Electrified ring fences miss the main point


  The UK establishment is engaged in one of those bizarre arguments over how to escalate regulations, long after a crash where the regulators failed to use the powers they had to stop trouble.

      No UK bank went down in 2007-8 because a risky “casino” bank undermined a good retail bank. Northern Rock, Alliance and Leicester, Bradford and Bignley and HBOS all got into difficulties in  traditional mortgage lending and High Street banking. The regulators did not try to make them keep more capital or to  take a more prudent approach to bad loans, though they had the powers to do so.

RBS  took over too many bad businesses with too little capital. The FSA, the Bank of England and the Competition Authorities could all have intervened in various ways to stop the damaging acquisitions or to make RBS hold more cash and capital against them. They failed to do so.

The UK economy needs better banking, not banking regulated to death. That requires more banks  behaving more competitively. The governemnt should get on and split up RBS instead of arguing over how to stop a future crisis after 2015 or 2019. The problems are now.

Electrified fences will not solve the future problems either. Who turns on the current and when? Why will it be better than last time when the regulators all failed to see the crisis coming?


  1. Lindsay McDougall
    December 21, 2012

    The government should sell both its RBS and Lloyds shares in whatever chuncks raises the greatest revenue. I trust that the government would be able to explain to the markets that the difference between the total price paid for those shares and the selling price was managable in terms of the increase in government debt.

    1. forthurst
      December 21, 2012

      The fact that many of the banking probems were caused by jumped up ex-building societies and Scottish banks with delusions of greatness, does not mean the concept of banking conglomerates with a mixture of purportedly prudent low risk activities (proper banking) and drug-crazed hyperactivity and outright criminality (banksterism), inherently represents either a desirable or stable business model.

      Several very large Wall Street bankster operations, with very active branches in the City, would have gone bust without copious infusions of taxpayers’ money. There is every reason to desire that those types of operations should not be attached to an organisation which is purporting to be ethical and a safe place to do business in this country.

      There is, however, no excuse for this government, whether pro- or anti-bankster, to delay any further in breaking up those unnatural and unsuccessful conglomerations created under Gordon Brown’s ‘stewardship’.

  2. Cerberus32
    December 21, 2012

    Even the dogs in the streets knew the banks had gone mad. How come the Chancellor, the Treasury, the FSA and the Bank of England failed to take action. Collective madness or greed and stupidity?

    1. Disaffected
      December 21, 2012

      JR would be perfect to be chancellor. That is not going to happen in this life time because of Cameron’s poor judgment. Cameron talks a lot and achieves nothing. Tory part need to wake up ASAP. He has got to go.

  3. Burkhard
    December 21, 2012

    Finally someone who states the obvious fact – the proposed split between investment and retail banking is pointless.

    1. Leslie Singleton
      December 21, 2012

      Burkhard–You have hardly proved that, Sir. All that John has really said, or could possibly say, is that last time (in the UK, not in America) investment so-called banking was not the main culprit. People (not you particularly) are always saying how good it would be if our clever regulators could get ahead of the problems instead of being late with the last lot and I for one think that investment so-called banking should get the hell out of true banking. Any bunch of merchants selling derivatives should not be allowed to call itself a bank for a start. All this ring fencing seems to amount to is separate subsidiaries still under common ownership. That is a joke (says me).

      1. zorro
        December 21, 2012

        That is the $US600+ trillion problem…..


      2. James Sutherland
        December 29, 2012

        The point is that the proposed “fence” rests on the assumption that the problem was caused by diversification: that keeping nice safe pure high-street/mortgage banks like Northern Rock separate from those dodgy risk-takers – no, wait, they need to keep nice safe solid investment banks like Lehman Bros away from those risky … you see the problem.

        A better-diversified bank would, almost by definition, be better able to protect its own retail banking or investment banking operations from a problem in one side using the other. To prohibit diversification, on the assumption that single-market banks like Northern Rock and Lehman would be safer than the likes of Barclays and HSBC, is so absurd only a government agency could even propose it.

    2. A Different Simon
      December 21, 2012

      Burkhard ,

      I agree there is no need to split investment banking a retail banking .

      However there is surely a need to split “Casino banking” from retail banking .

      Aren’t “Casino” operations just proprietary trading , i.e. far removed from banking ?

      Isn’t Investment banking taking fees for services provided ?

  4. uanime5
    December 21, 2012

    Perhaps the best way to improve the banks is to remove the oversight from the FSA, which didn’t prevent the problems, and introduce mandatory regulations regarding the amount of capital banks need, which would fix the problem. If only the Government would make a law regarding the amount of capital banks need.

    In other news next year the DWP is going to make it mandatory to join the Universal Jobmatch website even though it requires people to upload sensitive information, has been repeatedly hacked, contains numerous scam jobs, the Job Center sanctions people for not using this website for 30 hours per week for job searching, and forcing people to register with a website is illegal under EU law. I guess according to the DWP once you’re unemployed you have no rights.

    Expect numerous legal challenges and an humiliating climbdown in the new year.

