Banks contribute 9.4% to the UK’s economy and 3.6% to the UK job market in 2011. Because of this reliance, the sector is increasingly difficult to reform. Banks resist reform and there is fear that if reform doesn’t happen internationally then it can make domestic banks less competitive. This teamed with a historic ‘hands off’ approach has made banking reform an important issue for the Coalition
1. Dividing investment and retail banking.
The 2011 Vickers report identified the need to ring fence high street banking from ‘casino’ investment banking. Osborne introduced the Banking Reform Bill to parliament by announcing he would ‘electrify’ the ring fence, giving regulators the option to break up the banks that undermine the ring fence. Consumer groups such as Which? believe that this goes the right way in protecting consumers but the British Bankers Association believes it will just create uncertainty for investors, leading to less capital and ultimately less lending. Labour has attacked Osborne for not going far enough in his banking reform and for not implementing all the changes suggested by the report. The divide is an effort to prevent the banks risking ordinary peoples money leading to bailouts such as the ones we see for RBS.
2. Project Merlin
Recent statistics revealed in the Bank of England’s figures, have shown that lending by banks fell by £10.7bn in 2011. With the government part owning RBS and Lloyds, two of the four biggest banks, there has been pressure on Osborne to get them lending again. The scheme was an agreement between 4 of the major high street banks covering a range of areas including lending, transparency and general banking activity. Although it was announced that banks had met their £190bn Project Merlin targets last year, in fact only £74.9bn was lent out to small and medium sized businesses, a shortfall of £1.1bn.
3. EU reforms
The introduction of a cap on bankers bonuses was vehemently opposed by Osborne who was fighting a losing battle against the unified EU politicians. The cap set at £420,000 or 100% of the bankers salary seems like a retribution for tax payers but will actually tighten capital but putting up the fixed costs of banks who will just increase the salaries of the bankers. Furthermore, banking reform that is sweeping the European Union will affect the UK in that some of the banking union rules apply to the UK through the European Banking Authority.