The limits of Vickers

14 Sep

To much fanfare in the British media, the Independent Commission on Banking, chaired by Sir John Vickers, published its final report this month. Its interim report, published in April, had already attracted a great deal of attention and debate. This last report would – according to the BBC’s ever-excitable business editor, Robert Peston – be “hated” by British banks and promised to be “possibly” the most radical shake-up of banking in the UK ever undertaken.

Some of the proposals in the report seem sensible and are improvements on the status quo. The main thrust of the report is about how to avoid UK taxpayers having to cover the cost of another financial crisis. By ring-fencing the retail part of a bank’s business, its investment activities are no longer meant to enjoy an implicit government subsidy (the result of bankers knowing that in a crisis the government will save the bank in order to protect savers). This would make it more expensive for banks to engage in investment banking activities but the Vickers-led commission rightly responded that this is only a case of making banks pay for the risks they are taking.

A few problems stand-out though, all to do with the role banking plays in the contemporary national and international economy. The idea of ring-fencing – which is a watered-down version of the more radical idea of dividing up banks entirely, investment banks on one side and retail banks on the other – might make some sense in theory but in practice it is difficult to see whether it would actually fundamentally change the way the government acts in a crisis. The investment arm of a bank might be expected to take a loss in line with its risky behaviour up to a point. But what if this would threaten the survival of a major British firm, dependent upon financing from a shaky investment bank? What if more than one major firm was threatened? Would the government not be obliged to intervene as before? The idea of ring-fencing rests upon the idea that investment banking exists in one sphere, the “real”, i.e. non-financial, economy in another. This is simply not true.

Another problem is that the report invests too much importance into identifying an ideal structure for the City of London. This suggests that if the institutional rules are the right ones, we will be free from future crises. Or, at the very least, the consequences of future crises will be severely constrained, unable to spill onto the innocent paving of Main Street. But there is little evidence to suggest that the structure of banking industries is the crucial variable in the ongoing financial and economic crisis. Today, debate rages around part-nationalization of French banks as shares of big French banks plummet. And yet French banking is different in many ways from the British banking industry. The smaller and regional Spanish cajas are also in great trouble today, with many suggesting they should be consolidated into a smaller number of bigger players, a move that would make Spain look more like… Britain. The issue doesn’t seem to be the structure of the industry as such but rather something deeper. To focus on banking reform is to present the structure of the banking industry as a main cause of the present difficulties and of the 2008 financial meltdown. Events since 2008 suggest that it is less cause than consequence.

A really radical move would be to trace in detail the causes of the 2008 crisis and the current global economic slow-down, situating the role of the banks within a broader study of a financialized global economy.

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4 Responses to “The limits of Vickers”

  1. davidbick01 September 14, 2011 at 8:28 am #

    And this would lead to what? A plan to change the world capitalistic economic system? One can appreciate that it sounds a lot easier to tinker with what we have got.

    I’d be interested to know more about what, exactly, investment banks do. The picture painted in the media is of casino-like operations aiming to do nothing more than increase their shareholders’ dividends, using the savings of honest citizens as the chips on the roulette table. I have also heard it said that they do not lend money.

    If they do play a role that is genuinely useful, though, we need to know more about it, and we can then evaluate what value that role is to society, and put a price on it.

    Meanwhile I hope the Crédit agricole remains afloat!

    • Charles September 15, 2011 at 3:25 am #

      David this not a reply to you but rather the blagger that wrote this article. Now believe me when I say he is blagging. Firstly he does not know what investment banks do. secondly he is guessing that innvestment banks can not be separated from retail banks. The fact is they can because investment banks do not service or help retail banks to carry out their day to day business. Thirdly “INVESTMENTS BANKS ARE A B2B ORGANISATIONS!!!” THEY DO NOT HAVE ANYTHING TO DO WITH PERSONAL INVESTMENTS- IE PENSIONS ,ISA’S & UNIT TRUSTS ETC!!! Their interaction with retail banks is for one thing only and that is Proprietary trading via the use of people deposits.Either via using it as caleteral or short term loan. Retail banks don’t need investment banks for anything. Those who say that they do are either bankers insulting peoples intelligence or plain simply blaggers!

      • The Current Moment September 15, 2011 at 7:05 am #

        Our point wasn’t that the retail side of banking in the UK relies on or needs investment banks. Rather, that the ring-fencing proposed recommended in the Vickers report doesn’t fit very well with the way that investment banking activities are tied to the non-financial economy. The post suggested a scenario whereby the failure of an investment banking arm of a bank would threaten the survival of a large firm or a number of firms. The government may intervene there in the same way as it intervened to bail-out the banks in the last crisis. This would mean taxpayers picking up the bill, something the Vickers recommendations intended to avoid.

        More generally, on the advantages of tinkering, we argued that the Vickers report is limited simply because it implies that the institutional set up of a banking industry is crucial is avoiding future financial crises. That was the question most often asked of the Commission: would its recommendations mean that financial crises will be less likely (and cheaper for taxpayers) in the future. Given the variety of different kinds of banking industries across crisis-struck economies, it seems that more is going on. Hence the need for a wider analysis rather than just institutional tinkering.

Trackbacks/Pingbacks

  1. The state of European banking « thecurrentmoment - October 5, 2012

    [...] its recommendations: ones that are not so different from those of the Vickers report in the UK (see here for a comment on Vickers). However, the report itself gives a detailed account of the crisis and of [...]

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