UK government committee suggests outright ban on 'casino banking'

A ban on risky trading activities by large British banks could be needed to stop them taking advantage of UK government support, MPs said today.

The British Treasury Select Committee said bank profiteering on lucrative trading activities would be “intolerable” if taxpayers took the lion’s share of the risk to protect savings deposits.

MPs also attacked recent changes announced to the overseeing Tripartite Authority – the Financial Services Authority, Bank of England and Treasury – as “largely cosmetic”.

The Tripartite was criticised on its handling of the Northern Rock crisis but where final responsibility for decision and actions lay remained “a muddle”, the committee claimed.

MPs welcomed proposals by the FSA to impose much higher capital requirements on ’casino’ banking – but said the watchdog must not rule out a complete bar on such activities.

“A ban may not be necessary if firms are given sufficient incentive to separate their trading units from their retail banking activities of their own accord, but... should not be ruled out by the FSA as an option at this early stage,” its report said.

MPs added: “Those banks which are too big to fail must no longer be able to take advantage of that fact for private gain.”

The real test of the watchdog’s more invasive approach to banking supervision to prevent a repeat of the banking crisis will be when the boom years return, the committee said.

Chairman John McFall said: “All this is very fashionable now; the FSA must develop sufficient teeth in order to be able to go against the tide in the future and take unpopular decisions.”

Plans to rebrand the Tripartite’s standing committee with a Financial Stability Committee (FSC) announced in a White Paper earlier this month would “achieve little by itself”, when an improvement in cooperation and clarification of responsibilities was required.

“When the dust eventually settles on a new system, the question that we, and others, will ask is ”Who gets fired?“ if and when the next crisis occurs. It is a blunt question, but one which is necessary,” the report said.

Governor Mervyn King fuelled rumours of a rift between the Bank of England and the Treasury before the White Paper was published when he stunned MPs by admitting he had “no idea” what was going to be in it.

The committee said it was “extremely perturbed” at the lack of communication revealed by Mr King.

The report added: “The Chancellor must set out why consultation papers on financial reform are now no longer jointly published, or even shared, with his Tripartite colleagues.

“Failure to do so will only add further cause for concern to those worried about the state of the crucial relationships between the Tripartite principals.”

The FSA said the committee’s report acknowledged that it had “proactively identified and rectified its historic mistakes and that the financial services sector has clearly felt this change in approach”.

“The FSA’s new intensive supervisory approach is about making judgments on what might happen in the future – boom or bust – rather than acting solely on observable facts,” it said.

Liberal Democrat Treasury spokesman Vince Cable said: “This report rightly underlines the need for high-quality and transparent regulation if we are to create a stable financial system.

“We must not create a regulatory system that just deals with the current crisis but one which is fit for all the challenges ahead.”