Published on 11 Apr 2011

Banking report: still too big to fail?

It’s hard to imagine a more respected operative to answer the question – “what’s to be done about the banks?” Sir John Vickers is the Master of All Souls College Oxford, a former Chief Economist at the Bank of England, a former regulator, and a man whose academic research focuses on the economics of competition and regulation.

But is his report, in a sense, an Inside Job (see my blog on the Oscar winning documentary that spells out who got us into the banking meltdown and who is still in the system pulling the levers). Inside Job in the sense that the changes will take place inside the institution, there will be no external sign for wider society to see. Vickers’ interim report is no revolutionary manual. His rejection of a complete separation between “casino” banking and “retail” banking calms City nerves. Firewalls between these activities are his solution.

When you talk to senior City operatives, the banks they talk about are surprisingly not the state owned ones, but the PLC operations like Barclays who, whilst never bailed out, did take up taxpayer-provided funding to secure their activities. It’s hard to see how, if a big name bank failed in one sector, it would not inflict irreparable reputational damage on the whole bank. And we shall once again depend on regulators who have failed in the past, to detect and move on what is going on.

In short, banks in the UK, despite Vickers, most experts say, will stay more or less as they are now – unprosecuted. And the tax payer will still pay.

Cross the Atlantic to today’s news – US regulators to prosecute or sue the executives and directors in more than 100 lawsuits. The Federal Deposit Insurance Corporation is to make an example of “over aggressive executives or inattentive directors of the 348 banks that failed in 2008 and after.” $80bn is estimated to be at stake.

How many British banks and bankers have been prosecuted or sued by our own regulatory authorities? How many are to be prosecuted?

Banking? Still an Inside Job?

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26 reader comments

  1. margaret brandreth-jones says:

    I suppose that focus isn’t a perspective Sir John has to take , unless of course it means focusing on the bigger picture. As an academic and a working chief economist he will have the expertise to see ‘the fault.’
    Will he be able to see how problems have arisen over the years and how events have snowballed slowly, insidiously creeping up on us whilst the laggers behind were still enjoying the fruits of previous success.Can he see how the repetition of good times, when bad was up front and prospectors looked at previous evidence rather than intuiting what was ahead if the same continued, influenced ‘ the globe?’

    This morning on the news LLoyds have been advised to sell off some of their branches for the sake of competition.

    Over the years my personal experience of banking is that BARCLAYS is the best .

  2. adrian clarke says:

    Jon , i have long advocated that those senior bankers be prosecuted for misuse of what was/is public money.I read somewhere that the prosecutors could not find realistic charges to bring.What about simple “theft”The use of money,not their own , to recklessly gamble.
    What was Nick Leeson charged with over Barings demise?The overseers of banks during the crisis were no less culpable.
    A few simple prosecutions would get the message across that if they choose to gamble with other peoples money , be prepared to pay the consequences of failure.

  3. Barbara Robertson says:

    Solutions after the crisis by those in control during the events that caused the collapse bother me.

    I am not an economist but hindsight is always easy. Surely the world wide collapse of the property market could have been foreseen? The previous government depended too much on this area. This is partly responsible for the current mess.As with Portugal,Spain and Ireland.

    Sound economic structures are needed, not overdependence on one area.

    Good luck with the reforms they certainly are needed.

  4. Moonbeach says:

    I don’t remember Sir John Vickers, for all his academic brilliance, warning us or anyone else that the Banks were vulnerable and that we would have to pay!

    So the question is just how brilliant are these economic gurus?

    Every parent runs a small business. It has a CEO and Board (the parents, power dynamics ( who’s going to be boss?) and staff (the kids and pets) who are usually unreasonable in their demands!

    We have banks who loan us money through mortgages and credit cards.

    There are also loan sharks who lend money at outrageous rates to people who can ill afford it!

    Every sensible person knows that borrowing excessively is a recipe for disaster and a ticket to poverty.

    How come these so called brilliant economists know so little about our real world?

    Break up the Banks and charge them a licence premium if they take their head offices elsewhere.

    But first a pox on them and their bonuses!

  5. Gadfly says:

    The Icelanders have the best idea, no bail-outs for incompetent bankers. Indeed I would like to see the directors of failed banks have their property seized to pay the losses, investigated for fraud and if found guilty, sent to jail.

