Michael Robb: Vickers banking reforms could make 2012 a very tough year

Mike works on financial policy at Cicero Consulting. He has previously worked on political campaigns in both the UK and US, including the presidential election in 2004.

George Osborne has announced widespread acceptance of the recommendations of Sir John Vickers and the Independent Commission on Banking.

The whole process of banking reform has required an award-winning balancing act performance by the Chancellor, and undoubtedly Vickers too.

While Conservative desires to implement deep and lasting reform in the sector are absolutely genuine, the Lib Dems – and particularly the man long-associated with banker bashing, Vince Cable – desperately need to show their electorate that they have forced the ‘City-cosy’ Conservatives to come down hard on the banks. And, crucially, in this Parliament.

The Vickers proposals satisfy both these aims, which is why the Chancellor is almost universally adopting the recommendations.

We will see real and hard reform to the sector – most notably in the acceptance that UK banks will be forced to ring-fence their retail arm from their investment banking divisions, which Barclays Chief Executive Bob Diamond this weekend said would cost the banking sector £7bn.

Of most political importance is timing. The 2019 deadline for implementation remains in place, an attempt by the Chancellor to remove the risk to economic growth in the short-term. At the same time, the timetable meets the Lib Dem need to see reform of the sector set in motion post haste, with the legislation to complete its passage through Parliament by 2015.

The other headline proposal to be carried forward is to increase significantly the amount of capital a British bank is required to hold relative to its balance sheet, ensuring that banks are better able to cope with crises in future if we experience another credit squeeze.

Labour, too, support the proposals, though are concerned about whether or not the recommendations will truly be implemented in full. Nevertheless, the widespread agreement has inevitably moved the Labour attack to Project Merlin and their call for a repeat of the banker bonus tax.

It is usually the case that when there is so much political agreement on an issue something mustn’t be right, and this could well be the case here. Whilst the implementation deadline is intentionally set far in the distance in order to avoid a contraction of lending in the short-term, history shows us that financial organisations inevitably start moving towards fulfilling seemingly-distant regulatory requirements immediately.

The proposed reforms are designed to make the financial system safer and be to the long-term benefit of the wider economy – but there is a real danger in the short-term that they will result in precisely what Osborne is seeking to avoid: a slow-down in lending and adverse impact on already-anaemic growth.

That means further problems for the Government, not to mention the financial services sector, which is already struggling to restore its battered reputation. Further tightening the coffers, even if as a reaction to regulatory reform imposed upon them, is not going to wash with the general public. Joe Bloggs and Main Street UK don’t care, they just see the end result.

2012 was always going to be a very tough year for the Government, financial sector and borrowers alike – did it just get even tougher?