Osborne Warns Against Unpicking Vickers Bank Consensus

Chancellor of the Exchequer George Osborne warned lawmakers not to undermine support for legislation to make U.K. banks safer, urging them to stick with plans to erect firewalls around lenders’ retail units.

Osborne told the Parliamentary Commission on Banking Standards not to overstep its remit and to look at existing draft legislation rather than make new proposals. The 10-member panel headed by Andrew Tyrie, a lawmaker from Osborne’s Conservative Party, is considering calls to add U.S.-style powers to break up banks.

“You will be unpicking a consensus that has been established over the last two years,” Osborne said in testimony to the panel in London today. “That work has been accepted by all the political parties. Now, if you come back and tell me we need a new approach, either you will carry the day and we will have to start again with new legislation, or you won’t carry the day.”

The cross-party panel drawn from both chambers of Parliament, which was appointed by Osborne to look at conduct in the industry following the Libor scandal earlier this year, had its remit expanded in September to examine the Banking Reform Bill. Osborne’s comments suggest he is concerned that the scrutiny, initially aimed at boosting the credibility of the legislation, may now backfire and sink it.

Bank Lobbying

In a confrontational exchange with lawmakers, Osborne defended himself against accusations that his primary legislation lacks sufficient detail and would allow banks to lobby for a watering-down of the proposals.

Osborne said secondary legislation, which is easier to modify in future as the banking industry changes, is more suited to include the detail the panel is seeking. Tyrie said he wants Osborne to pass the secondary legislation to the panel as soon as possible for their scrutiny.

Tyrie released a statement after the hearing, saying Osborne had accepted the need to look at the structure of banks and that his panel’s remit was broader than that of the Independent Commission on Banking, led by Oxford University Professor John Vickers, which provided the basis of Osborne’s legislation. Tyrie reiterated the need for Osborne to hand over detailed legislation.

“If we are to do our job properly, we must have the necessary detail,” Tyrie said. “Much of this morning has been spent attempting to elicit it.”

Dilution Concerns

Successive witnesses at the committee’s hearings have expressed concern that the Vickers proposals will be diluted by the banks before they are properly implemented.

Witnesses including former Barclays Plc Chief Executive Officer Martin Taylor said regulators should be given the power to fully split banks along retail and investment lines if proposed arrangements for a firewall fail.

Former Federal Reserve Chairman Paul Volcker, who designed the U.S. approach, told the panel that the successful ring-fencing of banks’ operations is very difficult to maintain and financial institutions will seek to unwind the separation over time.

“We have reached this point, we have got agreement,” Osborne said. “Let’s get on and implement it. I don’t think this is the right moment to tear up all the work that has been done over the last few years. I would just caution Parliament about starting all over again.”

‘Go Further’

The opposition Labour Party’s Chris Leslie rejected Osborne’s argument that there is cross-party agreement on the proposals. He said in a statement after the hearing that if the Vickers plans are diluted, “we will need to go further and legislate to break up high street and investment banks.”

Pat McFadden, a Labour Party lawmaker, said during the hearing that regulators had told the committee that they fear they won’t have the right powers to prevent banks from watering down Vickers’s plans.

“Regulators are not confident they have the powers,” he said. Osborne told the panel the expanded powers of the central bank as financial regulator will do the job.

“The Bank of England is a powerful institution with a long history, and they will be able to withstand the lobbying from banks,” he said.

Andrew Haldane, the Bank of England’s executive director for financial stability, said on Nov. 7 that the proposals have a “gray area” that may be manipulated by banks. The threat of full separation is “quite a clever way of ensuring that Vickers is implemented faithfully and achieves what it is meant to achieve,” Haldane said.

Even Vickers, who said the powers he proposed would in themselves be enough to make the banking system safer, told the panel on Nov. 12 he would not be opposed to putting powers to full separate institutions on the statute book.

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