It's astonishing the banks haven't been ring-fenced earlier

The in-kind subsidy to consumer banks has been crying out for a limit.

The chancellor has announced his plan to "electrify" the proposed ring-fence between retail and investment arms of British banks — which George calls the "Jurassic Park solution" — ensuring that if a bank tries to breach the ring-fence, it will be separated fully.

Much of the criticism of the ring-fence, as well as the Chancellor's defence of it, stems from its effects on financial stability. That's obviously important, but there's a bigger reason why such a move is long over-due, and that's the state backing of retail banks.

This backing isn't even a question of the too big to fail subsidies which hand around £34bn to the biggest banks. Instead, it's the effect of the financial services compensation scheme.

That's the government body which protects up to £85,000 of individuals' deposits with accredited banks. Since it was formed, it has paid out over £26bn, mostly in the aftermath of the financial crisis, to customers of retail banks which went bust.

And that's good! The FSCS is necessary in a world in which customers can't be expected to judge the financial health of a bank when deciding where to keep their money, and even more necessary given that a bank account is largely deemed a prerequisite of living a normal life in the UK today (hence the concern over the lack of basic bank accounts). But, at least on a cursory analysis, the FSCS also reduces the cost of capital for banks, because they don't have to compensate customers for the risk that they will lose all their deposits.

For a bank that's not failing, though, the FSCS is an in-kind subsidy, and it makes sense to limit that distortion. That's the reason for a ring fence: it ensures that the government is only subsidising the consumer banking sector, rather than the entire sector at once.

The stability arguments are important; and the ring-fence does indeed lessen the downside of a casino bank going under (although the amount it will lead to broader stability of the financial system is more questionable). But even without them, there'd be a strong prima facie reason for some kind of limit to the amount consumer deposits can be leveraged.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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What did Jeremy Corbyn really say about Bin Laden?

He's been critiqued for calling Bin Laden's death a "tragedy". But what did Jeremy Corbyn really say?

Jeremy Corbyn is under fire for describing Bin Laden’s death as a “tragedy” in the Sun, but what did the Labour leadership frontrunner really say?

In remarks made to Press TV, the state-backed Iranian broadcaster, the Islington North MP said:

“This was an assassination attempt, and is yet another tragedy, upon a tragedy, upon a tragedy. The World Trade Center was a tragedy, the attack on Afghanistan was a tragedy, the war in Iraq was a tragedy. Tens of thousands of people have died.”

He also added that it was his preference that Osama Bin Laden be put on trial, a view shared by, among other people, Barack Obama and Boris Johnson.

Although Andy Burnham, one of Corbyn’s rivals for the leadership, will later today claim that “there is everything to play for” in the contest, with “tens of thousands still to vote”, the row is unlikely to harm Corbyn’s chances of becoming Labour leader. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.