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Published on July 7th, 2011 | by David Christie
Image © [caption id="" align="alignleft" width="160" caption="Business Secretary Vince Cable"]Business Secretary Vince Cable[/caption] In an open letter to the Observer over the weekend, left-leaning pressure groups Compass and the New Economics Foundation called on the Vickers Commission to recommend the break up of British banks.  In its initial report in April this year (the final report is due in September), the Commission proposed that the retail and investment arms of UK banks should be ring-fenced, to stop the deposits of ordinary customers from being used in risky investment activities (of the kind that contributed to the 2008 financial crash).  The Chancellor George Osborne is said to agree with the findings of this report.  However, the signatories of the letter criticise the Chancellor, and claim that this reform does not go far enough.  They argue that ring-fencing will be insufficient, and that it is necessary to break up the banks into seperate retail and investment institutions. What makes this a headache for the coalition is that among the politicians and academics who signed the letter, there are several prominent Liberal Democrats.   They include Adrian Sanders MP, Lord Trevor Smith, Linda Jack (of the party's Federal Policy Committee) and Professor Richard Grayson (a former director of policy).  There are also more senior Lib Dems who are likely to sympathise with the letter's signatories.  Business Secretary Vince Cable has urged a break-up of British banks on many occasions, and recently signalled that he is still willing to get tough on the banks.  The Guardian suggests that the split over banking reform could be as significant as Lib Dem unrest over the government's NHS reforms. On the other side of the debate, the Commission's ring-fencing idea is coming under attack from some in the banking sector and the business world, who want to water down any reform.  Economist Will Hutton claims that 'Vickers and his team are under enormous pressure to make their proposed ringfence as porous and soft as possible'.  Therefore the Vickers Commission, and the Tories, need to make a decision: will they agree with the Lib Dems, and get tough with the banks, or will they obey the bankers and avoid serious reform?

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Rift over banking reform – more trouble for the coalition

Business Secretary Vince Cable

Business Secretary Vince Cable

In an open letter to the Observer over the weekend, left-leaning pressure groups Compass and the New Economics Foundation called on the Vickers Commission to recommend the break up of British banks.  In its initial report in April this year (the final report is due in September), the Commission proposed that the retail and investment arms of UK banks should be ring-fenced, to stop the deposits of ordinary customers from being used in risky investment activities (of the kind that contributed to the 2008 financial crash).  The Chancellor George Osborne is said to agree with the findings of this report.  However, the signatories of the letter criticise the Chancellor, and claim that this reform does not go far enough.  They argue that ring-fencing will be insufficient, and that it is necessary to break up the banks into seperate retail and investment institutions.

What makes this a headache for the coalition is that among the politicians and academics who signed the letter, there are several prominent Liberal Democrats.   They include Adrian Sanders MP, Lord Trevor Smith, Linda Jack (of the party’s Federal Policy Committee) and Professor Richard Grayson (a former director of policy).  There are also more senior Lib Dems who are likely to sympathise with the letter’s signatories.  Business Secretary Vince Cable has urged a break-up of British banks on many occasions, and recently signalled that he is still willing to get tough on the banks.  The Guardian suggests that the split over banking reform could be as significant as Lib Dem unrest over the government’s NHS reforms.

On the other side of the debate, the Commission’s ring-fencing idea is coming under attack from some in the banking sector and the business world, who want to water down any reform.  Economist Will Hutton claims that ‘Vickers and his team are under enormous pressure to make their proposed ringfence as porous and soft as possible’.  Therefore the Vickers Commission, and the Tories, need to make a decision: will they agree with the Lib Dems, and get tough with the banks, or will they obey the bankers and avoid serious reform?

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