Westminster Blog

Sir John Vickers

I revealed in this morning’s FT that Nick Clegg and Vince Cable want to reopen talks on how to put the Vickers recommendations on banking reform into law.

When the commission led by Sir John Vickers first set out its proposals, the government accepted most of them – most significantly that banks’ retail operations should be ringfenced from their investment banking side.

But the banks won two crucial victories in their attempts to water down these proposals. The first was that the government scrapped the Vickers recommendation that ringfenced banks should have stricter standards on how much equity they had to issue compared with their assets. The second was that ministers allowed for interest-rate and currency swaps to be sold from within the ringfenced arms of banks, putting them in the same category as ordinary loans and making them cheaper and easier to sell.

Vince Cable, the business secretary, always seemed slightly concerned the government had conceded too much, particularly on how quickly the banks would have to implement these reforms.

Now, in the wake of the news that up to 11 of Britain’s biggest banks mis-sold interest rate swaps to small businesses, he and Nick Clegg, his party leader, want a rethink on whether they should be included in the ringfence after all.

Banks are rattled. One City executive told the FT:

Mis-selling is a cultural issue – ringfencing is structural. Outside the ringfence, products can still be mis-sold.

How seriously should banks take this new threat? Is it merely a piece of political positioning from the Lib Dems, who are keen to appeal to their base in the wake of their failure to enact Lords reform?

The answer is that Clegg, and Cable even more so, are definitely serious. They know that this is a technical debate, unlikely to inflame the passions even of their most devoted supporters.

They could launch a full attack on the banks by calling for higher capital ratios – something that would be fought even harder by the square mile. Instead, they are focusing on a relatively unknown but significant piece of regulation that is directly affected by a recent scandal. This is a genuine attempt to open up a debate.

How likely are they to get their way? At the moment, not very. George Osborne is still backing the plans as set out in the white paper, which would allow banks to include swaps such as these in the ringfence. I was told by a Treasury official yesterday “Our thinking has not changed on this.” The department agrees with the banks that these products are essential for lots of businesses, such as those who do a lot of trade in a foreign currency.

As long as the chancellor remains opposed, this will stay an intellectual rather than a political debate. But the white paper is still open to consultation and if Osborne sees this as a sensible way to look tough on banks while not succumbing to populist gestures, he may change his mind in the way his Lib Dem colleagues have.