Vince Cable, writing in the Daily Mail this weekend, ahead of the ICB report which has come out today, noted the problems which still beset the banking industry, and the solutions proposed, which also pose problems for Jersey if we, too, do not follow suit:
Three years on from the massive financial heart attack which did enormous damage to the world's economy, we have been reminded that although a complete collapse was averted by the surgeons in central banks and finance ministries, the patient is still far from well.
When the crash came it practically destroyed RBS (now nationalised), Barclays was rescued by Arab investors, and a succession of mortgage lenders went down - Northern Rock (now nationalised), Bradford & Bingley (nationalised) and, most important, Halifax Bank of Scotland, which dragged down Lloyds, now semi-nationalised, with which it was merged.
The carnage would have been worse had the Government - the taxpayer - not stepped in to offer guarantees and emergency lending for all banks that were short of liquidity.
He points out that while the domestic market - lending - has dried up, and is something of a desert where banking is concerned, the "casino" banking operations are back in full swing, and bankers bonuses are back, paid to those who effectively are gambling on the stock market:
The banks themselves have switched from showering their customers with offers of loans to extreme conservatism in lending. Small companies have struggled to survive as banks have withdrawn credit or increased fees - which is why the Government negotiated agreements with the lending banks to increase business - and specifically small and medium enterprise (SME) - lending this year.
Yet top bankers, whose institutions remain dependent on taxpayer guarantees, continue to award themselves huge salaries and bonuses.
And he suggests that the only way forward is to "ring fence" the retail activities from the investment banking arm:
The ICB's interim report suggests that its members were persuaded of the need to separate the retail activities of banks (personal and small business depositors, consumer, mortgage and business loans) from the investment banking 'casinos' (client trading, derivatives and foreign exchange and proprietary trading).
The commission suggested that separation would be achieved through 'ring-fencing' within the banks, which means that investment banks would no longer be able to subsidise their 'casino' activities using the money that depositors place in High Street banks. They will need to fund themselves. If they go bust, no one will rescue their shareholders and bond holders.
Under the proposed changes they will not be able to use the deposits of British savers to play the banking equivalent of the roulette wheel and the taxpayer will no longer stand behind that side of their business.
Banks now considered 'too big to fail' would be allowed to fail, and separation would make it easier to resolve a failing bank without taxpayers having to step in.
What are the implications for Jersey? Our overseas subsidiaries would not be subject to the same laws as in the UK, and yet over here, the two activities, retail banking and investment banking, go hand in hand.
If the UK splits banking activities in this way, the investment side in the UK could fail, but if nothing comparable is done, the entire overseas subsidiary of a bank like RBSI (for example) could be allowed to fail, with a domino effect, if the UK investment side goes under. Retailers and local customers could lose their savings.
That this can happen is clear - the case of the Icelandic bank in Guernsey makes that quite obvious. With banks such as RBSI, Jersey benefited from the UK bailout, which prevented both the UK branches and the overseas subsidiaries from going under.
But if they are not so closely linked in the UK, what use is the oft cited mantra that "we only permit banks in the top 500 to operate in Jersey"?
John Harris, director general, Jersey Financial Services Commission, writing in 2008, noted that the top 500 policy is more complex that one might imagine.
In fact, 'Top 500' is shorthand for a much more detailed set of licensing criteria which takes into account a number of factors over and above the pure size of the bank making the application. While licences are not granted to banks that are not in the Top 500 by size, the fact that a bank is in the Top 500 is no guarantee that it would receive a banking licence in Jersey.
An important consideration, and something which has served the Island very well in the turbulent recent times, has been the extent to which the parent of the bank branch or subsidiary proposed is supervised by its home jurisdiction and most importantly whether that home jurisdiction has the financial capability and resources to 'save' the bank in times of extreme market stress.
Clearly, if the UK parent had to ring fence operations, it would be arguable that the overseas subsidiary, if it did not have to follow suit, would no longer have "the financial capability and resources to 'save' the bank in times of extreme market stress."; in other words, the policy would not be worth the paper it is written on.
So Jersey needs to keep a careful watch on the UK, and be prepared to also act.
If the UK ring-fences, we need to bring in comparable legislation to ensure the local economy and local depositors are also ring-fenced, otherwise Jersey faces the risk that if the investment arm of UK banks fails, the Jersey economy goes the way of the Iceland one.
But Vince Cable notes how the banks are reacting in the UK:
The banking industry has launched a big lobbying operation to forestall the separation of its operations. They have made their money and reputations on the global stage, fixing big cross-border takeovers and concocting complex derivatives for multinational customers.
Their initial response was that further regulation would force them to relocate to more accommodating countries. However, the ICB's interim report effectively demolished these arguments. Other places - Hong Kong, Singapore, Beijing, even the US - are unlikely to expose their own taxpayers to huge risks.
So we need a Treasury Minister, backed by a Council of Ministers, who is prepared to face those kind of arguments, and call the banker's bluff - because to be sure, the same kind of arguments about "relocation" will be put over here - and ensure that depositors and retailers in Jersey have the same level of protection as those in the UK.
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