Banker's bonuses are in the spotlight again, and questions are being asked about the way banks spend our savings. To stop the rot, some are now suggesting bringing an end to free banking in Britain.
What's the argument?
The banking sector is a mixed bag. Retail banks like the Royal Bank of Scotland and Barclays also have investment arms, which can leverage the money deposited through retail accounts in order to make investments - for example, in the stock market. During the recession, several banks found their investments had failed and, had the government not stepped in, their customers' money would have been lost.
Subsequently, the government-backed Independent Commission on Banking (ICB) recommended that banks should be forced to 'ring fence' their retail business (current accounts, mortgages, loans etc) from their investment banking operations (shares, bonds and other investments), essentially keeping the two separate. But because the investment operations partially cover the costs of retail banking, removing the link would mean that the costs need to be recouped another way: possibly by charging customers for using banking facilities, including cash machines.
How much more protection would we get?
This is the first area of contention around the plan. No sooner was the report released than auditors BDO slammed the plan, arguing that the banking crisis that sparked the rethink was caused not by investment banking, but by retail banking - and excessive exposure to bad debt and property investments (the 'subprime' market).
While there's truth in the claim, that doesn't change the fact that 'casino banking' could bring down a retail bank. Or that ring-fencing those operations would prevent that from happening.
Would it curb banker bonuses?
It's doubtful. In fact, with so much protesting over the perceived cost of such a separation, it's possible that banking bosses could be preparing excuses for charging rather hefty fees for retail banking services.
How much would it cost?
The ICB estimated that ring-fencing retail banking would cost the banks between four and seven billion pounds. Exactly how that would be recouped remains unclear, but most organisations agree the cost would be passed to consumers and, most likely, mean the end of free banking.
Would savings interest rates suffer?
It's possible that removing the link between retail savings and investments could hit interest rates. But the rise of peer-to-peer lenders like Zopa and RateSetter suggests that there's money to be made simply by using deposits to support lending for personal loans, small businesses or mortgages. In fact, this strategy is already being built into retail banking by TSB.
Nonetheless, it is possible that savings interest will dip and/or lending rates rise. And, of course, that another debt crisis could hit.
What's the bottom line?
What it boils down to is how much the UK wants security against a certain type of banking collapse. To make an informed decision, it's first necessary to understand exactly what benefits we currently enjoy from banks, and what benefits the banks get from you.
Using the free finance software available from Money Dashboard allows you to gather all of your income and outgoings in one place, so you can assess whether you can afford the price of an extra level of security. What are your thoughts on free banking? Let us know in the comments below.
Posted by Marc Murphy, Marketing Manager at Money Dashboard.