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Banking: compound interests | Editorial

Despite claims by the British Bankers’ Association, market turmoil is no reason to delay reform

There are, crudely, three interested parties in the ongoing saga of the banking bust – the banks themselves, the wider business community and the taxpayer. All three are in tension, which makes life rather tricky for the CBI boss, John Cridland, who is paid to represent both the first and the second.

Should he side with the industrialists who say bankers’ arms must be twisted into doling out less restrictive loans? Or should he stand by the financiers, who insist they can only hope to recover their strength by living cautiously? Striking the right balance between the forces of thrift and productivity would be tough at the moment, even if vested interests were not a concern. But vested interests are the CBI’s whole reason to be. So Mr Cridland has effectively sought to unify his bickering members by rallying them against a common enemy, and training his guns on the taxpayer.

The mild-mannered CBI chief did not explain himself in quite these terms when he told the Financial Times that it would be “barking mad” to force bank reforms through just now. But make no mistake, the taxpayer, who has involuntarily invested in banking once, will be the big loser if the day is not seized when the independent banking commission reports in a fortnight. Its provisional prescription was for higher capital requirements, so-called bail-in provisions and a measure of separation between retail and investment banking. If there was a shortcoming in this plan, it was that it was not sweeping enough; otherwise, every suggestion was both pragmatic and necessary.

This summer’s market gyrations have exposed afresh the frailty of the financial system. Despite claims by the British Bankers’ Association, however, this is no reason to delay. Rather, the flammable bridge that has emerged between bank funding and sovereign solvency points to installing fire extinguishers at once. After all, the problem of banks too big to fail will pale next to that of banks too big to save, which is what will happen next time around.

There is no reason why new arrangements for bail-ins, or the ringfencing of high street banking, need lead to the Solihull branch of the Countrywide refusing a widget manufacturer’s loan. An overly rapid increase in capital requirements could have that effect, and therefore jeopardise investment and growth over a dismal immediate horizon. The solution, however, is not to delay the legislation, merely to pace its implementation. Vince Cable, who yesterday took the Cridland argument to task, is not merely venting a nation’s fury. His refusal to let this greatest of crises go to waste also reflects a hard-headed concern for the interests of the taxpayer. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds