Banking on Vickers
On Monday 11th April we will hear or read the preliminary conclusions of the Vickers Report into banking. A lot is riding on a successful outcome to this important Inquiry.
Politically John Vickers has to say enough to persuade people he understands the anger many feel about the conduct of banks and bank regulators prior to 2008, and the frustration they feel about the large sums of public money used to buy up Northern Rock, RBS and part of Lloyds/HBOS. Technically he has to understand what brought and keeps so many banking jobs in London, and how he can in the future keep income and wealth generation here whilst cutting the risk and size of any future bail out by taxpayers.
His analysis will be important, as well as his conclusions. I hope he will illustrate how there were two phases to the regulatory disaster – the first one when they allowed too much credit and leverage in the system, and the second when they allowed too little and starved the market of funds. His story will have to include the fact that Northern Rock and Lehmans, the two worst casualties of the Anglo-American crunch, were specialist banks, not large general banks combining investment and retail banking. Forced separation of the two components would not of itself have prevented the 2008-9 rolling collapses.
I trust he will seek to make changes to address two big issues. The first is the question of “too big to fail”. Early briefing suggests he will propose that the necessary utility UK banking arm of a large bank should have its own balance sheet and its own means of continuing in business whatever may befall the rest of the organisation. Alternatively it should be capable of separation in the event of a crash of the global bank owner. The latter proposal is probably the easiest answer, and the easiest to sell to the global banks in London.
All that matters to UK taxpayers is that any future crisis is not only less likely, but also much cheaper and easier to deal with because it will only relate to the essential utility UK banks. The rest of the banking groups will have to follow market disciplines in the event of a crisis, which could include a controlled move into Administation or temporary protection from creditors whilst it worked out how to sell assets and write off lossses.
The second big issue is how we can have a more competitive banking sector in the UK. Individuals and small and medium sized companies are not well served, and could do with more choice, better service and more competitive prices. The EU has made RBS and Lloyds sell off some assets in UK retail banking to provide some competition. Sir John could ask for more to be done from the RBS stable whilst it remains in public ownership.
It would be good if another couple of High Street banks could be hived off from the state assets owned by taxpayers. At the time of sale they could raise more private capital so those new banks would have money to help grow their businesses and give them a stronger position in a more competitive UK High Street. We have lurched from far too much credit to too little. The Regulators are now restricting the flow, and the few banks we have left are keen to sort out their balance sheets by squeezing their loan books. Regulating too tightly brings other problems to regulating too loosely. We are suffering from first one, then the other.