By Richard Smith
The IBC, or ICB report is to be published at 7:00 on Monday morning, UK time. So I’ll be glugging the coffee; and contending with a busy IBC, or ICB web site, no doubt.
I’ll just make a few points to try to orient US readers (and myself, for that matter).
UK banking concentration is even more extreme in the US; the UK doesn’t have that long tail of thousands of tiny banks – there are only around 20 banks operating retail networks in the UK now, with 80 percent plus in just half a dozen networks. So competition is a big concern and some of the report will be about that. I’ll skim that part because I think the systemic risk part is more important for the moment.
The Vickers report will probably pay a lot of attention to not-quite-breakup options (“subsidiarisation”).
Subsidiarisation (this year’s buzz-word, enforcing separation between bank subsidiaries along geographical lines or functional lines so that an imprudent sub could go bust without endangering the whole, or operational subsidiarisation, that protects deposits and payment systems) looks potentially as messy and expensive as breakup, without being nearly as conclusive, either. One wouldn’t want to discover, in a crisis, that the subsidiaries were still, after all, tightly coupled. One remains to be convinced about subsidiarisation. There will be more detail in the report.
The IBC can influence that part of the debate simply by excluding some options. For instance, all the rumours say that the option to enforce a breakup of companies that currently engage both in investment banking and retail banking won’t feature in the report. If you refer to Vickers’ trailer speech of January, that actually isn’t quite what he says (pp 9-12). So one surprise to look out for would be if the breakup option really was still “on the table” after Monday.
One reason to be sceptical about that possibility is that concentrated as they are, the UK’s banks are quite diverse in business model (and funding model, another source of big problems in the crisis). It is going to be pretty hard to come up with a “one size fits all” set of policies that derisks all of them in a uniform-looking manner. Something more ad-hoc is hard, politically, but inevitable, if the Commission, and the politicians that pick over their report, actually mean to get something done.
There are other ways one might contrive a break up: for instance if the BoE insists, as it well might, on very large capital ratios, in excess of Basel III requirements, Barclays might follow through on their threat to decamp, and might be forced to leave their retail operations behind. Or not: when the Swiss regulator hardened up their capital rules, UBS made a lot of noise about departing Switzerland. But they’re still there.
Leaving the fraught issue of breakup aside, here’s a couple of things one would like to see in the report, (and that actually got a mention in Vickers’ trailer, so they’re live options):
– Depositors to rank ahead of bondholders in bank bankruptcy (or, a deposit insurance scheme a la FDIC).
– Capital: support the BoE in calling for much more capital in banks, with the shortest shrift possible given to CoCos and the biggest possible cheering-on of common equity.
And here’s a couple of things that Vickers didn’t seem to push quite so hard, or missed altogether; with a bit of luck he’s caught up.
– Some measure that drives up the share of deposit based funding for retail banks. Reliance on market based funding sank Northern Rock, HBOS and RBS (and nearly got Barclays too, I suspect). Either more deposits or fewer assets would do. This will be a huge headache for our wards of state: Lloyds (which bought HBOS and was promptly sunk by it), RBS, and Northern Rock; and also for Barclays. Too bad.
– A cap on rehypothecation (140% of pledged assets, in the American manner). A little gesture towards the shadow banking system, which is barely touched by Vickers’ trailer.
No point in more speculation: eyes down for tomorrow.
The banks, particularly Barclays, will resist any change to the current system which enshrines the principle of privatized profits and socialized losses.It is,after all, in their interests to continue to be a “systemic failure risk”. As they see it there is no gain in decoupling the retail from the investment banking. Having to raise capital on the basis of their investment business would be more expensive, lower profits, and (maybe) bonus levels.
20 banks operating retail networks in the UK now, with 80 percent plus in just half a dozen networks. So competition
Don’t expect jaded MP-s to push through anything air-tight. Within a perfect political mechanism MP-s could walk away from the 20 odd Gordian Knots, make new regulations for future start-up-banks, but finally lay out a progressive-jazz-type-taxing-schedule that would double tax on wobbling-dinosaurs-banks each month. Such a plan would allow the banks to slowly disassemble themselves in orderly, controlled, incremental bankruptcy. The start-up-deposit-banks could pick up the slack as hedge-fund operators the World over could hone in on the unsuspecting customers leaving the crumbling institutions. Will MP-s, commissars, and exchequers make it happen? Not one snow-ball’s chance! English bank customers don’t have a prayer.
We will now see one melt down following the next as the force of money eventually becomes irrelevant. It’s a Wonderful World.
But not for long
If UK banks contribute 54 billion pounds tax per annum how many years theoretically will it take for the UK tax payer to break even on their bail-out plus associated costs of QE, unemployment benefit costs, etc? Is it an investment proposition even the banks would laugh at? If so why worry too much about getting tough with them they’re dodgy investments from Britain PLC’s point of view.
We can all stop pretending that anything is going to be done other than a few symbolic gestures around the periphery. I’m sure the hullabaloo will be “look how daring the commission is being”, the banks will howl publicly (and privately snicker) and things will go on just as they are until the whole damn thing collapses in 1-5 years. At which time the whole damn mess will be up for grabs, and seeing as how the “people” are sheep in our wonderful western “democracies” those who are moral and know how to set up a better system will be sidelined in favor of etc. etc. etc. Its just so damned tedious after a while.