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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