A classic British compromise

By Harry Wilson, Banking Correspondent

If you doubt this take a quick look at the share prices of UK banks this morning, which at the time of writing were up across the board.

The market is a fantastic machine for sifting almost instantaneously through the waffle and getting to the heart of an issue and what it has seen in the Commission’s report it appears to like, or at least not hate as much as some of the options that had been on the table.

To see why take the proposal for an extra 3pc equity capital buffer that will push the core equity ratios of UK-based banks to 10pc, but crucially will only apply to their retail banking operations.

What this means in effect is that investment banks, the core of the City’s business life, will largely be able to continue as before with the same capital ratios as their international peers.

Speaking to a partner at one major law firm this morning, he was clear that report represented a “laissez faire” approach to the investment banking industry.

But for the large British retail banks that will have to carry the new capital burden the same is not true and they could be put at a competitive disadvantage to non-UK-based rivals.

Should the Commission’s proposals be enacted, European Union rivals will still be free to use the region’s “passporting” mechanism to avoid complying with any new capital rules brought in by the Government.

The British authorities could try to make it more difficult for EU rivals. However they would face a well-established block of case law and would likely be forced to back down.

Of course, there is little the Commission can do about EU law and so it seems churlish to knock such a well-argued and reasoned report on the basis of technicalities.

However, it shows that while the Government may like to push through radical reform, it will face many compromises on the road to a new banking industry.