    1. A Different Simon
      December 22, 2012

      Uanime5 ,

      If it is necessary to regulate banks so closely (and it may be) there must be such severe problems that no amount or quality or regulations will do the trick .

      The death penalty would have been entirely appropriate for the boards of the big banks but it would not have been an effective means of regulation .

      At the end of the day , life in prison or the death penalty is a very constructive way of incentivising the officers of banks to behave responsibly .

      Even so , these incentives are not enough whilst we still enshrine the principle of “too big to fail” .

      There is no getting away from the need to let these businesses go bust when they fail .

  5. Anon
    December 21, 2012

    What does it take to get banged up in Britain ?

    Punching a school Head Teacher ?

    Filching millions as a banker ?

    Serious enforcement of existing law would cure many of the risks that the escalation of regulation is aimed at.

    In the meantime why is anyone playing by the rules ?

    So much is going ‘black market’ these days.

    1. A Different Simon
      December 22, 2012

      Give a man a gun , he can rob a bank .
      Give a man a bank , he can rob a whole country .

    2. APL
      December 22, 2012

      Anon: “What does it take to get banged up in Britain ?”

      Refusing to pay your television license tax, refusing to pay your council tax. Both will get you ‘banged to rights’.

  6. Antisthenes
    December 21, 2012

    Governments have been making bad decisions ever since Margaret Thatcher left office. When Labour assumed control they went from bad to worse to terrible not only in the UK but the same trend can be seen in most Western Nations. Bush and Sarkozy may have been bad but Obama (only shale gas is saving his bacon) and Hollande are a complete disaster. The EU and euro-zone crises is yet to play out and as everything the technocrats have done and propose to do will exacerbate the problems the future looks very dire indeed.

  7. Bazman
    December 21, 2012

    There should be no regulation, but however if a bank gets into trouble by its managers misguided ideas, incompetence and greed then it is down to the regulators with the customers and shareholders picking up the bill? If the bill is to large then the state bails them out, which if you own a bank that cannot go bankrupt because it is to important, is in effect underwritten by the government and has an unfair advantage over banks that can go down as they can borrow money more cheaply? Sound about right John? Nice work if you can get it. Risky to who? Me? That is right.

    1. zorro
      December 21, 2012



    2. A Different Simon
      December 22, 2012

      Quite right Bazman .

      As you know , in any banking operation there is always the inherent risk of runs or of lending low and borrowing short . They did a pretty good job of managing that risk for a very long time up until about 1985 .

      Surely the word “managers” should be changed for “directors” given the banks sacked branch managers who were not prepared to lend money to people who it was not in their interest to to borrow .

      1. Bazman
        December 22, 2012

        The are manager with executive powers. Not directors though they claim to be and are paid as such.

  8. Ralph Musgrave
    December 21, 2012

    The Vickers commission couldn’t even make up their mind whether “straightforward banking services to large domestic non-financial companies..” should be inside or outside the ring-fence. See top of p.12 here:


    Plus they couldn’t make up their mind on several other basic issues – instead they left those decisions to “the regulators”. Or as Laurence Kotlikoff in his book about Vickers put it, “The Commission’s proposals are a full employment act for regulators.”

    Laurence Kotlikoff is an economics prof in Boston in the US. Here is another choice sentence from his book:

    “Instead of fixing the real problems with banking – opacity and leverage – the Vickers Commission Report pretends to fix banking by re-arranging the deck chairs.”

    Kotlikoff’s book is entitled, “The Economic Consequences of the Vickers Commission”.

    But I’m not saying Basel III or the US equivalent are any better. Andrew Haldane said Basel III might as well be torn up. See:


    As for the US equivalent (Frank-Dodd) that consists of 9,000 pages with several more thousand yet to come. A lawyer’s paradise! See:


  9. lifelogic
    December 21, 2012

    That what we need more regulations, more incompetent regulators, more tax borrow and waste and more banks like RBS grabbing back funds from the private sector hand over fist.

    That will really real help growth will it not? Perhaps a few more gift to the PIGIS and some gender neutral insurance insanity to help too.

    Still at least we will be able to look at the many non revolving huge religious crosses and the pointless HS2 to Birmingham they have wasted it on.

  10. A Different Simon
    December 21, 2012

    The demise of the retail banks was a triumph of quantity over quality .
    They completely dumped an ethos which had served them well for centuries .

    Trouble is the principles of “Too big to fail” and the bailout have become firmly entrenched and is ongoing with ZIRP etc .

    Does anyone know whether the big management consultancies have established “bail out” divisions ?

    With their contacts in the Govt and Civil service that could be quite a money spinner .

  11. zorro
    December 21, 2012

    ‘No UK bank went down in 2007-8 because a risky “casino” bank undermined a good retail bank.’……I think it was more to do with the liberalisation in banking, a neat splattering of greed, and subsequent poor supervision which caused Northern Rock to go down.

    Who is actually saying that a risky ‘casino’ bank undermined a ‘good retail bank’?….The argument is that a Glass Steagall type wall separating ‘casino’ from depost/high street banks would have prevented the destruction unleashed prior to 2007….

