12 Sep 2011

Vickers should mark the dismantling of the credit bubble infrastructure. Eventually.

In April, many suspected that the ICB had been a little nobbled. Today’s full report from the Vickers Commission is, on any measure, impressive and provides a framework for true banking radicalism. Perhaps the most surprising thing for me is that the Chancellor has said it will be implemented, though the detail is to be ironed out.

On the downside, the seven year timetable means that the actual reform of our banking system will occur more than a decade after the peak of the crash in October 2008.

The measure of it is that clearly RBS and to a lesser extent Barclays feel a little singed, will have to restructure, and are likely to face higher funding costs. Martin Taylor, and ICB Commissioner and former Barclays chief was rather robust today: if bankers don’t like this “they should change their business model”. One of the bank chiefs who were briefed at 8am this morning told the BBC that it was a “disaster,” it is not very hard to work out that call might have come through the Edinburgh exchange.

The key issue here is the structure, position and timing of the “ring fence” designed to stop ordinary savers money, and the taxpayers’ guarantees associated with them, being used to fuel bonus-soaked “casino” trading. Is the ring fence chicken-wire or the Berlin Wall? The ICB say that the ring fence will be both “strong and flexible”.

That sounds like a contradiction, but Sir John explains it well.

64% of the existing assets of the UK banking system would be “prohibited services” for a UK ring-fenced bank. He categorically assured that buying derivatives, US mortgages, and fancy property investments in Asia, would be off limits for a British bank with tacit taxpayer backing. There would be “flexibility” on about 18% of the asset book, mainly corporate loans. The other 18% would be UK-based savings, mortgages, cash machines and payments systems.

So that’s the position of the ring fence. The strength would surely be a matter of intense lobbying and negotiations in the seven year period between now and the arrival of the fence. The lesson of the past decade or two is that any “flexibility” you inject into the system will be abused by an army of lawyers and accountants. This places a huge pressure on regulators, but even more on the separate boards of the ring fenced bank.

Can we really trust the same non executive directors who sat idly as their chief executives laid waste to Britain’s banking system? Obviously the answer is “No”. So to make this work, it will require a different sort of bank board: robust, independent and with the interests of UK taxpayers featuring in their thinking. Perhaps each of the Commissioners could volunteer to go on the board of one of the Big 5 banks?

So as others have commented, these reforms are momentous, and quite elegant – in theory. The lesson of a decade or two of banking dominance in Britain’s political economy is that they will get their way in watering down the detail of this proposal, particularly in the many years it will take for legislation and enforcement. Expect Barclay’s domicile to become a bargaining chip in these negotiations.

But there is a bigger picture too. The credit creation capacity of the British banking system is going back to its historic norm. The system that created 125% LTV mortgages, 8x income, and FTSE 100 companies gobbled up by funds, is not returning. It was a bubble, obviously. Vickers underlines that it is not coming back, because the infrastructure of the credit bubble is being dismantled. Slowly. No wonder Ed Balls thought it was the right moment for “deep regret” over Labour’s role in the inflation of that bubble.

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8 reader comments

  1. Anthony Martin says:

    I’d like to see you do a blog like Jon Snow’s predicting next 10 years. Think about it Faisal?
    During the ensuing years we will see another ‘bank crisis’ requiring further so called ‘bail outs’ and more ‘Quantative Pleasing’.
    We shall see the colluding scum, who’ve perpetrated this financial terrorism, go about their business with impunity and arrogance. Without a single person being held account for the catastrophic affect it has had on the majority of UK citizens and, people abroad who are dependent on UK charities.
    The Vickers report is yet another PR stunt and a deliberate waste of time. It’ll not result in any major change. Only civil strife will do that.
    The regulatory system has been deliberately made toothless just like most government commission regulators. The FSA is a joke and a playground for suits on seats.
    Faisal, it’s not rocket science to determine that regulations should have been in place decades ago. Instead, deliberate light touch governance has taken place and will continue to be the case.
    How this disgusting form of terrorism is allowed to continue is truly breathtaking. It can only lead to mass civil unrest and more repressive UK laws…

  2. Frances Coppola says:

    Faisal, how exactly would this ringfence mean no return of 125% LTV mortgages and 8x income? Unless I’ve misunderstood this proposal, retail banks would still be free to fund themselves on the interbank markets – as Northern Rock did – and sell on their loans as securities – as Northern Rock did. And the fact that these mortgages would be backed by insured deposits and supported by increased amounts of (expensive) capital might make a return to high-risk mortgages more likely, not less. The only restriction on these activities appears to come from Basel in the form of a leverage ratio – not from Vickers.

  3. muggwhump says:

    I agree with everything you say except for the bit about 8x income mortgages.
    Prices haven’t fallen that much from their peak in 2007/8 when I was offered an 8x salary mortgage – which I didn’t take – but incomes have certainly shrunk. Add that to the fact that both the previous Housing Minister and the present one have had any number of meetings with the banks and are always talking about house price ‘stability’…a not too coded signal that they will move heaven and earth in order to keep the price bubble inflated for the banks, and its hard to see how things are going to change.

    I hope I’m wrong because we have a housing crisis at the moment that will only ease when prices become more affordable to people who have many other financial commitments on top of their housing costs…not holding my breath though.

  4. AB says:

    Banking is global and it won’t be solved by this countries localised politics alone. Northern Rock was a retail bank that should have been allowed to fail- it was the politicians that decided to save it. The politicians now need to move on quickly and jump start the economy- there is nothing in the Vickers report that mentions taking away the ‘golden parachutes’ of the CEOs of any failed banks or prosecutions!
    We shouldn’t moan about paying successful CEOs being paid bonuses- but should punish those that don’t meet their responsibilities- they shouldn’t walk away with big pay outs!

  5. CB says:

    It was these same British MPs that called for more de- regulation in banking pre- credit crunch era!! The easy credit led to aN artificially inflated housing bubble between 2001 and 2007 and everyone thought house prices would keep rising. Those days are gone now- yet people still the good times will be back soon & bash the banks! The banks are in survival mode and all the greedy property developers should realise – the party is over! The conundrum of buying a house on a morgage or buy to let doesn’t work withfalling house prices and defensive banks!

  6. Saltaire Sam says:

    Strange how this government feels that the rest of the economic policy has to be done today, no leeway, no plan B. But the banks can drift on until 2019.

    And on their past record of recklessness, that could mean a bean feast of speculation while they still have the chance.

    By 2019 it could well be too late. They could have raped us once more.

  7. Evie Murray says:

    This Vickers report is all timed to coincide with the growing unease in society and the recent call for civil disobedience, merely a placebo to ease the tension in society.

  8. Andrew Dundas says:

    As Frances Coppola reminds us, None of the Vickers recommendations refers to the causes of the crises.
    * The CDO problems in Anerica that led to the closure of trans-Atlantic inter-bank borrowing upon which Northern Rock depended.
    * The extravagant takeover of ABN-Amro by RBS and its almost as foolish buys of dud finance houses in the USA.
    * The rash commercial loans made by BoScotland, B&B & Dunfermline BS, and the equally dodgy loans made by some other mutuals.
    * The losses made on CD Swaps that caused Lehman & AIG to go broke, and their counter-parties here to be left adrift.
    It would be a lot safer to control those unsafe practices directly, rather than rely on ‘phony sub-divisions that’ll give us a false sense of security.

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