We hear this morning that the Chancellor intends to take action to prevent a future government bail out of banks. He will have many supporters for his aim.
We learn that his chosen method is to require the large banks to ring fence their UK domestic deposit taking and lending activities. The Regulators could watch their solvency and liquidity more easily, and ask for them to be spun off if other parts of a bank get into financial trouble. The implication is there would be no bail out for the rest, if the trading, investment banking and overseas banking got into trouble.
As the one MP who advised the last government not to bail out the large conglomerate banks I have no problem with that. I then argued that they should have forced the banks in trouble to sell off their investment and overseas banking arms, and lent sufficient cash to the smaller domestic banks against what security they could take so depositors did not lose out. It appears that we are now moving to such a solution for any such future disaster.
The Chancellor should also remember that the last crash reflected bad central banking and regulation. We do not need primarily to change the commercial banks, but to change the way we regulate, conmtrol and act as a lender of last resort. The last crisis resulted from being too lax in 2005-7 and being too tight in 2007-8. It flowed from wrong interest rates, wrong cash and capital ratios, and above all from leaving money markets starved of money at a crucial time which was bound to bring certain banks down. The speech should talk to the authorities as well as to the commercial banks if it going to address the big issue.
Public money should not be put at risk by buying shares in damaged banks. No bank should be too big to fail. In 2008 they could have insisted on asset sales, cost cutting and other means of generating cash to avoid the need to put taxpayers at risk. The Coalition government should move quickly to return the banks to the private sector, as we have discusssed before. Livinjg wills for large banks is part of the answer. Better central banking is the other part.
The Chancellor could also up date us on how his growth strategy is going, and what he thinks of the squeeze the current inflation rate is causing.