Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.

George Osborne has called it the British Dilemma: how can Britain be one of the world’s
leading financial centres without exposing ordinary working people in this
country to the terrible costs of banks failing?

Let me illustrate
both sides of the dilemma:

The financial
services sector is one of our most important industries. Together with related
services, it employs around two million people in this country – two thirds of
whom work outside London. Even in the recession, financial services contributed
about one pound in every eight of government revenue to pay for public
services. The industry is, by far, our biggest exporter, generating last year a
£47 billion surplus from overseas trade, providing us with vital foreign
exchange earnings.

And yet that very
importance carries huge risks for Britain. At its peak, the combined value of
UK bank balance sheets amounted to 500% of British GDP. Compare that to 300% in
France and Germany and just 100% in America. That left us in an extremely
exposed position when the great debt bubble of the previous decade finally

In 2007, we
witnessed the first run on a British bank in more than a century, with
depositors queuing in the streets to get their savings out of Northern Rock. Subsequently,
HBOS and RBS – at the time the biggest bank in the world – had to be bailed
out, with £65 billion of taxpayers’ money. It was the clearest possible proof
of failure in the established system of financial regulation and in the culture
of the banking sector.

There can be no
doubt that reform is necessary – and it is this Government that has got on with
the job. The first pillar has already been put in place through the passage of
the Financial Services Act, which received Royal Assent in December. It puts
right the mess that Gordon Brown made of financial regulation in the country –
establishing clear lines of responsibility with the necessary powers to match.

The second pillar is
the Banking Reform Bill, which received its Second Reading yesterday in the
House of Commons. While the Financial Services Act is about regulatory
structures, the Banking reform is about how the banks structure themselves.

Following the
recommendations of the Independent Commission on Banking (chaired by Sir John
Vickers), the Bill creates a ‘ring-fence’ for the ‘vital organs’ of the banking
system. In other word those parts of a bank that enable millions of people and
businesses to save and manage their money and without which the whole economy
would grind to halt.

These are the
‘utility’ functions of the banking system—and, if they’re compromised, then governments
have in the past had no choice but rescue them through bail-outs. To protect
savers and taxpayers we must establish
a clear distinction between these and other banking activities. As well as
putting in place the ring-fencing ‘architecture’, the Bill ensures that the
directors of banks will be held personally responsible for making sure the
rules are obeyed.

We’ll also introduce
an important additional safeguard recommended by the Parliamentary Commission
on Banking Standards (chaired by Andrew Tyrie): if a bank tries to subvert the
ring fencing rules, the regulator and the Government will be able order a
complete separation of the bank. This new power ‘electrifies’ the ring-fence –
deterring those who imagine that the way to get ahead is by subverting essential
protections instead of providing the best service to customers.

Other protections
for the taxpayer include new requirements on banks to make adequate provision
so that they can cover their own losses without turning to the public purse.
Furthermore, in the event of insolvency, deposits protected by the Financial
Services Compensation Scheme will become preferential debts – again, so that
taxpayers are not left paying the bill.

Finally, as well
as reforming the way that individual banks are structured, we need to look at
the shape of the sector as a whole. I strongly believe that
the concentrated nature of the UK banking industry is unacceptable – because it
stifles the most powerful consumer protection of them all, which is
competition. We therefore need to tear down the barriers to new market entry. A
prime example is the UK payments system in which potential new banks have to
win the permission of incumbents in order to be able to use the system. The
Government is about to consult on proposals to ensure that access to this
system is available on fair, reasonable and non-discriminatory terms, and
subject to the outcome of the consultation, to implement the appropriate

All in all, the Banking Reform Bill, together with the Financial
Services Act, are reforms that will reset our banking system and. They are good
for savers and taxpayers – and good for the financial services industry too.
Britain built its position as one of the pre-eminent trading nations on a
reputation for straight dealing and fair play. In an uncertain world, there is
nothing old-fashioned about restoring these values in Britain today.