Why the banking reforms proposed by Vickers today are ineffectual


9:41 am - December 19th 2011

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contribution by Tony Greenham

The lesson of the financial crisis was that greater regulation of the banking system was necessary to ensure a stable economy.

Three years on from the banking bail out, we are no closer to meaningful reform of the financial system.

The final Vickers report, out today, welcomed by the government, opposition and the banking industry, makes plenty of political sense but very little economic sense.

Here are some quick reasons why:

· No separation of retail and investment banking: The flexible ring-fence proposed, will offer little protection from financial contagion and be a nightmare for regulators to enforce.

· Banks will still be allowed to be too big to fail. Even with a ringfence we will still have large interconnected institutions with assets that are greater than our GDP.

Which means we will have to bail them out if they are in jeopardy.

· 2019 is too long to wait: A slow timeline for reforms leaves the public exposed in the (increasingly likely) event of another financial crash – we might have to bail banks out again.

It also gives banks years to lobby for laws to be watered down even further.

· Nothing has been done to improve competition in the banking industry. Lloyds successfully lobbied to prevent selling off any more of its branches and nothing has been proposed to significantly alter the fact that six banks account for 92% of personal current accounts, 85% of mortgages and 88% of small business accounts.

Ultimately the government’s reforms fail the acid test: they will not prevent another financial crash or another bank bailout.

These so-called reforms do not go nearly far enough.

—-
Tony Greenham is head of finance and business at the new economics foundation.

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Reader comments


Well, if it is being welcomed by the banking industry and the government, it’s not going to be good news for anyone else. As usual.

2. Man on Clapham Omnibus

Yup.Thats about it! Merry Xmas

No separation of retail and investment banking: The flexible ring-fence proposed, will offer little protection from financial contagion and be a nightmare for regulators to enforce.

This really isn’t any sort of panacea. The banks that went bust in the US – Lehmans, Bear Sterns, Merrill Lynch – were investment banks without significant retail arms. The banks that went bust in the UK – Northern Rock, Bradford & Bingley, HBOS and RBS – were predominantly (RBS is the exception) retail banks without significant investment arms.

@3 Tim J

It may not be a panacea, but it’s a sensible enough move; I think the trouble most “lay people” have with the current financial crisis is that is was eminently avoidable, and can be attributed largely to under-regulation of the sector, and such patent idiocy as e.g. giving people mortgages without requiring them to prove their earnings.

There is plenty of mud to throw around of course… but funny how all those saying we are all in it together are the same ones who argued against more regulation in the first place!

It may not be a panacea, but it’s a sensible enough move; I think the trouble most “lay people” have with the current financial crisis is that is was eminently avoidable, and can be attributed largely to under-regulation of the sector, and such patent idiocy as e.g. giving people mortgages without requiring them to prove their earnings.

All difficult questions have an answer that is straightforward, understandable and wrong.

What difference would it have made in the UK if Barclays had been separated from Barclays Capital? Northern Rock would still have gone down on its ludicrously aggressive home-lending. HBOS would still have gone down on its bad commercial loans. RBS would have still gone down (albeit with less of a bump) even if it hadn’t bought ABN Amro. It’s an incidental problem, and not a central one.

And the financial sector as a whole is massively regulated – especially the banks. Read the Companies Act 06 (the largest single piece of legislation ever introduced in the UK). Read FSMA 2000 and its supporting Statutory Instruments. Read the numerous Banking Acts. There is a sodding great heap of regulation. What I suspect you mean is bad regulation, but that’s a very different thing.

@Tim

The Companies Act isn’t really targeted at the financial sector, it’s much more general than that – it has an impact for companies as a whole, not just bean-lenders. Not that any of this takes away from the mountain of regulation which is targeted at the banks, of course.

@5

Of course it means “bad” regulation; but we all know that the city expended huge efforts and no doubt money convincing those who ought to have known better that “light touch” regulation was the way to go.

How did that work out for us all….?

Naturally it isn’t JUST about ensuring that there is “good” regulation; it’s also about ensuring that those directing such institutions don’t come to see themselves as somehow not subject to the laws of common sense. This crisis wasn’t inevitable, and the crap decisions of lots of banks didn’t just happen in a vacuum, they happened against a background of a political elite which beleived the hype that the only way was up.

8. Frances_coppola

The Vickers reforms are indeed ineffectual, but not for the reasons the author gives.

1) Ring fencing will only apply to three banks – HSBC, Barclays and RBS. And the Government has also announced proposals to reduce the size of RBS’s investment banking significantly and force it to concentrate on retail and corporate lending as its major business activities. So that leaves only two whose investment banking operations might conceivably present a serious threat to their retail arms.

