Bank subsidiarisation is a good thing but probably won’t help if the Greeks default

 

When my father was Lord Mayor, the Mansion House Speech was press released after the event.

 

Nineteen years on, no Chancellor can resist the temptation to preannounce his speech and press release it nearly a day before, despite the disrespect to the City audience. I doubt if the clock will turn back, even if good manners suggests it should.

 

So today the Chancellor has leaked that he will announce the subsidiarisation of UK retail banks’ investment banking arms in his speech tonight.

 

On balance I think this is a good idea and will reduce risk in the economy.

 

But there are no free lunches in banking regulation and we need to appreciate that the benefits of reduced risk of default in the longer term have to be set against the likelihood of slower growth of bank lending.

 

The less exciting retail banks will find it more difficult to raise capital and hence will be less able to lend than they might have been. And some might even move abroad, which will partly achieve the Chancellor’s objective of handing the costs of potential bailouts to someone else but at the cost of loss of control over the UK economy.

 

Slower growth in bank lending will mean slower economic growth.

 

Another issue is that the biggest short term threat to the solvency of British banks could come from the breakup of the euro. And it is not clear that the subsidiarisation will do anything to help here.

 

But taking the costs with the benefits, what the Chancellor proposes will probably be a worthwhile derisking of the economy. Just don’t expect it to be a panacea and don’t expect it to be cost-free.