The banks are predicting doom if ringfencing comes, saying their inability to lend will stifle growth and it will all be the government’s fault. The government’s reaction in the short-term, I hope, will be to call their bluff and do it anyway. Let’s see – it’s only ten days to go before the ICB publishes its final report.
But what happens a bit further down the track?
According to Martin Wolf’s latest piece, the UK may already be locked into its longest depression for a century. He says a structural decline in output could condemn us to low growth and low productivity for years.
What do you think the banks will say in 2013 if, as Wolf predicts, the economy is sick as a dog?
I guess we can expect a chorus of “I told you so” from the bank lobby, followed by indignant demands to repeal ringfencing – which won’t be fully implemented by then anyway – together with any other reforms the banks don’t like.
It’s easy to imagine politicians supporting this as they start to see a 2015 election dominated by the economy. Voters, confused and worried about their jobs, will go along with them.
This would be a complete disaster, a victory for Voldemort. Today's lack of growth has its roots in a financial system that actively channelled capital away from productive activity. Reform is a vital part of recovery, even if it takes time to get right and to work through the system.
The recent credit bubble focussed almost entirely on property and financial assets, the least productive parts of the economy. The most productive parts, the unglamorous non-financial companies (the ones that create most of the jobs and exports), have been starved of growth vitamins for years thanks to the flawed Basel regulations and a culture of short-term, transaction-led banking.
Meanwhile on the demand side, pension funds and saving accounts have been raided by market volatility and low interest rates, both triggered by the financial crisis and sucking further life out of the economy.
Given this background, any future attempt to roll back financial reforms because of economic failures caused by the financial system itself would be extremely foolish.
But the financial lobby thinks far ahead and is already preparing to do exactly this, leaving a trail of high-profile warnings such as John Cridland’s “barking mad” comments (apparently made without irony).
If the government is to sidestep this trap it will need a counter-factual: something to show what would happen to the economy, or at last to productive lending, if we don’t adopt ringfencing.
Luckily, we have the US. Its political elite rather likes universal banks and is not about to ringfence them. The progress of its banks in the next few years will provide an interesting comparison.
However, the US and UK economies are too different for this to make policy. We need a British laboratory experiment.
Here’s an idea – let’s apply the ringfence to the whole banking sector apart from one UK universal bank, perhaps a certain state-owned one. Then let the reforms rip and see how all the banks fare as our 100-year depression unfurls.
My bet is that most of today’s big UK banks will adapt pretty quickly to ringfencing. They will build capital, their wage bills will fall and their aggregate funding costs (debt and equity) will fall as they become safer, more self-sufficient and less dependent on the UK's sovereign rating. They may have a couple of lean years in terms of returns on equity, but once the uncertainty goes and they have built their reserves I would expect their lending figures in 2013 to no longer be a source of shame.
The experimental bank, unreformed and still trading off its retail deposits, might look rather sickly in comparison. And if it isn't, well at least we’d know the truth.