U.K. Deputy Prime Minister Nick Clegg said he’s attracted to the idea of separating financial institutions’ activities to “insulate” the economy from the risks taken by investment banks.
“The banking system needs to be made safe,” Clegg said on the BBC’s Andrew Marr show today. The U.K. must “make sure that we insulate and protect the British economy and British taxpayers above all from carrying this huge oversized liability that blew up in our face of course under Labour,” he said.
The Independent Commission on Banking, sponsored by Prime Minister David Cameron’s coalition government of Conservatives and Clegg’s Liberal Democrats, said yesterday it’s looking at “ring-fencing” banking activities even if a full breakup of institutions is unlikely. Clegg said today that those comments were “very interesting.”
Banking “can never again become such an oversized liability for the British economy,” Clegg said. “That’s why I think there is a strong case to look at the way in which you can hive off or insulate very high-risk over leveraged banking activities from low-risk high street retail banking.”
The banking commission is halfway through its examination of whether to break up the banks to increase competition and financial stability in the wake of the banking crisis. The five-member committee will report its conclusions to Chancellor of the Exchequer George Osborne in September and will produce an interim report in April.
“While the ICB is unlikely to favor radical reforms of narrow or limited purpose banking, their aims deserve recognition,” John Vickers, chairman of the committee and former Bank of England chief economist, said yesterday in a speech. “They seek by structural reform and much higher capital and/or liquidity requirements to limit or make redundant the government guarantee on risky activities.”
Clegg, when asked whether he favored a separation of retail and investment banking activities, said that he’s “always been attracted to that idea” while noting that there are “various models of it” being looked at by the commission.
Douglas Alexander, the opposition Labour party’s spokesman on foreign affairs, said on the same program that he supports the commission’s work.
“One of the things that we didn’t get right was the regulatory system and the supervision of the banks,” he said, speaking on the same program as Clegg. “We do need a fundamentally different approach than the approach that overwhelmed regulatory systems right around the world.”
The U.K. Treasury’s talks with British banks to raise lending and cap bonuses have slowed and an agreement may be weeks away, the Sunday Telegraph reported, citing unidentified people close to the talks.
“Yes we need to deal with bonuses, yes we need more tax from the banks, yes we need them to lend more and that’s why we’re still in talks with the banks,” Clegg said today.
Vicky Pryce, a former joint head of the U.K. Government Economic Service, said on Sky News that those talks have “sort of stalled, it looks like.”
Banks “have become more risk averse, there’s no doubt about that,” she said. “There are capital requirements that are coming into force which are going to force them to in fact be even more risk averse than before.”
In his BBC interview, Clegg also responded to an attack by Ed Balls, Labour’s newly appointed finance spokesman and previously a chief economist at the Treasury and aide to former Prime Minister Gordon Brown. Balls criticized the speed of the government’s deficit-reduction plans in comments posted on his weblog yesterday, saying it was a “reckless gamble.”
“We’re entitled to ask questions about Ed Balls’ record,” Clegg said. “Who was in charge of the City when they were gorging themselves on bonuses and lending irresponsibly? Who allowed the housing market to let rip, to become a casino, pitching thousands and thousands of families into debt, who was whispering into Gordon Brown’s ear, budget after budget, creating this huge fiscal deficit?”
“The answer to all of those questions, that record, to me suggests they’re stuck in the past,” Clegg said.