Chancellor Osborne Tells Parliamentary Commission that Return to Glass-Steagall Fails Cost-Benefit Test and Would Erect a Maginot Line

UK Chancellor of the Exchequer George Osborne told the joint Parliamentary Commission on Independent Banking Standards that there is a strong consensus behind the proposed legislation to ring-fence retail banking in a holding company away from proprietary trading and sponsoring hedge funds. The UK legislation neither completely follows the Volcker Rule nor erects Glass-Steagall like separation. He urged Parliament not to unpick the work that John Vickers and his commissioners did that has been accepted by all the major political parties and is now on the verge of enactment.

The legislation would enable the regulator to establish a ring-fenced entity, to ensure its independence and to impose certain duties and directors and the like. The Government is absolutely clear that it will have separate governance; an independent board; separate risk management; separate balance sheets; separate remuneration committees and-as John Vickers added to the list when he gave evidence-capital and liquidity requirements. 

Calling for regulatory flexibility, the Chancellor warned against creating a kind of Maginot line in primary legislation that is absolutely right for 2012 and then find out in 2022 that the banks and the industry have completely bypassed it. The legislation must ensure that UK regulators are still fully armed and equipped to do what they need to do. He noted that by the early 1990s, the financial institutions had found ways around Glass-Steagall, and that was one of the reasons why it was repealed by Bill Clinton’s Administration. There is no guarantee that, if you go for some other approach, that will not happen.

Equally, he said of Paul Volcker that his definition of proprietary trading might look really good in 2012, but it might not look so good in 2022. Whichever approach you take, he emphasized, you have to have flexibility to address changing practices in the industry. 

The legislation does not simply follow the Volcker Rule. It is very clear that market making, investment banking and hedging is in the non-ring-fenced bank. That would not be the case with the Volcker Rule. 

While there is consensus that some form of separation is required, the Vickers process specifically looked at what form of separation and specifically rejected Glass-Steagall complete separation. One reason for this rejection was a cost-benefit analysis, revealed the Chancellor.

There is a very considerable cost to the industry in what this legislation is doing. There are going to be several billion pounds of set-up costs and several billion pounds of ongoing costs of implementing the ring-fencing. Full separation would be an even greater cost that could not be justified.

In addition, there are no additional benefits that full separation would bring so long as the you can make the ring fence high and impermeable. That is absolutely the intention of the legislation, he emphasized.