Terry Murden: Cable calls off the dogs in his guerilla war

Iince Cable, the chief guerilla in the war on the banks, appears to have called off the dogs and accepted the need for a phased introduction of reforms to the banking system. With the Business Secretary on board, there surely is no more reason for the coalition partners to be fighting among themselves about the timetable for change.

By The Newsroom
Friday, 2nd September 2011, 12:03 am

Up to now the vengeance-driven Cable has been demanding more immediate action, supported by his Lib Dem leader Nick Clegg and thereby pitching the two senior figures in the party against the Prime Minister David Cameron and Chancellor George Osborne, who have been taking a more conciliatory approach to the bankers’ calls for a phased introduction of any changes, particularly the ringfencing of retail and investment banking operations that will be complex and time-consuming to implement.

On the face of it, the Cable-Clegg argument for a speedy revolution is a sound one. No-one wants the banks to get into another mess and the need for reform is therefore undeniable. Even among the banks there are demands for a clear framework to be established quickly so they can get on with it.

But the bull-in-a-china-shop approach risks forcing through change that will ultimately prove imprudent and it is equally important that the reforms improve and bolster the system and not make it less effective and secure through bad legislation.

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Cable is now said to be in agreement on a gradual introduction of changes as long as the reforms are established before the next general election in 2015.

However, the political climate is stormy and other factors are coming into play. The CBI and British Bankers’ Association have already weighed in with their views on the timing of structural reform, but introducing fundamental systemic change alongside regulatory demands is also testing the ability of the banks to help the economic recovery.

Andrew Tyrie, chairman of the Treasury select committee, has warned the government that bringing in tougher rules on capital reserves and liquidity could prove damaging to the banks’ ability to lend. He is supported by Sir John Gieve, former deputy governor of the Bank of England.

A concern for the City is that much time and energy will be absorbed in the debate and implementation of reforms rather than on pushing ahead with improving the performance of banks. As the arguments have intensified, their value has plummeted, with shares in Royal Bank of Scotland plunging below 20p and the cost of insuring bank bonds hitting 12-month highs.

RBS shares ticked up yesterday, perhaps indicating that a growing mood of consensus will mark the bottom of the banks’ decline, but the restructuring process, as proposed by the ICB, is predicted to shave 15 per cent off banks’ profits. In the case of RBS the ring-fencing of retail and investment banking divisions could reduce pre-tax profits by about £1.3 billion. There are other costs involved. In its submission to the ICB, RBS said a full break up would cost between £3.5bn and £4.8bn and analysts see ringfencing as costing nearer the lower figure, a significant bite out of RBS’s bottom line. There is clearly no gain without pain.

While Carr is keeping his cards close to his chest

Sir Roger Carr, president of the CBI, last night took the coalition to task over its tax policies with Chief Secretary to the Treasury Danny Alexander in earshot.

The pair shared the speakers’ platform at the CBI Scotland annual dinner and Carr, who said the coalition deserved credit for sticking to its guns in repairing the public finances, clearly could not resist having a dig at the government’s “high” personal taxes and its oil and gas levy.

It’s a pity Carr spent so much time reminding his audience that Scotland has significant energy, whisky and financial services sectors and notable that he avoided the banking issue, especially the current row over structural reform.

However, after his DG John Cridland called the plan to ringfence banking operations “barking mad”, Carr told us that he welcomed what seems to be an agreement to phase in the reforms. Another tick in the government’s box, then?