  6. Tom Wright says:

    The State isn’t going after the banks because the State is every bit as much to blame. We deregulated banking with our ‘light touch’ approach which was deliberately designed to give banks a free hand to cement London’s position as a global financial powerhouse.

    So, there are no ‘crimes’ to prosecute bankers for – taking excessive risks is not a crime.

    The US is taking robust criminal action because it has the necessary statutes, not because it has a better class of politician.

    And reputational damage just has to be irrelevant right now – how could the banks possibly lower their reputations!

    If the report’s recomendations effectively end the taxpayer’s liability for casino banking, it’s done its job.

    If we want to punish someone its irrational to punish banks – they were deliberately given free rein by the state. Its like blaming the dog – the problem is always, always the owner.

  7. Peter Stewert says:

    We really won’t be able to run prosecutions (partly because our politicians are either scared stupid or just stupidly in thrall) because our banks acted foolishly, but maybe not criminally. For example, credit was a lot more freely given prior to the bank collapse, but despite sacaremongery, British mortgages were no were near as mis-sold as Fanny’s and Mae’s.

    With luck we might be able to get some meaningful detail because dumbing this story down to being about “Firewalls”, a word that provides no detail while also giving a false impressive impression. From what I’ve been reading Vickers is suggesting a Fig-leaf be inserted between investment and retail banking, which gives the appearance of separation while providing no real legal protection (are parent companies no longer liable for any of the activities of their subsidiaries?)

    *sigh*
    Look the bankers got away with, have done from the start. Time now for us to put the pursuit of justice to one side and try to carve out a little happiness in life.

    1. Tom Wright says:

      I’m afraid parent companies aren’t liable for the misfortunes of their subsidiaries – you have put your finger on the exact reason for the existence of sub-companies – limited liabilty.

      Big companies routinely set up little ones when an operation is risky – if the venture goes down in flames, the small organisation can be rolled up and the creditors told to stuff it.

      In this case, its probably a little more than a figleaf – it effectively means big banks can have their investment arms go bankrupt, but without stuffing retail banking and so the state doesn’t have to bail them out.

    2. Peter Stewert says:

      Never fear positive news, and I’m glad that there will be some protection with the sub-comp approach. (And with the talk of the inter-connectedness of Banks raising its head in the past day or two I’d like to add the inter-bank loans departments in to the list of potentially toxic banking arms to candidates for fire-walling.)

  8. Saltaire Sam says:

    Bankers, like politicians, have to learn that they are our servants not our masters.

    It always used to be a simple transaction, usually with a person you knew by name, who made decisions based on what you could afford and what was safe for the bank.

    Then, like so many other companies, they stopped being satisfied, with just making a profit and wanted to make massive profits. To do that, they bribed staff with bigger and bigger bonuses and the staff started to take chances.

    The first step towards returning sanity is for everyone to abandon the big banks and put their accounts with smaller, less corrupt banks.

    If our politicians don’t have the guts to sort it out, we must vote with our cash.

    1. adrian clarke says:

      Spot on Saltaire.I have been advocating that for ages.Try switching to the co-op.
      Plus the government to totally nationalise the two we partially own and run them correctly.

    2. Tom Wright says:

      There’s a lot too this. In the eighties, much of bank work was computerised. In order to make lending decisions simple (and thereby cheap) the systems were linked up to credit information providers like Experian (which began life as part of Barclaycard) and the banks started collecting data and trend information on who it is safe to lend to. This computerised, rules based approach meant they could make swathes of skilled lenders redundant and was the beginning of the ‘computer says no’ phenomenom.

      This approach has now been applied to business. Whilst its undoubtedly made lending safer for banks, it has also proved a significant barrier for new and small businesses to get access to lending as they have no credit profile, but may well have a killer service or idea. In the US, the credit reference agencies were seen to be doing a poor job – to me it looks pretty clear that the outsourcing by banks of credit decisions to third parties has led to a major breakdown in the capital supply chain. Its hard to see how they can promise to increase lending without changing their systems.

      The real problem is of course, that banks are simply too big. I’d move my money to an ethical startup.

    3. the-Richard-of-Nottingham says:

      “The first step towards returning sanity is for everyone to abandon the big banks and put their accounts with smaller, less corrupt banks.”

      Aye, it’s the only real solution that has any clout Saltaire. It’s called direct action and governments and big institutuions are terrified of it.

