks should ringfence retail banking businesses (that functional, saver-friendly part with branches and glass partitions) from their investment banking arms (the shadowy, “casino” part).

Chancellor of the exchequer George Osborne has promised to pass legislation implementing the report’s recommendations by the end of the current parliament, although banks will have until 2019 to finalise a “firewall” around their retail banking services, a requirement that will pose the biggest housekeeping issues for Barclays and the mostly state-owned Royal Bank of Scotland.

Under a ringfenced regime, governments would step in to protect the retail part of the banks, and by extension “innocent” savers and borrowers, while investors would be obliged to contemplate the idea of a loss as the “casino” is let go under.

But not everyone agrees this is the panacea the Vickers report implies. “Ringfencing retail from investment banking is not the answer,” Osborne’s predecessor Alistair Darling said at an event in Dublin on Sunday. He described ringfencing “as a useful way of managing a collapse”, but stressed that it would not have actually prevented the crisis. This is partly because the problems at RBS were to do with bad judgment on loans and acquisitions, not casino banking. In addition, investment losses at the likes of Lehmans arose from a misunderstanding of the risks, not because they were relying on government bailouts.

There is now a moral hazard issue to be neutralised, of course, and the Vickers recommendations may help in this regard. But the failure of a powerful investment bank would still have the potential to threaten financial stability, even if it has zero retail customers.

German officials’ actions speak louder than words

“OUR COMMON goal is the stability of the euro and we want Greece to stay in the euro” – the words of senior German officials yesterday as they tried to counter mounting fears of default were commendable.

Were it not for the fact that much of the most immediate turmoil roiling the markets yesterday can be attributed to actions by senior German political figures and central bankers, the comments might be taken more seriously.

The decision of ECB “chief economist” Jürgen Stark to step down from the European Central Bank executive board was always going to make this week’s market opening extremely difficult.

As Germany’s most senior man at the European Central Bank, his sudden departure would inevitably trigger a negative response.

The pointed refusal to repudiate the globally held view that the move “for personal reasons” was more accurately due to his opposition to the bank’s entry into secondary debt markets to support the sovereign debt of both Italy and Spain only exacerbated matters.

And the ECB, the only player in the current crisis seen as acting to address the issue rather than talking itself into a bigger hole – albeit in a manner of concern to some of its governing council – is now seen to be so riven with discord as to undermine its very intent.

With German policymakers talking openly about the prospects of Greek default, the decision of economics minister Philip Rösler, expressly to put an “orderly default” in Greece on the agenda was distinctly unhelpful.

If Europe’s leaders were as transparent with their proposed fixes for the debt crisis as they are on their divisions, we might be considerably closer to a position where the markets feel there is some ground for confidence about the future stability of the euro zone.

In the meantime, Germany, of all states, should bear in mind that the price of a euro collapse could yet be higher than the price of underpinning it.

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