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Economics

Published on December 18th, 2013 | by Tanya Silverman
Image © Steve Caplin 2007

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Banks a Lot: The UK Banking Reform Finalises

Following final approval in the Commons on Monday 16th, Chancellor George Osborne’s Banking Reform Bill is set to be put into play in 2014 after it receives the stamp of the Queen which is expected this week. This is fantastic headways considering the cap on its implementation was initially January 2015. The Bill was introduced into the House of Lords for consideration February 4th this year after the 2012 Libor Affair and 2008 Financial Crisis. In February, Osborne stated that ‘2013 is the year when we reset our banking system.’ We’re finally witness to some of his motions. Following the scandal, the Cross-Parliamentary Commission on Banking Standards was appointed to review suggestions from an Independent Banking Committee in accordance to Osborne’s suggestions to set up inquiries to inform the Bill. The commission’s role is to look into banking standards and culture and also attempt to avoid reverting reform ‘back to square one.’

In the development phase of the Bill, Osborne stated that the reform would protect the taxpayer. This was a key incentive behind the movement, especially as the financial crisis wiped 10% off UK wealth, and also for those who relied on the financial system ‘to have that trust reciprocated’ with better banking. I have already discussed some of the ins-and-outs of the financial crisis in my blog post on the US Government Shutdown.  But what was the other catalyst behind this – the Libor Affair?

The Libor Affair, or scandal, was a series of falsified actions that were connected to the London Interbank Offered Rate (Libor). Libor is an average interest rate that is calculated through submissions. The Wall Street Journal published a 2008 article and study that suggested some US banks may have understated the borrowing costs they had reported for Libor during the 2008 credit crunch. This was later confirmed by economists that furthered the study, and it was revealed through further investigations that UK banks were also falsely inflating their rates to profit from trades. This led to worldwide reaction as prior to the investigations it wasn’t even comprehensible that false claims on such magnitude could occur. This is where Osborne’s plans kick-started.

In the initial phases of reform-development Osborne warned against suggestions of a completely new approach to reform, highlighting the dangers. Some proposed laws were to see the retail sections of banks ring-fenced from their investment arms. A new legislation was witness to this. This is essentially a separation of these two functions of a bank which has been termed risky ‘casino-style’ investment and was in a bid to protect savers’ deposits, maintain the running of cash machines, and keep branches open. September was also witness to a newly introduced 7-day current account switching service, making it easier for people to switch their current accounts. This was following statistics that 75% of all current accounts were monopolised by just four companies. You’re likely to have noticed that Lloyds TSB became two separate banks and this is why – to increase competition (the downside being that I keep forgetting which bank I’m part of).

Lloyds TSB - is back to just Lloyds and TSB

Lloyds TSB – is back to just Lloyds and TSB

 

There have, however, been some criticisms of Osborne’s plans. City A.M’s editor, Allister Heath voiced some warranted concerns over the plans back in July. Heath, who stated that ‘banking lost the plot in the West when governments extended the welfare state to financial institutions,’ believes that the plans could wreak havoc. His concerns are that the reforms are likely to make banks relocate their Head Quarters overseas and avoid the new legislations. The new system may also risk criminalising failure. This could lead banks into a mentality of serious risk-avoidance, pushing them to avoid losing money at all costs. Whilst risk avoidance may initially sound like a good idea it would be detrimental as it could cut off credit to small businesses, homebuyers without large deposits, and property developers.

It is worth mentioning that whilst the UK undergoes its own structural changes to the banking sector, the US banking system is also witness to change following the Libor scandal and financial crisis. There is a key difference between the two reforms. Instead of operating the ‘ring-fence’ system of the UK the US is adopting the ‘Volckner Rule’ that will ban US banks from using their own funds for trading activities.

Whilst Osborne’s changes throughout the year have been a step in the right direction, they did not get to the heart of the nitty-gritty of the issue. However, in its final state the Banking Reform faced crucial changes on its Wednesday 11th amendments, prior to Monday’s final approval of the Bill. Lawmakers Mr Tyrie and Justin Welby won concessions from the government whilst they pushed to strengthen legislation. This included ensuring the implementation of an independent review of the ring-fence which can consider full structural separation if necessary, stricter oversight by senior management, and a review on proprietary trading by banks.

The final stage of Common’s discussions took place in the upper house when senior MPs agreed on the technical details thus far and of a regime to certify bankers’ bonuses. This is the introduction of new rules that will be put into place to ensure bankers’ bonuses are paid for over a longer term. This is also to aid the stamping out of excessive risk taking.

However, several of the Parliamentary Commission on Banking Standard’s recommendations failed to make it into the Bill. These included suggestions for reforms for the Bank of England’s governance and the mooted abolition of some UK financial institutions.

Regarding its criticisms and concerns, well, I suppose we’ll have to wait and see what happens. If concerns, such as Heath’s, come to be a reality then legislative implementation may slacken, calling for reforms and more mistrust in financial services. And that’s if the banks haven’t gone overseas – fingers crossed we won’t be waving them goodbye. Now, however, it is up to the banks to see the new legislation through and to make a difference.

Please note that all blog posts do not represent the views of Catch21 but only of the individual writers. We also aim to be factually accurate and balanced across all content taken as a whole.

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About the Author

Tanya Silverman

Tanya graduated from SOAS with an Msc International Relations, but if there was a Pokemon Academy she would have opted for that. A professional Pokemon trainer, Tanya also has a deep rooted interest in art and politics, focusing on global affairs ranging from the Middle East to Southeast Asia.



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