In this week's Money Week column, I've been looking at the Vickers Report, and how it let the banks off the hook. Here's a taster....
This year, the UK had a Goldilocks moment to get to grips with its over-mighty finance industry. Two years ago, the banks were still too weak. You can’t put a patient in for major heart surgery when they are still recovering from a car crash. In the immediate wake of the credit crunch, the banks could not have survived radical restructuring. And in another two years, the banks will all be making big profits again, paying lots of corporation tax, and paying big donations to political parties. The memory of the credit crunch will have faded, and the political will to break then up will have evaporated.
But right now, the banks are strong enough to take some punishment. And the desire to make sure the events of 2008 are never repeated is still there. As Goldilocks would put it, it is neither too hot nor too cold – but just right.
Despite that, Sir John Vickers and his colleagues on the Independent Banking Commission blew it. Last Monday’s report on the future of the British financial services industry was the dampest possible squib. Its response was so feeble, and so irrelevant, that it now looks the British banks have in effect escaped from the worst series of collapses in a century or more without any meaningful reform to the way they operate.
No one can be in much doubt that Britain’s banking industry is in need of a major structural overhaul. Put simply, this country’s banks have become too big, and too risky, for the size of the economy that ultimately underpins them.
The point was well illustrated in a research note published by UBS last month. Barclays now has a balance sheet worth 100% of GDP. For a comparison, JP Morgan has a balance sheet worth 24% of US GDP. In effect, Britain is host to three very large banks – Barclays, HSBC and Royal Bank of Scotland – each of which has the potential to quite literally bankrupt the country.
We have already seen how Iceland and Ireland were ruined by the recklessness of their financiers. The same could easily happen to this country. It is a threat, and one the Commission had a duty to take seriously.
And yet, probably under the influence of lobbying from the banking industry, it has largely ignored it. The report singles out Lloyds for its main attention – when, in fact, it is the bank that poses the least threat to the stability of the financial system.
Lloyds will be forced to sell off more branches, over and above the 600 the EU is already making it get rid of. It is certainly true that Gordon Brown’s decision to bounced Lloyds into merging with HBOS was one of the former Prime Minister’s many catastrophic mistakes. It ruined a fairly sound bank, and dramatically reduced the competition in the mortgage and savings market. If reducing its size creates some space for new players in the financial services industry that will certainly be a good thing.
Yet, it is crazy to imagine that will make the financial system more stable. There is simply no evidence to suggest that too little competition between the banks is what led up to the credit crunch. Indeed, through 2006 and 2007 there were arguably too many lenders crowding into the British market. They were throwing around self-cert buy-to-let mortgages like confetti. More competition in a market is always a good thing. It creates more choice, and better service, with better prices. But anyone who thinks it is going to make the system safer is simply kidding themselves.
If the Commission was too harsh on Lloyds, it was too soft on RBS, Barclays and HSBC. It proposes stricter capital requirements, and dividing lines between the retail and investment banking units, so that the investment bank can safely be allowed to go bust, whilst the retail arm will be protected.
The trouble is, neither is going to fix the real issues.
The banks didn’t go bust because they had too little capital. A bigger buffer against financial shocks will help, but a reckless bonus system, too many complex products, and mindless expansion into markets they didn’t understand were the underlying causes of the crisis. Would RBS have survived with a couple of percent more capital? Almost certainly not. Neither would any of the other banks.
Nor is ‘ring-fencing’ the banks retails arms going to make a great deal of difference. It is very hard to believe that any kind of structure can be created that will make it certain that a collapse of the investment banking arm won’t bring down the retail bank as well. Bankers are very good at shifting money around a balance sheet. If there is a way of making the retail unit subsidise the rest of the bank, someone will find it and exploit it. For the system to work, you have to believe that the regulators are smarter and more knowledgeable than the people working in the banks – and the chances of that are just about zero.
Vickers had a one-off chance to do something really radical. He should have proposed a complete split between retail and investment banking. The retail banks would be safe, fairly dull institutions, and they could be fully protected by the government from failure. . The investment banks could take all the risks they liked, in much the same way that the hedge funds do, and if they went bust it wouldn’t matter very much to anyone apart from their staff.
Barclays might opt to move to New York. HSBC might decide to go back to Hong Kong, or to Shanghai. But so what? It matters much less than most people suppose whether a bank is domiciled in this country. The Commission had a duty to think seriously about whether it was responsible to host massive banks in the UK. It failed completely. The moment to protect the country from another massive banking collapse has passed – it won’t come again.