Reformed finances, but not yet

Should there be tougher curbs against people taking out mortgages they can't afford? Of course there should.

Should banks be forced to protect and secure the retail end of banking against the much higher level of risks in their investment arms? It's a no-brainer.

But... not yet.

The problem with both these reforms, being announced today, is of timing.

Image copyright PA
Image caption Easy access to credit fuelled the housing boom

Both react to the mistakes that took the UK into financial crisis and deep recession; incredibly easy access to credit, fuelling the house price boom, and banks loaded with risky assets that needed bail-out to stop them from collapse.

Without bail-outs, the banking crisis would have taken out vital retail banking without which confidence would have quickly evaporated from the entire financial system.

But both reforms run the risk of delaying the country's exit from downturn.

The property market is barely functioning. The number of transactions is nowhere near normal or healthy levels, and prices have not reached an equilibrium that matches falling earning power, interest rates and much higher deposits required.

On the latter, astonishing figures from Capital Economics consultancy: in the late 1990s, the average deposit was less than 20% of average annual earnings, now it's nearer 90%.

Home and away

According to a calculation for The Economist magazine, based on the ratios of price-to-earnings, and price-to-rent, Britain is one of nine developed nations where property prices remain about 25% overvalued.

Without settling on that equilibrium, there's not much hope of reviving confidence in residential property. There have been measures successfully shoring up prices, at least in cash terms, while the bubbles burst in Ireland, Spain and the US and sent cash prices tumbling. Irish prices have fallen 45% since 2007, in America, they're down 28%, but Britain's seen less than a 10% drop.

There has to be concern, for homeowners and the economy at large, that the current lack of confidence in general could lead to another dip in the residential property market.

With that background, it's a risky move today from the Financial Services Authority to make it substantially more difficult to get a mortgage - not only requiring applicants to prove their earnings (it remains incredible how little this was done before), but testing their resources against the certainty that interest rates will, eventually, go up.

All very sensible, but not at all helpful to kick-starting the property market now.

And in case you didn't see it, there was an interesting observation from the Bank of Scotland's property team at the weekend that so-called "second steppers" - typically selling up their starter flats after four years, for a move to semi-detached houses - are facing a bigger gap in the stretch to the next rung of the property ladder than those trying to get on at the bottom.

That's because the value in their homes has gone backwards. Having put down about £17,000 average deposit four years ago, and then paid some capital repayments each month since then, they're now looking to clear only £4,000 for a deposit on their next home - at a time when real earnings are in decline.

Political ring-fencing

On Chancellor George Osborne's adoption of the Vickers Report into banking, with a statement today to MPs, there's a lot of politics mixed up in there.

The Lib Dems are spinning that they've stopped the Tories from going soft on the banks. But remember it was Lib Dem business secretary Vince Cable who said in opposition that the banks should be broken up entirely. I don't recall him talking about "ring-fencing", which is what they're getting.

Just how tight that ring-fence will be is subject to yet more ferocious lobbying by the banks. The threat of a huge shrinking of its London investment banking is not being denied by Royal Bank of Scotland.

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Image caption Sir John Vickers' banking report advises separating retail banking from more risky investment activities

And the government has to judge things in a such a way that the big banks don't re-locate, which is why some concessions on capital buffers have already been achieved.

The other bit of politics behind George Osborne's statement is getting reform on the statute book by the 2015 election, to say they've delivered on one of the main planks on which they fought last year's campaign.

But there will be rather less of a drive to implement quickly. Both Sir John Vickers and, we're told, the chancellor, are targeting 2019 as the deadline for ring-fencing banks and requiring enhanced capital buffers.

Of course, that's because there are very complex processes in disentangling bits of banks.

But it's also because 2019 looks safely beyond this downturn, by which time banks may be in a better position to take the hit of as much as £7bn extra costs per year from being better protected against another downturn.

Banker bashing

Will the Treasury be able, by then, to sell off its stakes in RBS and Lloyds? At current prices, they could only do so at a loss of more than 50% of the £63bn poured in to them in 2008 and 2009.

And while the eurozone crisis has depressed bank share prices badly, particularly since August, the election last year of a coalition government committed to "radical" reform of the sector appears to have had something to do with blighting the value of the public's stake.

There's an uncomfortable trade-off for us all there; bash the bankers and break them up, but only at considerable cost to ourselves as shareholders.

One item to watch when George Osborne delivers his official reaction is how much of the Vickers Report he's going to take on in terms of increasing bank competition.

It's no coincidence, ahead of today's announcement, that last week we learned of the FSA's damning report into the causes of the Royal Bank of Scotland's meltdown, or that Lloyds Banking Group is close to a deal with Co-op Bank on selling more than 600 branches - as required by the European Commission to reduce its retail market dominance.

Vickers said there should be a greater share of the market sold off by Lloyds, or at least that the terms of the sale of those branches should be on sufficiently attractive terms to the buyer to ensure it can develop them into a serious competitor for the current narrow range of big high street banks.

The lending giant will await with interest, with a few lobbying tricks up its sleeve, to see what George Osborne has to say about that extending that divestment.