Sir David Walker has called on the Chancellor to review the legislation surrounding bank ring-fencing, claiming it will simply burden customers with extra costs and harm competition.
The former chairman of Barclays, writing in a personal capacity for The Telegraph, brands ring-fencing "uniquely British" which could lead to some banks moving operations overseas.
Sir David, the City grandee who stood down as chairman of the British bank just six weeks ago, argues "there is an urgent and compelling need for the Government to review its approach to ring-fencing."
Sir David Walker stood down as chairman of Barclays at the bank's annual meeting in April
In his first public comments since retiring from the Barclays board, Sir David said that other countries are incredulous that the UK is persisisting with a policy that "would irrevocably damage its banking system."
It has been estimated ring-fencing will cost UK banks some £2.5bn, with annual operating costs of approximately £4bn.
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The policy is unpopular with many senior bankers, with HSBC in particular having cited the ring-fence as one of the reasons it is reviewing its UK domicile. It has already begun work on moving its UK retail bank - which may spun out under the 'Midland' moniker - to Birmingham in order to meet part of the ring-fence requirements, which also call for a separate board, independent of the parent bank.
Citing John Maynard Keynes, whose 132nd birthday falls on this Friday, June 5, Sir David points out that he famously said: "When the facts change, I change my mind."
The banking veteran says that George Osborne, the Chancellor, should take a Keynesian approach on the subject of ring-fencing.
In the opinion piece, below, he argues that developments since Sir John Vickers' Independent Commission on Banking - which first suggested UK retail banks be ring-fenced from the commercial and investment banking operations of their parents - first suggested the move, due to come into force from 2019, the landscape has changed.
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"It is hard to see how the complex structural re-engineering involved will further boost the resilience of banks beyond the new capital and leverage requirements that have been put in place elsewhere," he writes.
"Ring-fencing’s role in effective resolution – crucial to protect the taxpayer – is also now redundant as banks adopt comprehensive standalone mechanisms as part of the EU Recovery and Resolution Directive."
He also goes on to say that ring-fencing will not improve banker behaviour or society's view of financial institutions, adding that the deeply unpopular UK bank levy makes banks pay for any implicit susbidy of their investment banking arms.
Opinion: Sir David Walker's exclusive comment piece
John Maynard Keynes was never short of confidence in his own intellect or abilities, so he would probably not be surprised that, 132 years after his birth this week, his endorsem*nt continues to be sought and fought over.
But this self-belief also stopped him being dogmatic. When criticised for altering his view, he famously retorted: “When the facts change, I change my mind.” As we consider the costs to banks and to the economy of plans to ring-fence retail banking operations, it is time to find a little of Keynes’ confidence and review a measure now not only unnecessary but actively harmful to the UK.
This was not the case when the proposal was first made in the aftermath of the global financial crisis. Given the hugely damaging impact of the behaviour of the banks and the failure of the regulatory system, no one could argue against the need for action to protect depositors and, ultimately, the taxpayer. The existing system and safeguards had failed to do their job.
The Independent Commission on Banking was set up by George Osborne, the Chancellor, in 2010 to consider what went wrong and to make recommendations to prevent any repeat. Its major recommendation, after a year-long inquiry, was to require large UK domestic banks to separate their retail and commercial arms from their other operations, in particular their investment banking business. It was a proposal the Government put into law and is scheduled to come into force in 2019.
Chancellor George Osborne
While the Chancellor’s determination to act quickly and decisively was understandable, there were doubts even at the time that ring-fencing was the right solution. Far and away the biggest losses sustained by British banks in the crisis stemmed from traditional bank lending rather than from trading losses, so it was hard to see how separation was going to give depositors or the taxpayer the extra protection that was needed. There were also fears expressed that illiquid, long-term commercial real estate loans – typically the riskiest part of any bank’s activity – remain within the ring-fence while liquid, benchmark, investment-grade corporate bonds remain outside.
But while these arguments may have been finely balanced, we believe that developments in the last four years have, as Keynes would say, fundamentally changed the facts.
The landscape within which UK banking now operates has been transformed for the better. Demanding new requirements on capital, liquidity, leverage and provision for resolution and recovery – partly as a result of other recommendations of the Banking Commission – have increased both the resilience of UK banking and protection for the wider economy.
It is hard to see how the complex structural re-engineering involved will further boost the resilience of banks beyond the new capital and leverage requirements that have been put in place elsewhere. Ring-fencing’s role in effective resolution – crucial to protect the taxpayer – is also now redundant as banks adopt comprehensive standalone mechanisms as part of the EU Recovery and Resolution Directive.
Nor, in our view, will ring-fencing in itself improve behaviour or help in the essential task of restoring society’s trust in banks and bankers.
Lastly, the UK bank levy in effect makes banks pay for any implicit subsidy of their investment banking.
The Treasury has estimated implementation costs to be some £2.5bn with ongoing annual running costs of more than £4bn. It is inevitable that a large part of these extra costs will fall, one way or another, on bank customers.
We also now know that no other country is likely to impose such extra costs on banks or customers. This unique structure risks preventing UK banks from competing on equal terms with their foreign counterparts and may even see some operations moved abroad.
There is an urgent need for review because banks are already beginning their complex and expensive implementation programmes.
There is incredulity in other countries at the prospect that the UK might persevere with a policy that would irrevocably damage its banking system. It is time to remember Keynes and have the confidence to look again at the facts.
Sir David Walker, the former chairman of Barclays, co-authored this article with Simon Samuels, a banking consultant and senior visiting fellow at Cass Business School. They write in a personal capacity.