      So here’s the deal :-

      1. Don’t use a bank for anything other than holding your spending cash.

      2. Don’t buy their products (ISA’s, Bonds, Mortgages, etc). They’re expensive, and you can buy better elsewhere. MUCH better.

      3. If you invest in pension funds (or ISA’s) then steer clear of the big brand funds who are top-heavy in the financial sector. Better still buy shares yourself and be your own fund-manager. It’s easier and cheaper than you think. And, most importantly, you don’t get stiffed on unjustifiable fund management fees.

      4. Never buy anything you don’t understand. Especially bank shares. The banks have proved beyond doubt that they do not understand the true nature of risk. They still think that you can apply the bell curve to all aspects of human nature. You can’t !!

    4. Jim Flavin says:

      ”Bankers, like politicians, have to learn that they are our servants not our masters”
      Sam – actually as has been proved time and again – its the other way round .
      ”put their accounts with smaller, less corrupt banks.” — less corrupt banks – so they will be corrupt but not as corrupt as the worst . This is getting funnier .
      ”we must vote with our cash.”- at last something to agree on – but where to put whats left – after waht Naomi Klein called the ”biggest hesit in History ”, — the biggets transfer of Public Money to the Private sector – and basically I see no end to it . What Freidmann , Reagan and Thatcher started has become a disaster – and this farce od a report does zero to stop it .Building societies are well nigh gone [ here anyway [ ROI ] . They became banks . These bankers / gamblers / devolopers /politicians understand ONE language – and it does not come from written reports by their cronies .

  9. Jim Flavin says:

    ”Sir John Vickers is the Master of All Souls College Oxford, a former Chief Economist at the Bank of England”.
    Well what exactly did one expect from such a figure – an end to ” Diaster Capitailsm ” – some regulation .If the casino and high street parts of banks are not seperated – what the difernce . Sc#ew what the ” City ” thinks . How often have we heard the phrase – ” the stockmarkets reacted poisitvely ”- usually to bad news for the populations of various countries .This has been our ” Shock and Awe ” treatmnet ,- and Freidman said – this is what is needed to get thro unpopular legisltion . And is this going to stop – No way . Makes no differnce who is PM of whatever country – they OBEY . This is the biggest Robbery in History – right before our eyes , and waht do the population by and large do – Nothing – but absorb more shock from the majority of TV channels and Newspapers .Anyone who thinks that things will get better –well wait and see – but IMO – its a foregone concluion that this is just the beginning . ” They ” have gotten away with it by and large – and if so – maybe its what the people deserve .

  10. marland says:

    As an RBS customer I thought my savings were now in safe hands and not being used at all in the ‘casino banking’ world, but I recently looked at one 5 year bond I took out with them and found the word “derivative” in the fine print.

    Now we know how ‘bound together’ the two banking arms are and why they won’t be changing soon, despite Vickers’ sop to the nation: put your cash into a high street bank and off it shoots to the virtual casino’s futures wheel for spinning into magic profits (especially a heap of bonuses to the ‘entrepreneurs’ who broke us all!). We are still being hoodwinked and we’ll soon have had our ‘chips’ yet again if they don’t stop it!
    Bring back the building societies is the only solution – at least that was a form of public good for both savers and mortgage holders and should never have been ‘commoditised’…

  11. IAS says:

    This emphasis on the ‘Private Company’ itself is overwhelmingly naive. The focus HAS to be on the Banker’s themselves – yes, those responsible for creating the policies … and mortgage fraud!!

    Our politicians were, and remain, too weak (probably due to the ‘Conflict of Interest’ that exists between their Party funding and Bankers) to scrutinize or publicise the Balance Sheets that should or MUST show the vast lack of mortgage repayments that stemed the flow of problem. The fact that these bankers continued to lend recklessly, should put an end to their positions … one would think!!?? Instead, they were given tax-payers moneys – almost as a reward – to dig themselves out of the whole they dug for themselves.

    Changing the weaknesses at the helm was always fundmantal to CHANGE. But, these CEOs still remain at the helm of these banks.

    Politicians should have sent shock waves to the City by arresting these bankers – with a view of encouraging new bankers, better banking practices … with a community approach. CHANGE is possible, but is ONLY to remain possible as long as government has a Conflict of Interest with bankers, and thus do little, or less, than what is required.

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  13. Brady Kaigle says:

    well, Hollywood is crap! full of lies! Ent media always exaggerates things for their tabloids to sell. haha Liars!

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