UK banking reforms: What's new?

When will we know that the UK has truly put the financial crisis behind it? Everyone will have their favourite answer to that.

But one sign that we're "back to normal", I would humbly suggest, might be when we stop being so fascinated by everything and anything about Britain's banks.

A quick glance at the front pages is enough to tell you we're not there yet. We are still very interested indeed in our banks and the people who run them.

Why? I think it's because, at bottom, people want evidence that the banks and the broader UK financial system have changed: that the people inside them aren't earning vast amounts, taking risks with what might turn out to be our money. Now more than ever, people also want them to do a better job of promoting economic growth.

Will the reforms introduced by this government over the past couple of years achieve that kind of change? Robert Peston has written extensively on this in the past. Now the chancellor has given a speech to persuade you that they will, on the day that his long-awaited banking reform bill is submitted to parliament.

Most of the contents of the speech, and the bill, is familiar. What with the Independent Banking Commission (which came up with the basic proposals) and the Parliamentary Commission on Banking led by Andrew Tyrie (which debated the first draft of the bill last autumn), this is not a piece of legislation that has been under-discussed.

One piece of "news" in today's speech - though it is not, strictly, a surprise - is that Mr Osborne is accepting the Tyrie Commission's suggestion, to "electrify" the new ring-fence between banks' risky, investment banking-type activities and their retail operations.

The other somewhat fresh announcement is that the Chancellor plans to "open up" the payments system. This was flagged up in the draft bill, but the details had not then been decided.

The payments system, in effect, is the plumbing for Britain's financial system, which is often said to be backward in comparison with other countries. The various parts of this system (BACs, CHAPS etc) are largely owned by the main established UK banks and effectively self regulated.

I don't think many outside the banks will condemn the idea of freeing up this part of the UK financial system: it's been a source of contention since at least the Cruikshank report in 2000. He identified it as a major problem for banking competition and innovation in the banking industry - and proposed a new independent regulator.

Labour endorsed that report but then failed, in effect, to implement it. (John Kay wrote up the sorry saga for the FT back in 2009. Given this history, people will be keen to hear the detail of Mr Osborne's proposals, and to monitor whether they subsequently get watered down.

Some may also question whether the payment system is still, in today's world, a major block to new entry in banking. The Vickers Commission considered it, explicitly, and concluded that it was not. But I suspect most economists and consumer groups will be in favour in principle - even if they're reserving judgment on the specifics.

An electrified ring-fence sounds tremendously exciting. Whether it actually will make a lot of difference is another matter.

There are two views on this.

The first is that this represents a big climbdown for the chancellor - which re-opens the entire question of the best structure for UK banking, and so creates a lot of new uncertainty for British banks.

The other view is that is is largely a cosmetic change - which reflects on the general low regard people now have for the banking sector, but does not make a big difference to the ring-fence, for good or ill.

You will hear both sides represented today. But I suspect that the majority view of those who are not either members of Her Majesty's Opposition or the banking profession will lean towards the second.

It's possible that the ultimate threat of break-up will concentrate the mind of individual banks, and give them a stronger incentive to take the ring fence seriously. But this change is not going to mean much to the critics who say the government - and the Independent Banking Commission - should have opted for absolute separation from the start.

If you are someone who thinks that any ring-fence, by its nature, is going to be ineffective, or that the government has given the banks too much leeway in deciding where it should be drawn, then "electrifying" is not going to make much difference either way.

We should perhaps also remember, the toughest ring fence in the world would not have prevented the failure of Northern Rock - which did not have any "risky investment bank activities" to speak of. Instead it had a humdrum retail/mortgage operation which turned out to be anything but.

This blog post was first published on Monday 4 February 2013. Because of a technical problem, it had to be republished with a new timestamp.