2) Full separation would not provide greater protection than a ring fence unless steps were also taken to prevent retail and investment banks from trading with each other. Northern Rock was heavily involved in “risky” securitization with the assistance of a tame investment bank and a SPV. It was fully separated from both.

3) The Lloyds/HBOS merger should have been unwound. The Vickers report concluded that it was a mistake, but it chose to protect the Brown government’s reputation instead of doing the right thing by the British public. Frankly I thought this decision – explicitly stated in the report – was disgraceful. And the Vickers proposals do very little to lower barriers to entry to new entrants into the banking marketplace or to encourage customers to switch accounts. The banking sector desperately needs more competition. These proposals go nowhere near providing for it.

4) The additional capital requirements will at the present time be very difficult to raise without asset sales and serious cuts in lending activities, which could potentially have a catastrophic effect on a very fragile economy.

To my mind the Vickers report relies too much on simple increases in amount of capital and does not address the far more difficult question of how capital is allocated. For that it relies on Basel – and that I think is partly the reason for the delayed implementation to 2019, which is also the Basel III final implementation date. Capital allocation in the financial crisis turned out to be utterly deficient, because the banks were allowed to use their own models to calculate risk weightings for more complex instruments, and because some classes of asset turned out to be much riskier than their weightings would suggest. Basel III still relies completely on bank-calculated risk weightings and therefore does not really address this matter adequately. Increasing the capital amount without vastly improving its allocation is an expensive and inefficient way of reducing risk.

5) The Vickers report does not address the appalling failure of regulation and supervision by the FSA. It makes no recommendations for a more rigorous regulatory and supervisory regime that is less open to errors, conflicts of interest and corruption.

I have little confidence in the new regulatory body replacing the FSA, since it is under the aegis of the Bank of England (which notably failed to supervise BCCI and Barings adequately), and seems to be made up of many of the same players who failed so spectacularly to regulate or supervise HBOS, RBS and Northern Rock. Giving people a second chance to get it right after making errors of such magnitude seems like crass stupidity to me.

6) No curbs are proposed on retail lending activities, despite the fact that it was excessively risky retail lending that brought down three of the four UK banks that failed in 2008. Instead, the Vickers report preserves the commonly-held – and totally wrong – belief that the financial crisis in the UK was caused by investment banks “gambling” with retail depositors’ funds. It wasn’t – it was caused by retail banks speculating on property. Yes, the worldwide crisis was focused more on investment banks, tho even there the ultimate cause was the excessive risk and fraud in American mortgage origination and securitization. But the UK crisis was definitely one of RETAIL banks.

I wish NEF writers could get out of their heads the idea that the size of a bank’s asset base is an indicator of its risk. It is not. We should pay far more attention to the quality of its assets – including getting some proper regulatory supervision of risk weighting calculations – and the size of the gap between lending and borrowing maturity profiles. Unfortunately Vickers ignores these completely and simply throws money at the problem. It’s a fig leaf.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Vickers report http://t.co/nqvLAwwU

  2. Molly

    (in summary, it's a little bit shit) RT @libcon: Vickers report http://t.co/YIBAjOcU

  3. Patron Press - #P2

    #UK : Why the banking reforms proposed by Vickers today are ineffectual http://t.co/BWyERIQ1

  4. sunny hundal

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  5. Neil McLintock

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  6. DPWF

    Vickers report http://t.co/nqvLAwwU

  7. Legal Aware

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  8. DPWF

    The Vickers reforms will improve the banking sector, saving taxpayers in part from further bailout, but only partly. http://t.co/MweOxXXq

  9. John Flood

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  10. Ebony Dawn Marsh

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  11. Star Hart

    Why the banking reforms proposed by Vickers today are ineffectual | Liberal Conspiracy http://t.co/U4YWwbjP via @libcon

  12. Janet Graham

    Vickers report http://t.co/nqvLAwwU

  13. Janet Graham

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  14. mao zedong

    #UK : Why the banking reforms proposed by Vickers today are ineffectual http://t.co/BWyERIQ1

  15. Jeni Parsons

    Why the banking reforms proposed by Vickers today are ineffectual | Liberal Conspiracy http://t.co/i7AVO6pq via @libcon #otmp #occupylondon

  16. Oasis Caretaker

    Why the proposed Vickers reforms of the banking industry today are ineffectual http://t.co/OtuvxV6P

  17. Frances Coppola

    Why banking reforms proposed by Vickers are ineffectual http://t.co/K1wHhwL3 via @libcon << They are, but not for reasons this author gives

  18. Where I agree with Maurice Glasman’s criticism of Ed Balls | Liberal Conspiracy

    […] Ed Balls and the Labour team meekly called for it to be implemented in full. The report was badly watered down and did absolutely nothing to fundamentally challenge the structure of banking in the UK; it […]





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