'Hackgate' might just invigorate a moribund banking debate

It's now or never for banking reform in the UK.  With just 2 months until the ICB releases its final recommendations, the stakes could not be much higher.  The UK economy is flatlining (latest excuses for 0.2% growth include the Royal Wedding?!), the US is threatening to default on its debt, and Europe remains on the precipice as the cost of borrowing on Italian long-term government debt hit an eleven year high in expectation of a Greek default. 

Vince Cable has finally woken up and smelt the coffee.  Himself a member of the Which? commission that set the terms for the ICB's investigation, Cable repeatedly called for the complete separation of retail and investment banking during the run-up to the election.  When the ICB essentially ruled out full scale separation, preferring the rather muddier 'ring-fencing' of capital reserves between the two functions, his silence was deafening. But with 'Hackgate' putting his indiscretion about 'going to war' with Murdoch in quite a different light, he has found the confidence to put his head above water.  In a typically maverick speech yesterday, Cable attempted to open up the debate once again, pointing out that the ICB's report was, indeed, 'interim', and stating that:

"The Government will be still seeking reassurance from the final report to demonstrate that a ring-fence can be as effective as full separation at lower cost."

He went on to lay out three keys tests upon which to judge the ringfencing proposal:

1. Would it stop banks using deposits underwritten by the taxpayer to cross subsidise their ‘casinos’?
2. Will the ring-fence be high enough and the ‘Chinese walls’ strong enough to eliminate regulatory arbitrage by the banks?
3. Will the division between what is inside and outside the ringfence ensure that nothing resembling a universal bank remains?

The last question is particular pertinent and Cable focuses here on the poor performance of the remaining universal banks in getting credit to SMEs, in contrast to Banks that don't have investment banking arms.  His point is that we should be thinking not only about averting future financial crises with any reform, but also enhancing the performance of the banking system in terms of productive investment.  The Treasury Select Comittee raised similar questions in its recent response.  The Chancellor George Osborne, who gave the rubber stamp to the ringfencing proposal in his Mansion House speech on 15th June, will not be best pleased.

As well as waking up Vince, Hackgate should have the effect of exposing the ICB and banking reform more generally to increased public scrutiny.  If we're going to ask searching questions about dinners between politicians and media moguls, why not ask the same about the senior bankers?   In fact this is exactly what nef and Compass are doing as part of our Good Banking Forum  - you can send in your own questions here.

In all the media furore about the phone-hacking, we shouldn't forget that the economic and social damage wrought by the financial crisis is in quite a different order of magnitude.  In a speech yesterday, David Miles of the Bank of England laid out figures showing that if the UK economy had continued to grow at its pre-crisis trend of 2.5% per year, real GDP would now be about 10% higher.  That would mean we'd all be about £6,000 better off this year.