The Financial Services (Banking Reform) Bill received Royal Assent today, making it an Act of Parliament.
Chancellor of the Exchequer Sajid Javid said: “I am pleased that the Banking Reform Bill has received Royal Assent. This marks a major milestone and marks the end of a three-year Government-led process to make the UK banking system stronger and safer so that it can support the economy, help businesses and serve consumers.”
The legislation introduces so-called “ring-fencing”, which has been presented as “banking separation” and has been much praised.
It is different.
Under true bank separation, implemented by the Glass-Steagall Act in the United States, banks had to choose the type of banking activity in which they could be involved: retail or speculative.
The ring-fencing partially works (at least in theory): a banking group can own and operate either retail or speculative banking divisions, but not both, and they must be legally and operationally “independent” of each other.
This is to prevent depositors' savings from being used for speculative activity, for example, and to protect the retail division from collapsing if speculative activity in other parts of the banking group runs into problems.
It's also a measure to prevent the need for a government bailout in the future, something that even Sajid Javid refused to rule out: “I don't think any minister can say that there will never be any government involvement in resolving banks, now or in the future,” he said.
Looking more closely at the government's arguments, it appears the new law may not be the “milestone” that Javid claims it is.
“Large banks will be separated from investment banks and will provide safe custody of our funds,” the Treasury Department said.
That's not true.
What they, and the mainstream media, don't tell you is that the Banking Reform Bill is just the first major piece of legislation – there are a host of so-called “secondary bills” in the works that banks are lobbying hard for to ensure they are given the option to avoid ring-fencing restrictions.
Secondary legislation can take several forms, but the most common is a “statutory instrument”, which might be better described as an “Order of Privy Council”. Remember that the Privy Council is an unelected body made up of Members of Parliament and the House of Lords, and only a quorum of seven is needed to issue such an order.
As I say, banks are already lobbying hard to have holes in the ring fence.
One argument already being made by banks is that ring fencing will prevent small businesses from accessing derivative products. Ironic. Perhaps the British Bankers' Association should ask small business owners who have lost their business after being forced to sign up for derivative products called “interest rate swaps” as a condition of receiving a loan whether access to such “products” is a good thing.
One thing is certain: any legal document resulting from bank lobbying will be passed in the Privy Council behind closed doors.
“If a bank fails, investors will foot the bill, so taxpayers won't have to,” the Treasury Department said.
Now, as noted above, Javid himself has already admitted that this is not necessarily the case.
But what is the definition of an “investor”?
Over the past few months, we have been highlighting the fact that new documents from the world's major central banks state that depositors are now considered “unsecured creditors” and are therefore subject to asset seizure to “bail out” failing banks. This is the current policy.
However, as the recent bail-in of Co-operative Bank made clear, the first target of this type of bail-in was the “investor” class known as “bondholders”, i.e. pension funds.
So even if, as the Treasury says, “taxpayers' money” is not being used, we are all taxpayers, so “taxpayers” will definitely pay.
“Bankers may face criminal penalties,” the Treasury Department said.
Or maybe not.
The “regulators” have had ample opportunity to prosecute bankers for fraud they have already committed. But no such prosecutions have been filed. There was no need for new legislation to enable such prosecutions, and there is no reason to believe that such prosecutions would be filed under this new legislation.
In summary, the Financial Services (Banking Reform) Act is not Glass-Steagall. It is not bank unbundling. It may not even be properly “ring-fenced” depending on the nature of “secondary legislation” and how successful the banks are in lobbying to punch holes in the fence.
So our job is not done yet. Not quite. We must continue to press for full unbundling and the restoration of the Bradbury Pound.
