Ian Fraser: Do the UK’s “Vickers” Banking Reforms Go Far Enough?

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser

This morning I was listening to Nicky Campbell’s phone-in programme on BBC Radio 5 Live. The topic was the final proposals of Sir John Vickers’ Independent Banking Commission for reforming the UK’s banking system, which were published this morning.

To many, including Philip Augar (who since leaving the City in 2000 has done much to expose the destructive ways in which British finance works, and was a guest on Campbell’s show), Vickers’ proposed reforms — which include ring-fencing banks’ retail arms, forcing banks to plump up their capital cushions and the introduction of greater competition into the sector — are an elegant solution to an intractible problem.

Their hope is that the proposed reforms, which Vickers told us this morning don’t have to be fully implemented until 2019, will in the long-term make Britain’s banks safer, less likely to have to rely on government bailouts, and more predisposed to serve society and the wider economy.

I agree with a lot of what Augar says, but I fear he may be wrong about Vickers. The reforms are intended to ‘render safe’ a toxic sector from which the former Labour government unwisely removed many of the checks and balances in 1997-2007 and which, perhaps unsurprisingly, went on to bring the UK economy to its knees.

Since then, the banking sector has displayed minimal contrition for the damage it has wrought on the economy, and minimal gratitude for the immense support taxpayers have given it. It has continued to exploit a near-oligopoly, to “rent gouge” on the UK economy, and has in recent weeks been issuing far-fetched warnings that even modest attempts at reform are going to lead to economic Armageddon.

One caller to Nicky’s programme, Tony, referred to the 12-year-old boy who recently received a nine-month supervision order and who’s mother fined £50 fine after he stole a £7.49 bottle of wine from Sainsbury’s during last month’s riots. Manchester City Council has said that his entire family now faces eviction.

Tony argued that there is a mismatch. Draconian punishment has been meted out to this boy and his entire family for what seems a relatively minor offence. Yet the people who, as a result of their own lack of probity, which in some cases extended to criminality, caused the banking crisis have, for the most part, walked away from the wreckage they created Scot-free!

Another of Campbell’s guests, Andew Lilico, an economist who blogs for the Daily Telegraph, responded by saying he does not believe fraud was a major cause of the banking collapse. I would dispute this.

Having studied the evidence (including the criminal actions being pursued against RBS, HSBC and Barclays by the United States government agency Federal Housing Finance Agency for, allegedly, misrepresenting the quality of residential mortgage-backed securities (RMBS) in the US market) and having studied the report that came out of an investigation done by the US Senate’s Permanent Subcommittee on Investigations (“Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”) it’s clear that fraud was a major contributor to the financial crisis. And this was certainly the case on both sides of the Atlantic.

There’s also the HBOS Reading scandal, which I’ve been writing about for three years now. This is widely considered to be the tip of an enormous iceberg of fraud and malfeasance at the former Halifax Bank of Scotland which Lloyds chief executive António Horta-Osório seems no less determined than his predecessor Eric Daniels to cover up (here’s how one of the many victims of that fraud feels about Vickers‘ final report).
However none of this got much attention in the report. Nowhere in the 146,000-word, 358-page document, does the ICB even use the words “ethics” or “ethical”. Nor do “morality” or “integrity” feature (unless they’re associated with the concept of “moral hazard” or to mean “completeness”.) Yet, without these virtues, isn’t it going to be impossible to build a banking system that endures?

Maybe the ICB believes that, by preventing banks from gambling depositors’ money on so-called “casino” activities, and by preventing them from abusing the implicit state guarantee to sustain their investment banking arms, the temptation to misbehave will somehow be lessened or removed. If this is the case, I think the commission is being naive in the extreme.

Another caller to Nicky’s programme said it’s high time that British politicians developed some “cojones” and stopped cosying up to the banking sector — as they traditional do at annual shindigs such as the white-tie Mansion House dinner. (Famously, it was at this particular extravaganza that ex-chancellor Gordon Brown in June 2006 told bankers he did not favour a regulatory crackdown on their sector in the wake of scandals like WorldCom, adding “we were right to build upon our light touch system … fair, proportionate and increasingly risk-based”.)

(It was at the same event in June this year that current chancellor George Osborne told the banking fraternity he was going to implement the Vickers reforms, three months before the final report was even published!)