    ‘Northern Rock, Alliance and Leicester, Bradford and Bignley and HBOS all got into difficulties in traditional mortgage lending and High Street banking.’….

    Let’s talk about Northern Rock….what they were engaged in along with others was quite reckless – 125% loans et al, far too easily obtainable loans helped feed the pricing frenzy and blow up the credit balloon. It was reckless, nothing more, nothing less. They should not have behaved in such a risky way in the ‘traditional mortgage lending and High Street banking arena….


    The reason that they were acting that way is they thought that they would be supported by the government and they were….that is the problem. Deposit/high street banks would not have acted so recklessly if there was no guarantee or they had not been allowed to act in that way. ‘Casino’ banks can do what they like as long as they pay the pricve of success or failure.

    ‘Why will it be better than last time when the regulators all failed to see the crisis coming?’….Exactly, it won’t be because regulators are always behind the game, that’s why we have to address the cause of the banking failure. Allowing them to carry on in the same old way won’t help. I know that there are now ‘living wills’, but I wonder in the heat of battle or another crisis, what they will actually be worth. I suspect that the banks would blackmail the governments with Armageddon again…


    1. zorro
      December 21, 2012

      I forgot to mention the unwise dabbling in securitisation but that is another story…


      1. zorro
        December 21, 2012

        The electric fence they propose within the same banking institution between supposed investment and deposit/high street arms will be easily short circuited. They need to be fully separated and left to the free market to decide which will be viable.


  12. Jon
    December 21, 2012

    Governments turn on or turn off the current. Brown turned on the current for borrowing and leveraging and turned off the current for savings and investment. Then the media line up along side him to blame someone else when they did exactly what the government asked them to do.

    I see the that the BBA are now feeling the weight of the FSA regulator like the rest of us have been putting up with. They are asking for clarity from the regulator, good luck with that one chaps!

    1. Jon
      December 21, 2012

      Unintended pun ha.

  13. helen jones
    December 21, 2012

    Applegarth , Fred the shed and the rest all walked away with massive Pensions and new directorships elsewhere when they should have been called to account .

    Merve and B of E INSIST it was not their responsibility to act
    FSA say the same

    Its all the little people who were shareholders who suffered and since the majority of savers are Pensioners who have no other source of income except for lousy useless State Pension the Financial chaos is hitting those who have no means to avoid the ensuing poverty
    “we are all in it together” is total rubbish
    Osbourne and Merve are deliberately stealing from Pensioners and the poorest and ripping off 2/3rds of their incomes
    But when you get £305K a year who cares about those on £7K!!!!!!!!!!!

    Not Merve and definitely not Osbourne

    Cameron, Clegg and Osbourne should honour their speeches and promises to help savers

    1. A Different Simon
      December 22, 2012

      Helen ,

      It’s the same thing with MP’s and the civil service at all levels .

      They win no matter what the outcome so the outcome is not important to them .

      It’s well over due to replace their defined benefits pensions with defined contribution pensions which are invested wholly in the UK .

  14. David
    December 21, 2012

    I have just been reading Michael Lewis’s book Boomerang in which he states that Tony Shearer, the former chief executive of Singer & Friedlander, wrote to the FSA in 2005 to raise his serious concerns about Kaupthing & its management team before they took him over, but his letter & concerns were ignored, with inevitable consequences. The FSA, of course, rejects his account of events.

  15. Richard1
    December 21, 2012

    Excellent summary. I hope ministers read your writings on this subject, few of them seem to have much grasp of the issues. Perhaps Mr Carney’s arrival will force a clean-out of banks’ balance sheets. What we then need is a limit on leverage such as might apply to other businesses and a resolution regime, also as would work in other businesses. The market will do the rest. The culture of state subsidy and bail-out for the banking sector must end. There is no regulator who could have a fraction of the force of customers and investors looking to protect their money. RBS is a zombie bank and cannot be cured however talented and hard working its management. The government should pursue a break-up as you suggest, and take the losses caused by the Brown bail-out on the nose.

  16. Bernard Juby
    December 22, 2012

    ‘Tis the season to be merry!
    Did you really intend the pun in your title John?
    If they miss the point then they can’t switch on the electricity in the first place.

    Reply: Yes, just a little pun

  17. sm
    December 22, 2012

    The point is, too big to fail and too big to prosecute or so we are led to believe.
    Who turns the electric fence on? Who cares? The stable door is wide open.

    NR is pretty small beer. Now ask yourself why AIG was bailed? and for whoose benefit?

    Anyway history suggests divide and conquer is a favorite and appropriate strategy.

  18. David Langley
    December 23, 2012

    110% self certificated mortgages, having high initial costs through in house insurance etc, are not good banking practice and verge on ‘casino” practices. When they go bad which is likely the rush for more capital becomes a panic.
    Proper retail banking is safe because risk is factored in properly. Therefore Casino investment banks can gamble as much as they like with capital provided by investors accepting risk ie Lloyds of London or 3M and if they go bust so what. Deposit takers are different with different risks and practices as laid down by their Chartered Institute, and legal banking practice. RBS will in time become solvent and profitable with good management and attention to the above.

Comments are closed.