The Independent Commission on Banking in the UK, chaired by Sir John Vickers, former chief economist to the Bank of England, and including the admirable FT commentator Martin Wolf, has just released its report with sweeping proposals for reform. Not quite a Royal Commission, but it was still set up by the government. The report is not another unsolicited paper from a think tank, and can’t simply be ignored.
The aim they state for British banks applies just as well to other countries:
.. a banking system that:
- is much less likely to cause, or succumb to, financial crises and the huge costs they bring;
- is self-reliant, so that the taxpayer is never again on the hook for losses that banks make;
- and is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, and efficiently channelling savings to productive investments in the economy.
Risk reallocation does not figure as a strategic function.
The key proposal is to ring-fence retail, High Street, banking from investment banking.
Retail banks could be part of larger universal bank groups, but would have separate management, accounts, capital reserves, and culture. They could not engage in trading or derivatives other than hedging the risks arising from retail operations. The fence would be permeable only insofar that lending to big companies would be allowed either side of it.
These proposals (already floated in an interim report) are likely to be very popular in in the UK. Cameron may postpone action on them, but can’t I think reject them outright. Sky TV – a part of the Murdoch empire – called for a first reaction on a campaigner to the left of Vickers. This guy wanted complete separation as in Glass-Steagall.
Does this fix the biggest problem? I’m not sure. It will presumably prevent a rerun of the Northern Rock fiasco, when the government was forced into an emergency nationalization of a big but not systemically dangerous mortgage lender whose wholesale financing had dried up. But the big rescue came later, with the slo-mo collapse of the much bigger and universal Royal Bank of Scotland. Lehman was a specialist investment bank but its failure showed that it had managed to create a systemic risk without any retail banking connection. Vickers seems to rely on global and European regulation of British wholesale and investment banking – which is now at least three times the size of retail in gross terms (Vickers gives the latter’s balance sheets as between £1 trn and £2 trn out of £6 trn.) Another Fred Goodwin could still put British taxpayers on the hook or create a global banking crisis. But at least Vickers, if implemented, will stop such men from siphoning retail deposits into their investment banking casino.
I like Vickers’ robust line on the higher costs which bank lobbyists will plead to frighten the
Our financial stability proposals may increase some banks’ costs of capital and unsecured debt, especially outside the ring-fence. But that is largely a consequence of returning risk-bearing to where it should be – with investors and not taxpayers. This is a benefit, not a cost, to the economy as a whole, and will better discipline risk-taking.
Others of the report’s issues reflect British and not American circumstances. Vickers sees concentration and inadequate competition in High Street banking as a major issue, but not credit card charges. These are reasonably well regulated and bank cards enjoy competition from retail store chains like Tesco. British merchants pay Visa and Mastercard a princely 0.2% interchange fee per transaction after these lost a long battle with the EU competition regulator.