I intend to write a more detailed appraisal of Vickers proposals, including looking at whether the commission should have gone further, examining whether the fact reforms don’t have to be implemented until 2019 give banks plenty of scope to quibble over the details and get harsher aspects kicked into the long grass, and whether its conclusions are worthless since its report is based on a fairy tale story about banking, in a subsequent article or blog.

In the meantime, however, here’s what the Daily Telegraph’s economics editor Philip Aldrick had to say this morning. In an article focused on the true costs of the implicit government guarantee, which Barclays erroneously claims costs taxpayers nothing, Aldrick wrote:-

The ICB is right, and Barclays is being utterly disingenuous when it says taxpayers spend no money as a result of the implicit guarantee. The facts speak for themselves. The benefits of reform far outweigh the costs.

Update 1: 5.45pm, Sept 12th : Since writing this blog I have read Alex Brummer’s column, in which he lists five reasons why he believes the process was flawed, not least because the Independent Banking Commission owed it origins to political expediency rather than a deep-seated desire to create a sustainable financial system. I wholeheartedly agree with most of what Alex says here.

Update 2: 7.20pm, Sept 12th : Here’s some interesting commentary from Compass and the New Economics Foundation, both of which are critical of Vickers. “Instead of recommending the simple and effective step of complete bank separation the British establishment has bottled it and the City has won again,” says Neal Lawson, chair of Compass.

Update 3: 12.30am, Sept 13th : Just found three excellent articles about Vickers

Philip Stephens in the FT Vickers hands victory to the bankers’ shop steward
Steve Richards in the Independent Bankers are the unions of our time
Peter Jones in The Scotsman Three cheers for taking the long view

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14 comments

  1. Fraud Guy

    “One caller to Nicky’s programme, Tony, referred to the 12-year-old boy who recently received a nine-month supervision order and who’s mother fined £50 fine after he stole a £7.49 bottle of wine from Sainsbury’s during last month’s riots. Manchester City Council has said that his entire family now faces eviction.

    Tony argued that there is a mismatch. Draconian punishment has been meted out to this boy and his entire family for what seems a relatively minor offence. Yet the people who, as a result of their own lack of probity, which in some cases extended to criminality, caused the banking crisis have, for the most part, walked away from the wreckage they created Scot-free!”

    Pardon me if I misremember English history, but wasn’t there a time where English landlords took over the various village commons to increase their rents & revenues, while the ex-peasants who were forced out to urban penury ended up getting draconian (i.e., capital) sentences for what amounted to petty theft?

    1. Skippy

      Can I have “cattle, sheep, humans, and what husbandry maximizes value” for 600…bob.

      Skippy…please let not be an audio clue…

  2. Tao Jonesing

    Since then, the banking sector has displayed minimal contrition for the damage it has wrought on the economy, and minimal gratitude for the immense support taxpayers have given it. It has continued to exploit a near-oligopoly, to “rent gouge” on the UK economy, and has in recent weeks been issuing far-fetched warnings that even modest attempts at reform are going to lead to economic Armageddon.

    Why should the banking sector show contrition? After all, as somebody recently said, they’re just “very smart, diligent, hard working and passionate about what they do.” We cannot blame them for pursuing their own self-interest to the detriment of society. Indeed, we all know that society necessarily benefits when everyone pursues his own self-interest, so, clearly, the damage you talk about must be illusory.

    And if the damage is real, well, nobody is to blame. The people in the banking sector were just “exposed to very complex economic forces” that overwhelmed their capacity to distinguish between right and wrong.

    Nothing to see here. Move along.

  3. Linus Huber

    Nice write up, thanks Yves.

    All these different approaches by Governments to get the banking sector under control are kind of useless as banks will always find ways to wiggle throu some loophole.

    That is the reason why I see only one way to solve this problem, namely hold the high rollers personally (with their illgotten wealth) accountable and as sooner as better. Once they get the message that they cannot get away with the loot, they will stop and not one day before.

  4. gerold k.b. weber

    The goal is to put the taxpayer off the hook for casino banking, and end TBTF. Ringfencing retail banking from casino banking is a logical approach, although the devil is in the details.

    Which derivatives (on interest rates, exchange rates, credit, shares, commodities, real estate, or arbitrary conditions like price volatility or the weather forecast) will ‘ringfenced’ banks be allowed to trade, or to forward to their investment banking arms for execution? Bankers certainly will argue that they need such dealings for and in the interest of their customers.

