Osborne's banking reforms "fall well short of what is required", warn MPs

Banks must be broken up if they try to get round the new ring-fence, says the banking standards commission.

When George Osborne appeared before the Parliamentary Commission on Banking Standards last month, he told it not to "tear up" the coalition's proposed financial reforms. But while the commission, which published its first report today, doesn't go that far, it does warn that plans to ring-fence banks' investment arms from their retail divisions "fall well short of what is required".

Appearing on the Today programme this morning, Conservative MP Andrew Tyrie, who chairs the commission, criticised Osborne for "watering down" the reforms proposed by the Vickers report. Tyrie is calling for the government to 'electrify' the ring-fence (one might call it the "Jurassic Park solution") by giving regulators the power to break up the banks if they try to evade the new rules. He said:

The proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ringfence.

For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to. That's why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.

Tyrie's words bring him into line with Labour, which has called for the government to hold out the threat of a full Glass-Steagall-style separation if the banks refuse to implement "the spirit and principle of Vickers". Unsurprisingly, then, Ed Balls has given a warm welcome to the commission's report. The shadow chancellor said this morning: "As Ed Miliband and I said at the Labour Conference this year, if the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks.

"We need serious cultural change in our banks and the Commission's next report on the culture and practices of the banks will be just as important as these vital structural changes. Only then will we get the banking system our businesses and economy needs."

In a banal response, the Treasury has said that "the government is grateful to the Parliamentary Commission on Banking Standards for its scrutiny of the draft bill and notes that it, 'welcomes the government's action to bring forward legislation to implement a ring-fence'."

But this rather ignores the fact that the same commission believes that the ring-fence, as currently proposed, is seriously inadequate. Unless Osborne proves willing to toughen his reforms, he will stand accused of failing to learn the lessons from the crash.

Conservative MP Andrew Tyrie warned that "the ring-fence will be tested and challenged by the banks". Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Getty
Show Hide image

Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

0800 7318496