The importance of distinction - The Banking Reform Bill

by John Bloor on 15.05.2012 10:52

This week, the Queen’s Speech revealed the Banking Reform Bill as being on Parliament’s “To Do” list for the current session. It will implement some of the recommendations of the recent Independent Commission on Banking - particularly ring fencing "essential banking services" from wholesale and investment banking activities.  What makes up “essential banking services” is yet to be defined. No doubt the things Adair Turner, the chairman of the FSA, had in mind when he asserted that a significant part of what investment banks do were of "no useful social purpose", will be excluded. Perhaps these activities are those that are capable of generating large economic rents of the sort the Scottish economist Adam Smith might have described as the income of: “men who love to reap what they never sowed.”

It is important to realise that the distinction that needs to be made is not between high street banks on the one hand and investment banks on the other, but the activities in which they engage and whether these are done appropriately, prudently and sensibly.  There were some UK mutual building societies that invested in US mortgaged backed securities for example and needed rescuing. That hardly seems the sort of activity in which a regional building society should engage. On the other hand, one high street UK bank in particular did one of the things it should do – lend to business – but did it so badly that the consequences are and will continue to be suffered for some time to come by the taxpayer. So it’s not really who you are, but what you do that is the essential thing to remember.

John Bloor
Director, Finance and Financial Services Practice