Over the years, the U.K. Parliament's Treasury Select Committee has earned itself a justified reputation for generating more heat than light. Its members have tended to grandstand for the benefit of the media rather than engage in serious scrutiny of financial policy and as a result its reports have been largely worthless. But under new chairman Andrew Tyrie, the committee is taking its task far more seriously. Despite the occasional lapse, such as when committee members harangued new Barclays boss Bob Diamond earlier this year, it is going about its business with a seriousness of purpose that suggests it may yet make a worthwhile contribution to financial policy at a time when robust parliamentary scrutiny is urgently needed.
A case in point was Tuesday's cross-questioning of three of the five members of the U.K.'s Independent Commission on Banking. This was the first public appearance by Sir John Vickers, Bill Winters and Martin Taylor since the ICB published its interim report in April which recommended British banks be required to ring-fence their U.K. retail operations. That report received mixed responses at the time. Vince Cable, the Liberal Democrat Business Secretary, expressed himself well satisfied with the ICB's direction of travel, which largely explained why people close to George Osborne declared the Chancellor to be ecstatic. Meanwhile much of the U.K. press wondered if the report was a whitewash which would allow the banks to emerge from the crisis unscathed.
In fact, the report was a half-baked shambles. As the Treasury Committee exposed during two and a half hours of respectful but forensic questioning, the idea of a retail ring-fence has been so poorly thought through that the ICB members couldn't explain how it might work in practice, what it might cost the banks or the economy, or how far it might help prevent a future crisis. Sir John was unable to say what assets would be ring-fenced, how a retail operation would be funded, or what its governance arrangements might be. All aspects of the proposal are up for discussion, without even some basic models on the table for analysis. Sir John emphasized the ICB's determination to eliminate the taxpayer subsidy to banks, but could not say with any conviction how big this subsidy is, or who benefits from it, or who would bear the cost of eliminating it.
None of this will have surprised those who engaged with the ICB in the run-up to the publication of the report. During those final weeks, ICB staff criss-crossed London in an increasingly desperate attempt to put some flesh on the bones of their idea, unable to come up with a proposal that did not do substantial harm to the interests of one bank or another. Towards the end, an increasingly alarmed Treasury had to get involved; high-level phone calls were made to executives at Royal Bank of Scotland imploring them to help Sir John out of the hole he appeared to be digging for himself. Indeed, the Treasury is now closely involved behind the scenes helping the ICB secretariat find a practical way to make the ring-fence work that won't trigger unintended consequences.
The stakes could hardly be higher. Moody's announced Tuesday it was putting 18 U.K. banks on negative ratings outlooks, pending a review of their implicit taxpayer subsidy. If the rating agency concludes that regulatory reforms are likely to eliminate this subsidy, it could downgrade the banks by up to five notches, which would force up their funding costs, raising both the cost and reducing funding for the economy.
How can the UK extricate itself from its banking misfortunes? The Treasury doesn't know, the ICB hasn't yet found the answer, while BOE and FSA attempts to engage in new thinking are undermined by the fact they are still led by the people who presided over this disaster. Perhaps Mr. Tyrie and his committee will come up with some solutions. Fingers crossed. Read more. (Subscription required.)
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