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Have the banks got off lightly in the Banking Commission report?

Well, their shares went up this morning on publication of the Banking Commission report so the markets obviously think it could have been alot worse. To me the proposals look messy, indecisive and overly complex and lack the courage to drive through to the obvious conclusions.

First a caveat. The full report is 214 pages long and I haven't had a chance to read it in detail. I think I have got the main points straight but if there are nuances I have missed then I'll catch up with them later.

It seems to me that the complex proposals for splitting retail and investment banking operations within single ownership structures are acknowledging that the two activities are far from compatible with each other and that one - retail - needs protecting from the extreme hazards of the other - investment. If that is really what the Banking Commission thinks then why doesn't it advocate the cleaner, simpler solution of enforcing separation? By giving the major banks the option of remaining broadly-based banking groups the Commission is in danger of creating a very costly regime. It will cost the banks substantial sums to implement it and it will require very close supervision to ensure that the internal walls are effective.

Of course, the Commission may think that it is being clever by not opening itself up to accusations that it is merely trying the turn back the clock to the era of Glass-Steagall (the post Great Crash of 1929 US legislation that enforced separation until it was repealed by the Clinton administration in the 1990s). It may feel that this more draconian solution could be vulnerable to attack by the banks and that the whole report could fall as a result. Certainly the very tame initial response from the British Bankers' Association suggests that the report is not easy to attack from the banks' perspective. It would be going too far to say that the Commission has wrong-footed the banks but it appears to have given them just enough that they know a knee-jerk response would not be appropriate.

Politically, the report strikes a very careful balancing act. It makes looks to be something that both Conservative and Liberal Democrat ministers could sign up to without too much difficulty. There is little point in producing reports that have little chance of becoming reality because they lack the requisite political sensitivity. The world is littered with well meaning reports on all manner of subjects with have never been implemented because they are lacking in this crucial political awareness. That said, I still think the Commission has almost tied itself in knots in trying to offer something to everybody.

Where it definitely falls down is in the recommendation that Lloyds sells off more branches.

The prompt for this is a sensible concern that there is a lack of competition in the retail banking sector but this is not going to be resolved by swapping a few branches and making it easier to switch accounts. We need more players in the market and a diversity of ownership. This is where the report disappoints as it fails to propose that the government use its ownership of large slabs of the banking sector to explore the options for breaking them up into smaller units as they are returned to the private sector. Alongside this the government should be looking to create greater diversity of ownership by introducing some mutual ownership back into the banking sector. The Treasury Select Committee saw the potential for this when it reported before last year's General Election and it would be worthwhile people re-reading that report as they digest and debate today's recommendations from the Banking Commission.
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