    But how can we separate true hedging for customers acting in the real economy from casino gambling? There seems to be an additional need for regulation which is still widely unaddressed. And even if such rules are proposed, there is a high chance that banks will tell regulators they are not enforecable in practice.

    One relevant option is the introduction of utility banks with a narrow and exhaustive enumeration of commercial activities as the only type of bank with implicit taxpayer guarantee (see also Yves Smith’ recent coverage of that topic). But anyhow, the Vickers commission’s proposals deserve to be studied also in other capitals as a potentially reasonable and important step in the right direction.

  5. aet

    So this is the Brit version of the USA’s old “Glass-Steagall Act”?

    “investment banking” ?
    That’s acting for private investors, rifght? The public isn’t invited in that door, are they?
    Then why ought we to “backstop” or somehow “implicitly guarantee” their private profit-taking/seeking activities with our (our Government’s, that is) Public faith and credit AT ALL?
    Did we put a gun to their heads, and demand that they take risks, in order to gain some possible low-tax profit?

    Meanwhile, how exactly do these “private” investment outfits find those profits they claim are to be found in the economy?

    Well, some are alleged to have colluded with each other and thereby low-balled their “competing” bids for assets:

    http://www.bloomberg.com/news/2011-09-09/kkr-blackstone-deal-rigging-lawsuit-over-lbos-expanded-by-federal-judge.html

    If what’s alleged is how they operate, then these people produce nothing – they simply arrogate stored wealth unto themselves, enabled so to do, because others trust that there are yet others who attend to their – and society’s – long term interests (which is precisely what the law acting in the service of justice ALWAYS seeks to do) – and not only the interests of certain select families.

    Same laws apply to everyone: or the one enforcing the laws is nothing but a kind of tyrant.

    And any punitive law which does not serve justice, ought not be enforced at all: for such laws do not serve the polity, but only the powerful.

  6. Steve

    Turn it around and make it illegal for the banks to handle people’s money. All they would be allowed is to do casino gambling, with their own money. Create some simple, traditional banking options, maybe state owned.

      1. aet

        That comment also evinces a poor understanding of what the term “illegal” means in practice; as well as how civil law, rather than the criminal law, functions – or ought to function.

        You appear to think proclamation, and the power to enforce those proclamations, form the essence of law – instead of justice and fairness. If so, you’re simply wrong.

    1. Fíréan

      don’t they just do that ( all the time), heavily leveraged, and created a shadow banking system ? ( not much talk about the SIVs anymore these days). i tend to agree with aet’s reply here.

    2. Steve

      Chill out you guys. Perhaps I misused the term “illegal”; you completely miss my point.

      The banks want to play the market. Customers do not want them to do that. You could:
      1. Allow the banks to do so (present situation)
      2. Disallow the banks playing the market (the banks don’t like this)
      3. Remove the customer’s money from the banks to an alternate banking system that doesn’t play the market. Then they can do what they please.

      Clear enough now that I spell it out?
      I’m sure there are lots of issues with #3, but it seems worth considering.

      Steve

  7. fcc

    A postal bank is one example to which Steve refers, the State Bank of North Dakota is another. Non speculative banks acting in the interest of the general community are a good idea.
    That is not to say gambling banks may not exist, but they do it on their own dime. Not mine.

  8. Ian Fraser

    Thanks for all the comments, guys. The only one I strongly disagree with is Tao Jonesing.

    As promised, I have now written a more considered piece on Vickers’s proposed reforms, published on QFINANCE earlier today.

    My overall conclusion is that without proper, no-holds-barred inquiries into the collapses of banks like RBS, HBOS, Northern Rock etc (which was have not yet had in the UK), Vickers is probably pissing into the wind. http://www.qfinance.com/blogs/ian-fraser/2011/09/14/vickers-report-and-ringfencing-may-turn-out-to-be-a-sideshow

  9. Fiver

    The 2019 targets for banks are already 3 can-kicks down the road and cannot be taken seriously. There is no question whatever events will overtake and supersede such airy-fairy nonsense.

    London believes its infinite balance-sheet, BS finance model can suck enough wealth out of the world’s less fortunate to float it again. But it’s one time too many.

Comments are closed.