George Osborne's banks plan is 'separation lite' | Andrew Simms

The chancellor's proposal to ringfence retail from investment banking sounds good but doesn't go far enough

With George Osborne's pledge to ringfence retail banking from its casino investment twin, the first dust begins to fall from stones shifting in the structure of our financial system.

Nearly three years after the financial crisis that almost brought down the global economy, this is the first sign of awareness from government that structural reform of the banking system is necessary. However, today's announcement is not it. In making the proposal Osborne is effectively conceding that another bank crisis is likely and acting, not to prevent that, but to protect the taxpayer and depositors when it happens.

He accepts the admission made tacitly by Sir John Vickers' International Commission on Banking report that future trouble is highly probable. There is, it said, "inherent uncertainty about the nature of the next financial crisis", and in doing so took for granted that there would be one.

Although full details are yet to be made public, Osborne's proposal appears to stop short of the full and effective separation of investment and high street, retail banking. But full separation is what worked so effectively for decades in the US after the Glass-Steagall Act was introduced in response to the devastating Wall Street crash of 1929. It worked partly because it was simple, unlike the weaker and far more complicated recent US attempt to restore financial order, the Dodd-Frank Act.

Osborne appears to be proposing a half-measure, "separation lite", a move that lacks the simplicity of full separation and could, as a result, fail adequately to protect the taxpayer as well as being complicated to implement.

For a start, global retail banks will still be large, complex beasts, and ringfencing will not address the "too big to fail" problem and its costly public underwriting. Retail banks will also still be able to make a range of high-risk investments, and unless there is scrutiny over the balance of assets they are allowed to hold, they could still represent a major public liability. For example, the financial writer John Kay suggests that retail banks should be forced to hold 90% of their assets in the form of relatively safe business loans, residential mortgages or government bonds, which would also help the economy.

Even under ringfencing, capital can still be moved between the subsidiaries of investment and retail banks, as long as the capital held in each subsidiary stays above a certain level. That means, again, that taxpayers' guarantees will still, to some extent, be subsidising casino banking.

The measure also leaves untouched the range of ways in which the banking system is failing large areas of Britain, countless businesses and much of the population, either by not providing sufficient services, or providing them at excessive cost and with terms and conditions that make flatpack furniture instructions look user-friendly by comparison.

While the ringfencing proposal has drawn most attention, Osborne is also announcing a worrying return to business as usual with the news that Northern Rock would be re-privatised. Yet, if the crisis of 2007-08 taught us one thing, it's that we need a more diverse banking system for stability, resilience and to work for people. That means more mutuals, co-ops and innovative, smaller local banks, not more risk-takers wanting to gamble unaccountably with other people's money. Remutualisation of Northern Rock would have helped to build this kind of system.

The Bank of England's own figures show that the banks are still dependent on significant public support. With the government's economic strategy failing to effectively reduce the deficit and further weakening the economy; ringfencing alone, although symbolically important, looks like the minimum desperate intervention of an administration that knows another crisis is coming, and is dimly aware that much greater structural change is needed.

Compared to Treasury briefings earlier in the year that appeared to dismiss any separation of the banks, Osborne has surprised some by seeming to follow the ICB's advice. He shows good intentions but hasn't reach a logical conclusion, like building a bridge halfway across a valley. Public anger is also unlikely to be assuaged, with the spectacle of bank executives walking off with massive pay and bonus packages underwritten by taxpayer guarantees still present. Dust may be falling from the financial system, but a dangerous, shaky edifice still towers above us.

George OsborneBankingAndrew Simms
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