UK Labour leader Ed Miliband has indicated that a threat by banks to move abroad would not deter him from breaking them up if they did not agree to revolutionise their operations and put ordinary customers first.
In an interview with the Observer, the Labour leader says he will confront the City of London with what is seen as the nuclear option for reform if the banks fail to separate their “casino” investment operations from services to account holders, savers and businesses.
Critics of such a policy argue it would lead the banks to abandon the UK as their base.
The Labour leader told BBC1’s Andrew Marr show he did not believe that would happen but said that, if it did, he was ready to face them down.
“I think what the British people want is a prime minister that will do the right thing for the country,” he said. “Do you want somebody who will stand up to the powerful vested interests in our country or not? And I think if that’s the test of the election between myself and David Cameron, I think people will understand that I can answer that question better than he can”.
In terms that will anger the investment banking industry, Miliband told the Observer a Labour government, as one of its first acts, would push through a modern-day equivalent of the 1933 Glass-Steagall Act, which split the commercial and investment operations of US banks after the 1929 stock market crash.
The move is part of an attempt by the Labour leader to flesh out his promise to deliver a more “responsible capitalism”, amid signs the public does not yet believe he is not tough enough, nor has a sufficiently clear vision, to be prime minister.
Speaking ahead of Labour’s annual conference, which opened in Manchester on the weekend, Miliband says banks must concentrate on core functions such as lending to small businesses “rather than playing the international money markets”.
Such behaviour puts ordinary customers at risk of having to share the consequences of failed investments.
Echoing concerns expressed last month by Sir Mervyn King, governor of the Bank of England, who believes that reforms proposed last year by Sir John Vickers are being “watered down” after lobbying by the banks Miliband says it is time to stop backsliding, and to change banking culture for good.
The recent Libor scandal involving the fiddling of inter-bank interest rates and the £10bn scandal over mis-selling of payment protection insurance showed the culture was still rotten.
Miliband says: “Either they can do it themselves which frankly is not what has happened over the past year or the next Labour government will, by law, break up retail and investment banks.
“The banks and the government can change direction and say they are going to implement the spirit and principle of Vickers to the full. That means the hard ring-fence between retail and investment banking. We need real separation, real culture change. Or we will legislate”.
The coalition government says it will implement the majority of the Vickers report, which will be the subject of legislation due to reach the statute book by 2015. But the changes will not come into effect until 2019. The plans have, however, been watered down, with ministers agreeing that the ring-fence will only apply to the UK operations of banks even though many in the UK have vast overseas operations.
Vickers also wanted the government to insist that banks hold higher grade assets in their reserves to insure against another financial collapse. But the government relented after the industry complained that buying these assets would be expensive and the £1.3bn estimated cost would be passed to customers.