Tag Archives: banks

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.

Sarkozy and the French banking sector

29 Jun

It was announced on the 27th June, by French president Nicolas Sarkozy, that French banks had agreed to a plan to rollover a large chunk of the debt owed to them by the Greek government. Le Monde reports that this was decided upon at the weekend, with aim of bringing the French proposal to an International Institute of Finance meeting in Rome on the 27th where around 400 financial companies would be present. Without giving up on debt repayment as such, in the French plan the banks agreed to extend new loans to the Greek government as existing loans come up for repayment. These new loans would be extended over a longer time period, giving Greece more breathing room. Originating as a German idea to force private investors to share some of the burden in bailing-out Greece, France and the ECB had been firmly opposed to the idea. Now, cast as a purely voluntary affair, France has struck a deal with its big banks remarkably quickly.

Reported in the financial press as an arduous process, likely to take weeks, the French government has announced a deal within days. How was this done so quickly? Part of the answer is of course the degree of exposure of the big French banks. By some way, they are as a whole more vulnerable than banks from other European countries.

Banks Exposure (Billions of Euros)
BNP Paribas (Fr) 5
Société Générale (Fr) 2.9
Axa (Fr) 1.9
Dexia (Fr-Belgian) 3.5
Generali (It) 3
Commerzbank (German) 2.9
Royal Bank of Scotland (UK) 1.1

Source: Forbes

That said, these figures also show that exposure to Greek debt runs through the European banking sector. So how to explain the speed of the French plan? A hat tip to my colleague, Daniel Mügge, for the answer. The French government, whilst having divested itself of its share of the banking sector as with its share of public services in general in the course of the 1980s and 1990s, is still able to coordinate policy with the main banks. No longer a state-run economy, France nevertheless rests upon a set of remarkably close relationships between political, business and finance leaders. The French deal was brokered by a working group, with representatives of the French treasury, the ministry of finance and the secretary general of the Elysée palace, Xavier Musca. Three of the biggest French banks – Société Générale, BNP Paribas and Crédti Agricole – are reported to have made their proposal to the government but there was much pressure in the other direction too. In other countries, such as Germany, it is by no means clear that the government will be able to put a similar agreement together. This is not only because its banks are marginally less exposed than the French banks but also that the nature of the relations between government and the banking sector is different.

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